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RESEARCH PAPER

No.2 1994

Natural Gas - An AustralianGrowth Industry?

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ISSN 1321 • 1579

Copyright Conunonwealth of Australia 1994

Except to the eJi:tent of the \Wea permitted under the Copyrigbt Act 1968, no part ofthia publication maybe reproduced or tranamilted in any fonn or by any means including information storage and. retrievalIyrtem, without the prior written oonsent of the Department of the Parliamentary Library, other thanby Members of the Au.atralia.n Parliament in the 00Ul'IIl! of their official duties.

Publi.ahed by the Department of the Parliamentary LibraJy. 1994

Paul KayScience,Technology, Environment and Resources Group

25 March 1994

ParliamentaryResearch Service

Research Paper No.2 1994Natural Gas - An Australian

Growth Industry?

Telephone: 062772422Facsimile: 062772407

This paper bas been prepared for general diRnbution to Membe.n of the Au.tralian Parliament.Readers outaide the Parliament are reminded that thit ill DOt an Alwtralian Government~nt,buta paper prepared by the author and pubwbed by the Parliamentary ReRal'eb. Service to contribute toconsideration of the issues by Senators aDd Memberfl. The vie..... upressed in thit Paper are tho.e of theauthor aDd do not nec:euari.ly reflect too.. of the Parliamentary Research Service and are not to beattributed to the Department of the Parliamentary Library.

CONTENTS

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

Introduction 2

Characteristics of Natural Gas . . . . . . . . . . . . . • . . . . . . . . . . .. 5

Export of Liquefied Natural Gas .. . . . . . . . . . . . . . . . . . . . . . . 6

Environmental BenefilB of Natural Gas . . . . . . . . . . . . . . . . . .. 7

Development of Natural Gas as a Fuel in Auatralia . . . . • . . . .. 8

Natural Gas Usage 12

Natural Gas Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14

Outlook for Natural Gas 16

Conclusions . . . . . . . . . . . . . . . • . . . . . . . • . . . . . . . . • . . . . .. 18

Appendices

UnilB and Conversion Factors .............•........ 20

1993 and 1994 Lists of PRS Publications

Natural Gas - An Australian Growth Industry? 1

Summary

During the early 1980s Australia's natural gas prospects wereconsidered poor relative to proven overseas reservoirs. Petroleumexploration companies targeted oil primarily and considered gas asecond best result once encountered. A decade later oil remains theprime exploration goal, but natural gas is assuming a prominent rolein Australia's energy production and consumption mix. The largestresource development in the history of Australia is the North WestShelf Liquefied Natural Gas Project. After coal and oil, natural gas isthe third most important energy source for Australia, particularly inthe manufacturing industries.

An abundant resource of natural gas is located offshore from northwest Western Australia and lesser resources are scattered throughoutAustralia. Demand can be accommodated for many decades from thisproven resource and additional discoveries are likely. To fully utiliseavailable natural gas resources a pipeline from Western Australia tothe large eastern markets is likely to he required as early as 2009.Only when the natural gas supplies of eastern Australia are nearingeconomic depletion will this pipeline become a viable proposition. Thedevelopment of a cross border grid in natural gas is generally acceptedas inevitahle. A key result of Fehruary's COAG meeting was theagreement by State Governments to remove legislative barriers to freetrade in natural gas. Future activities of the TPC are likely to includemonitoring of the gas industry and relevant government initiatives.

Pressing political concerns, namely the balance of payments on currentaccount, urban air pollution and the greenhouse gases issue can beaddressed immediately hy the partial suhstitution of natural gas forliquid petroleum fuel. The economic benefits of indigenous supplyversus imports are clear and the Federal Government has gone someway to addressing concerns by facilitating the National Natural GasStrategy and by providing a commitment to low taxation of natural gasas a vehicular fuel. Natural gas has a number of hurdles whichprevent market penetration, with improvements to the grid networkof key importance.

