Challenges and opportunities delivering gas to the Australian domestic market

24 March 2021

~Check against delivery~

Good afternoon, it’s great to be here with you at ADGO. I know I stand between each of you and lunch so I will make my remarks as brief and to the point as I can.

Let me begin by acknowledging the Gadigal of the Eora Nation, the traditional custodians of this land and paying my respect to Elders past, present and emerging.

I also draw your attention to the note on this chart concerning forward looking statements.

Your participation in this conference indicates you probably don’t need to be convinced of the importance of natural gas as a reliable, competitively priced and low emission source of energy. Esso Australia is proud to sell all the natural gas we produce on the east coast into the domestic market where it is used right here in Australia.

So for that reason and in the time we have today I would like to share with you our perspective on what will be required to ensure Australians continue to have access to reliable and competitively priced domestic gas here on the east coast.

Investment required to supply domestic gas

When the gas we need is produced in Australia it benefits all Australians, supporting the local economy, creating jobs and raising tax revenue.

It’s even better when that gas is produced close to where consumers need it. Because that keeps transportation and infrastructure costs low, which ultimately lowers the price paid by gas consumers.

Let’s take a look at the chart on the left first. It shows south east Australia’s demand for reliable and competitively priced gas, indicated by the red line, can continue to be met from domestic sources, most of them close to consumers, for the remainder of this decade. The undeveloped supply indicated on this chart is located in Victoria, New South Wales and South Australia.

But at some point LNG imports will likely be required to balance the market in the southern states. The important question is when. And to an extent the answer depends on decisions over the next year to invest in new wells, facilities and infrastructure to develop these resources in the southern states.

If some or all of these investments do not go ahead, as shown in the scenario on the right side of this chart, annual domestic demand will likely exceed supply in the next few years and other sources of supply, such as LNG imports, will be required to balance the market as soon as 2023.

Investments of this magnitude in domestic gas supply that sit in front of industry today, require a stable and secure policy environment that provides industry with confidence. Confidence to invest, so the gas all of us rely on continues to be available when and where we need it at competitive and sustainable prices. Ensuring these investments are made at the right time and in the right place is the shared challenge and opportunity for all of us as producers, consumers, government and regulators to work to ensure these investments are made.

Investing in reliable and competitively priced domestic gas

We have been supplying energy from the Gippsland Basin for more than 50 years. Over this time the Gippsland Basin Joint Venture has produced more than four billion barrels of oil and 10 trillion cubic feet of natural gas. That is more than half the oil ever produced in Australia, and enough gas to power almost every home in Australia for a decade. At the same time Esso and BHP have paid billions of dollars in federal government revenues.

Maintaining a reliable and competitively priced supply of energy over more than five decades comes down to a couple of key factors; first - the hard work and creativity of thousands of Esso Australia’s amazing employees and second - supportive government policies that provided the confidence to make some of the most significant investments in Australia’s energy system.

As you can see on this chart, Esso Australia continues to lead investment in exploration, resource development and infrastructure. And through these investments has done the heavy lifting to deliver natural gas to the east coast domestic market.

Over the past three years Esso Australia drilled three exploration wells and spent more than two hundred million dollars exploring for new gas in the Gippsland Basin. One of these wells was drilled at a water depth of 2300 meters, setting the record for the deepest water well ever drilled in Australia. While records are nice and despite spending more than two hundred million dollars none of the three wells identified commercial quantities of gas. Proof again of the cost and risk upstream companies take on to explore for new resources, in this case without a reward.

In 2017, we brought online the Kipper Tuna Turrum offshore project and the Longford Gas Conditioning Plant. At a total cost of five and a half billion dollars, this project was and remains the largest investment ever made in Australia’s domestic gas market and far exceeds any other investment in the southern states.

And as we look ahead to this winter the Gippsland Basin Joint Venture will flow first gas from the West Barracouta project.

Delivering reliable and competitively priced domestic gas

West Barracouta is one of the most important domestic gas projects to come online this decade. As you can see on the right hand side of this chart, West Barracouta alone will produce as much gas this decade as that anticipated from either Narrabri or the Beetaloo basin.

So although we’ve been producing from the Gippsland Basin for over half a century and we will continue to see some decline in our legacy fields, because that’s the reality of a depletion business, it is because of the investments I spoke of earlier that the Gippsland Basin remains today the largest single source of gas supply to the east coast domestic market. And West Barracouta demonstrates the basin still has the capacity to bring material new gas supply to the market. 

From the profile on the left side of this chart you will also notice that by the end of this decade the Gippsland Basin will continue to have the potential to supply one third of south east Australia’s domestic gas demand. And like West Barracouta, currently undeveloped projects shown on this chart also have the potential to supply more gas this decade than either Narrabri or the Beetaloo basin. But this will depend on decisions to invest in development of new supply.

Now as we evaluate these investments, three items will be of particular importance
• Cost
• Government policy and
• Whether we receive strong signals of commitment from customers

High cost to develop domestic gas

Turning first to cost. The gas developments of the future will not be the low cost resources of the past. They are deeper, smaller and more complex meaning they will be technically challenging and more expensive to produce.

