Australia's Future Gas Strategy: a pathway to energy security while supporting decarbonisation

Released on 8 May 2024, the Future Gas Strategy details the Federal Government's plan to maintain, grow and enhance Australia's gas industry as a pillar of Australia's economy until at least 2050.

Against a backdrop of the Federal Government's "a future made in Australia" campaign, the Strategy recognises the importance of natural gas both as a firming fuel to underpin Australia's transition towards renewable energy, but also as a fuel necessary to underpin the Australian manufacturing industry.

While the Strategy itself does not change the way gas is regulated in Australia, it does provide a helpful blueprint for industry to understand how the regulatory landscape for gas might change in the pursuit of net-zero emissions by 2050.

What are the Strategy's core principles and what do they mean for industry?

The Strategy is built on six core principles which are stated to guide government policy on gas. These are detailed below:

Principle 1 – Emissions reduction

The Strategy recognises the various continued use cases for natural gas but provides, as almost a trade-off, that such continued gas use must be decarbonised.

In doing so, the Strategy recognises that while gas powered electricity generation (GPG) used as a "firming fuel" will play a fundamental role in decarbonising Australia's energy market and that there are various industrial processes used across Australia for which there is no substitute for natural gas, such natural gas use must be decarbonised as much as possible.

To do so, the Strategy proposes the following key focus areas:

• electrification of processes that currently use natural gas (eg., natural gas extraction and processing) where possible and, otherwise, increase in efficiency of such processes;
• where possible, replacement of natural gas with other low-emissions gases (e.g., hydrogen and hydrogen-natural gas blends); and
• reduction of any remaining emissions to levels as low as possible and, where not possible, offsetting any such emissions (including through the use of Carbon Capture and Storage (CCS)).

Principle 2 – affordability

The Strategy recognises the importance of Australian natural gas remaining affordable to Australian users. It may come as a relief to industry that the Strategy appears to focus on enhancing supply of natural gas to drive down prices (also see Principle 3 below). However, the Strategy does flag the continuation of heightened levels of gas market regulation through instruments such as the Competition and Consumer (Gas Market Code) Regulations 2023 and the Australian Domestic Gas Security Mechanism (ADGSM). Industry may expect a heightened level of oversight from entities such as the Australian Competition and Consumer Commission (ACCC), including in respect of any claimed "green credentials".

The Strategy also flags that industry can expect the Federal Government to also focus on:

• ensuring First Nations people are involved with, and benefit from, the net-zero transition;
• continuing to ensure long-term domestic energy security via exercise of AEMO's market powers, the Heads of Agreement with east coast LNG exporters and via the ADGSM;
• ensuring plans are in place to support communities that might be affected by declining demand for fossil fuels (ie., the rural and regional communities with economies underpinned by the CSG and LNG industries); and
• continued review over existing regulatory regimes to ensure they remain relevant and meet the needs of the gas market.

Principle 3 – expanding supply

As mentioned at Principle 2 above, the Strategy recognises the importance of achieving natural gas affordability by boosting supply. The Strategy recognises the near-term possibility of a supply shortfall (by 2028 on the East Coast and 2030 on the West Coast) and focuses on expanding natural gas supply from existing gas basins. The Strategy appears to focus on addressing the supply question in three parts:

Part 1 – East Coast Supply

The Strategy emphasises that near term supply constraints cannot be overcome without further investment and exploration in undeveloped fields in the Surat Basin (5,761 PJ), Narrabri field (1,316 PJ) and Northern Territory (5,365 PJ). Particular emphasis is placed on the need for new investment from 2025 in the Surat Basin due to the low cost of production arising from economies of scale, proximity to key gas transportation infrastructure and strong proximity to the LNG facilities constructed on Curtis Island.

Part 2 – West Coast Supply

The Strategy notes that AEMO has forecasted a potential shortfall in the West Coast Gas Market, however with a lower price impact than on the East Coast. The Strategy notes the importance on releasing new onshore gas acreage as well as review over Western Australia's domestic gas reservation policy to ensure it remains fit for purpose.

Part 3 – Transportation and Storage

The Strategy notes that for the most part, end-users of gas are not co-located with gas producers, with many gas users being located in New South Wales and Victoria. Therefore, it is expected that the demand for north-south gas transportation in the East Coast gas market will continue to increase. Investment in both new and expanded pipelines and storage systems are noted (See also Principle 5, below).

While not explicitly stated in the Strategy, we note that the release of acreages and grant of associated on-shore tenure to produce natural gas is a matter governed by State, not Federal, law. We therefore expect that implementation of this Strategy would be subject to co-operation with State legislators.

Principle 4 – Higher use over time

The Strategy notes that gas consumption is forecast to continue beyond 2050, particularly in times of peak load demand and firming in renewable power generation. In respect of each area of expected continued use, the Strategy provides:

• Generation: demand for GPG is expected to spike as coal fire generation is phased out in many of the States and Territories. The Strategy notes that, at this point in time gas is most likely to firm up the supply of electricity as the electricity market moves away from coal-fired baseload towards a predominantly renewable energy mix.
• Manufacturing: high heat manufacturing such as steel, concrete and glass will rely on gas due to challenges in electrification of their manufacturing processes. Transition away from gas will require significant technological advancement.
• LNG facilities: significant capital expenditure is required before LNG facilities can be electrified, despite the cost savings that are evident. The Strategy also promotes the use of CCS and Hydrogen to aid LNG facilities in their reduction of emissions.
• Households: low-income and renting households are not able to electrify their appliances on demand, and the continuation of gas allows households to install energy efficient appliances when it is suitable to them.

Principle 5 – adaption of the gas market

As noted above, the Strategy emphasises the importance of continued investment in expanded transportation capacity. The Strategy expects that gas pipelines will continue to play a larger and more critical role in the Australian energy market as demand increases in New South Wales, Victoria and South Australia with the phased shutdown of coal generated power plants. This Strategy again stresses the need for investment in the infrastructure surrounding gas including storage facilities, pipelines, re-gasification terminals and, where necessary, import terminals.

Importantly, "future proofing" such infrastructure is also an important theme in the Strategy. The Strategy highlights the importance that such transportation infrastructure should be able to support low-emission gases and biomethane. While not explicitly stated in the Strategy, this may become a key criteria for government investment in gas transportation infrastructure.

Principle 6 – LNG

The Strategy highlights the importance of Australia remaining a reliable, sustainable supplier of LNG to the world, in particular to China, Japan and South Korea.

The Strategy appears to focus on the importance of Australian LNG exporters continuing to meet their supply commitments under Long-Term Contracts, while balancing this with the need to ensure the Australian domestic gas market has sufficient supply. While this may provide certainty to proponents of Australian LNG projects, those proponents should note the Federal Government's continued use of instruments such as the Gas Market Code and the ADGSM.