Relative to diesel and petroleum fuels, natural gas has positivegreenhouse and local air quality contributions however, benefits arenot as clear as simple tailpipe emissions measurement. Disadvantagesof compressed natural gas for vehicles include the requirement for aspecialised pressured tank; the cost of conversion; expenditure on theprovision of gas distribution; and the difficulties due to the existingmarket domination of petrol and diesel fuels. The alternative fuelsmarket for vehicles is already satiated with the provision of exciseexempt liquid petroleum gas to continue for at least five years.

2 Natural Gas . An Australian Growth Industry ?

Introduction

Gas as a fuel is hardly new to Australia as distribution of retorted(heat converted) coal gas by the Australian Gas Light Company toSydney commenced in 1841.' Recent phases of gas usage haveincluded a growing industrial market and residential consumption forheating, cooking and hot water where reticulated natural gas isavailable. Significant moves to use natural gas as a transport fuelwithin Australia have begun; such usage elsewhere is extensive,examples being Italy, the United States, New Zealand and Argentina.Augmentation of the existing natural gas electricity generation capacityin Australia has also been recently investigated.2

Australia's resources of natural gas are distributed unevenly throughthe country with the bulk of the reserve located in the north westernareas of Western Australia as shown in Figures 1 and 2. Domesticconsumption of natural gas is forecast to increase with some degree ofsubstitution of natural gas for other energy sources. The economics ofthe more remote gas fields is likely to improve due to an improvingnetwork of pipelines. Development of a large Liquefied Natural Gas(LNG) export industry has been achieved through the utilisation of theCarnarvon Basin resource through the North West Shelf Project.

Perhaps the greatest SaUTee of confusion in the description of energyresources and supply is the plethora of units. Various units are usedthroughout the literature in describing energy commodities andproducts. The general measure is the energy value of the commodityhowever, this does not readily reveal the volume of material involved.The Systeme International (SI) unit for energy is the Joule andAustralian natural gas is generally around 39 Megajoules per cubicmetre. For a full listing of the energy values of individual fuel gasessee the Appendix.

Broomham, Rosemary., First Light, 150 Years of Gas, Hale and Iremonger,Sydney 1987"

2 Gas for EJectn"city Generation, Electricity Supply Association of AustraliaLimited, July 1991.

Natural Gas - an Australian Growth Industry? 3

AUSTRALIA'S NATURAL GAS RESOURCES

BOWENSURAT3EJ

S

EROMANGA1.5 EJ

AMAD0.4EJ~

GCOOPER~~=----=AoBrisbane

I __~EJ

Perth--elbOu GIPPSLAND

OTWAY I ~ 10EJBASS '\"0

'vHobart

BONAPARTE10EJ

BROWSE {l20EJ a

CARNARVON55 EJ

PERlH0.15 EJ

LEGEND

Producing Basin and Reserve

Prnenlial Resource

Gas Producing States

GIPPSLAND10EJ 0

OTWAY c:>

oEJ = 10" JOULES OR EXAJOULE

Figure I : The location of Australia·s major natural gas resources.

Adapted From: Gas Supply and Demand Siudy. AUSlraiian Gas Association July 1992

Natural Gas - an Australian Gro~rtllllldllslry ? 4

THE AUSTRALIAN NATURAL GASPIPELINE TRANSMISSION SYSTEM

ockhamptooladslOllC

Mt Isa

CWC'olStlC

A/I Sydney, bclT".l

-",,, AI I)'

Melbo • Ba~~ trail• l.i. Fields

\:2obart

P~lrcl

&. Tern

\

nlQicrNnrthRankin

LEGENDExisling and Planned Pipelines

Gas Producing Field

Significanl Pipeline Terminus

Possible Pipelines

Gas Producing Stales

•

Figure 2 : Australian natural gas pipelines, existing and planned.