We can illustrate this point by talking about two of our currently producing fields, Snapper and Kipper.

Snapper is one of the largest conventional gas fields in eastern Australia. It was discovered in the late 1960s and began oil and gas production in the early 1980s. At that time Snapper was developed principally for the oil and gas was sold as a byproduct of oil production. As shown on the left side of this chart, oil production has declined significantly in both absolute and relative terms particularly in the last 20 years. The days of gas prices subsidized by oil production are long gone. Future gas developments will compete for global capital without the subsidy that was once provided by oil production.

Thirty years after Snapper came online, growing gas demand and advances in technology allowed development of the Kipper field. Kipper is about one fifth the size of Snapper, is a deeper reservoir, in deeper water and its development required dedicated subsea drilling and infrastructure. Kipper gas also contains impurities such as carbon dioxide and mercury, requiring additional investments to condition the gas ahead of traditional gas processing. Further, Kipper does not have the world class pressure support that Snapper does, meaning additional investment in compression is required to maintain production. As a result it costs about five times more per GJ in real terms to produce Kipper gas than Snapper gas.

While we can’t change the geology, there are important things that can be done by governments and regulators to reduce costs and bring more gas to the domestic market.

As the chart on the right shows Australia is a high unit cost country, particularly when it comes to new developments and Australian developments are in the highest cost quartile when compared to other countries. Reducing green and red tape, removing moratoria, simplifying regulatory approval processes and reducing compliance costs would all encourage more investment in Australia’s domestic energy supply.

Finally, most gas development opportunities in the southern states, where new supply is needed most, are located in mature fields just like the Gippsland Basin. So policy should address the specific challenges of mature basins, this includes an internationally competitive offshore decommissioning policy which will be important to bringing new gas supply to the markets in which it is needed most.

The east coast gas market has changed significantly from a series of single supplier and customer relationships to an open and competitive gas market, a growing number of producers and retailers, an increasing number of industrial customers contracting directly with producers, high quality market information available to all participants and a significant increase in participation and volumes traded on east coast spot markets. With domestic gas prices at their lowest level since 2016 the east coast domestic market is responding to supply and demand fundamentals and working well.

This brings us to the second and third points, policy and customer commitment. Investments in new domestic supply will compete for capital as standalone gas developments including competing with what will likely be the next most competitive alternative in the southern states, LNG imports. Confidence that natural gas prices will continue to be an outcome of supply and demand fundamentals in an open and competitive market and customer commitments to offtake will be essential to attracting the capital required to make investments in new supply.

It’s great to see federal bipartisan support for the development of our natural gas resources and this is something that is good for all Australians. Along with a commitment to open and competitive markets this has supported investment and delivered prices to customers in Australia “well below the price paid by customers in export destinations”. 

So it should be concerning for every gas consumer that we continue to see pressure for market intervention based on claims about price that are demonstrably false.

The investment risk created by the prospect of intervention will result in an outcome that is the opposite of what is intended. It will deter the investment that is required and force gas prices up, not down.

For the southern states, a lack of investment in domestic supply will accelerate the transition from pricing based on LNG export netback to pricing based on LNG import parity. Anyone who doubts this need only look at the six proposed projects lining up to develop LNG import terminals, all of them located in the southern states.

But more gas alone won’t be enough. Although I spent the majority of my career overseas I was raised in Melbourne. When we returned home we noticed a lot had changed. Now unfortunately the performance of my football team and the weather remains largely the same. So in Victoria, and unlike Queensland, this means we consume about three times the amount of gas during winter than we do in summer. Additional investments that match supply with seasonal demand is of vital importance to the 70% of households across Australia that use natural gas to heat their homes, provide warm water for showers and cook food, most of them in the southern states of Victoria, NSW and South Australia. 

A prescriptive approach to regulating the interactions of producers and large customers in particular but also storage providers, pipeline operators and LNG import proponents based on conditions prevailing in Queensland, risks making it more difficult to solve the challenges that southern states will face in the coming years.

Closing

Esso Australia has a long history of supplying reliable and competitively priced energy and has led with significant investments to support Australia’s energy security. We are proud to sell all the gas we produce on the east coast to customers in south east Australia, where it is used in homes, businesses, industry and for power generation.

New gas produced here in Australia, particularly in the southern states where it is needed most, will drive lower prices for consumers, higher government revenue and more jobs for Australians.

I would like to thank the conference organizers for inviting Esso Australia to share our perspective on the eastern Australian gas market.

As I noted at the beginning, improving the supply outlook will require decisions to make new investments in the time between now and when we gather together for ADGO in 2022. Ensuring these investments are made at the right time and in the right place is the shared challenge and opportunity for producers, consumers, government and regulators. Reducing the cost of developing Australian domestic gas, ensuring price remains an outcome of supply and demand fundamentals and customer commitments to long term supply will all be important to ensuring these investments go ahead, and deliver reliable and competitively priced domestic gas when and where it is needed.

Thankyou.