Adapted From : Gas Supply and Demand Siudy. Australian Gas Associalion July 1992

Natural Gas - An Australian Growth Industry? 5

Characteristics of Natural Gas

Natural gas occurs in underground reservoirs generally juxtaposed inthe pore spaces with oil, called associated gas. Oil exploration effortsin Australia have yielded gas on a number of occasions with little or nooil, called non·associated gas. Natural gas may also be produced by thegas drainage of coalfields, which may in the future prove to be asignificant source for Australia. The exploitation of natural gas as anenergy source is comparatively recent; vast quantities have been 'flared'as a waste product to facilitate crude oil production. As recently as1985 some nine percent of international gas production was flared, themajority of this in Nigeria, Iran and Saudi Arabia.3

Naturally occurring gas is composed of the lighter hydrocarbonfractions mainly methane (CH,) witb some ethane (C2H,). Dependingon the source of the gas it may contain minor propane (C3Hg), butane(C,H lO) and pentane (C5H 12). Other constituents mayor may not bepresent, such as longer chain hydrocarbons, nitrogen (Nz), carbondioxide (C02) and hydrogen sulphide (H,s). Pure methane gas iscolourless, odourless and lighter than air. Impurities such as hydrogensulphide can give natural gas an odour.

Ethane, propane, butane and pentane are known as natural gas liquids.Both propane and butane are used in Liquid Petroleum Gas (LPG) fueland ethane is widely used as a petrochemical feedstock. Where thenatural gas is low in these liquid hydrocarbons it is known as a 'dry'gas, a 'wet' gas has a relatively high proportion and a 'lean' gas fallsbetween the two. A 'sour' gas contains more than one part per millionhydrogen sulphide and is characterised by a foul smell. Australiannatural gas is generally 'sweet' due to a low hydrogen sulphidecontent.

3 Hedley D., World Energy, The Facts and the Future 1986. EuromonitorPublications pp 27.

6 Natural Gas - An Australian Growth Industry ?

Export of Liquefied Natural Gas (LNG)

Due to the low thermal density of natural gas the fuel is extremelybulky to move or store in its gaseous state. A given pipeline can onlycarry around one fifth of the quantity of natural gas as compared tooil. This factor is the main disadvantage of natural gas compared tooil and other fuels. To reduce transport and storage costs natural gasexported to Japan from Australia is liquefied. The liquefaction occursat minus 161 degrees celsius at atmospheric pressure. Volume isreduced by six hundred times, hence a cubic metre provides around23.4 Gigajoules of energy as opposed to natural gas which yields 39Megajoules. The LNG is regasified after delivery for distribution orpower generation.4

Processing of natural gas at the individual well head is variable, as isthe product from individual wells.5 These variations can causedifficulties in storage and LNG from different sources cannot be storedtogether. LNG exported from Australian to Japan is controlled bystrict contracts ensuring that each tank is dedicated to a specificquality of gas' Gas prices are generally quoted at the wellheadincluding liquefaction costs for anyone gas source. The price increasesas the transport margins are added.

LNG projects require heavy capital investment prior to any cash flowgeneration from sales. Facilities are constructed according to forecastdemands many years in advance. Should demand not meet theforecasts or price alterations occur, the cash flow of the project may becritically restricted. Consequently for investment security natural gasprojects generally require forward sales contracts. Pipeline gas is alsoa capital intensive development but to a lesser degree than LNG.

4 Wheelahan, Bernard., International Prospects for Liquefied Natural Gas (LNG)Conference Address 4/8/92 Sydney N .S.W. 'Commercial Opportunities for the GasIndustry'.

5 Armstrong, Graham., Energy Pricing, National Eoonomic Review, no. 19 April1992.

6 Arai, T., Liquefied Natural Gas Trade. A Japanese Perspective, PacificEoonomic Papers, 110. Australia Japan Research Centre, Australian NationalUniversity Canberra.

Natural GIJS • An Australian Growth Industry? 7

Environmental Benefits of Natural Gas

Natural gas combines with oxygen on burning to release heat, formingcarbon dioxide and water.

CH. + 20, - CO, + 2H,O + Energy

This reaction is similar for all fossil fuel sources such as petrol, dieseland coal. Benefits may be derived from the use of natural gas relativeto the convenient liquid and solid fuels. The energy produced inproportion to the amount of carbon dioxide released is low for naturalgas relative to other fossil fuels. Levels of particulates (minute solidmatter) released to the atmosphere are also low for natural gas, whichcan positively contribute to local air quality. Lead is not required fornatural gas vehicles as an octane enhancer. Additionally carbondioxide, aromatic and nitrous oxide emissions are reduced. Thereduction in the emission of carbon dioxide achieved by a Natural GasVehicle (NOV) is around twenty percent. Figure 6 shows the relativeemissions of carbon dioxide per gigajoule of energy produced.7

Estimates made by the Australian Institute of Petroleum indicate that,even by converting half of Australia's road vehicles to natural gas,savings of only two per cent would be made on the total Australianemissions of greenhouse gases.8 That is the benefits are not as clearas the simple tailpipe emissions measure. The Institute contends that'much greater reductions of carbon dioxide emissions could be achievedby using gas instead of coal in new power stations'. Since the relativedifference in emissions between coal and natural gas per unit of energyproduced is some 50 percent more for coal, advantages may be derivedfrom the substitution of gas for coal where possible. A disadvantageof this substitution could be a rapid run down of natural gas resourcesfor power generation. Future usage in vehicles could be moreadvantageous for stretching overall fuel resources.

7 lVby Natural Gas Vehicles for Australia, The Australian Gas AssociationA.e.N. 004 206 044.

8 The Greenhouse Effect a Position Paper. Australian Institute of Petroleum Ltd.Submission to Senate Standing Committee : Reducing the Impact of theGreenhouse Effect 7/2/92.

8 Natural Gas - An Australian Growth Industry ?

Development of Natural Gas as Fuel

The Australian Gas Light Company commenced gas distribution toSydney in 1841. Town gas was produced by the retorting Cheating) ofcoal rather than by tapping indigenous natural gas. Cost analysis atthe time indicated that gas was the cheapest available fuel source forlighting. Electricity assumed the major light generation role in Sydneyby the time of the First World War. Gas remained as a source ofdomestic fuel for cooking and heating with the distribution orreticulation system remaining in place.

As late as the mid 1960s Australia's demand and supply of natural gaswas virtually zero.9 Commercial quantities of natural gas werediscovered in Australia during the 1950s and 1960s. A pipeline toAdelaide from the Moomba Gidgealpa field was constructed hy theSouth Australian Government hy 1969; Brisbane commencedcommercial reticulation of natural gas from Moonie in 1969; byDecember 1970 Melbourne was converted to natural gas from theGippsland field; Perth was supplied with natural gas from Dongara in1971; natural gas from Moomba reached Sydney in December 1976.The connection ofSydney resulted in a dramatic revival of the NaturalGas Company - formerly Australian Gas Light (AGL).lo

The Australian natural gas industry has evolved as a series of separateState supply entities with the exception of the Cooper gas basin inSouth Australia which supplies gas to New South Wales. The FederalGovernment is strongly encouraging trade in natural gas on a nationalbasis consistent with its broader microeconomic reform strategyincluding the National Competition Policy (Hilmer Report). Resistanceto these plans is driven by uncertainties of particular states withregards to supply surety. Nevertheless, the development of a crossborder grid is generally accepted as inevitable and should be a featureof the domestic gas scene by 2000. However, restrictions will beimposed by the relatively immature state of the existing grid. One ofthe key results of the Council of Australian Governments (COAG)meeting in February 1994 was agreement by the State Governmentson the removal of legislative barriers to free trade in natural gas. Themeeting also agreed that the national framework would includeuniform national pipeline construction standards, increased

9 Petroleum Gazette 1992/93 pp16.

10 Broomham. Rosemary. First Ligbt, 150 Years of Gas, Hale and lremonger,Sydney 1987.

Natllral Cas - An Australian Growth Industry? 9

AUSTRALIA'S NATURAL GAS RESERVES

10%

54%

2%20% o BROWSE

~ BONAPARTE

10% 0 CARNARVON

~ COOPER

• GIPPSLAND

IIIIIll OTHER

Figure 3. Relative Proportions of Natural Gas Reserves in Australia

NATURAL GAS CONSUMPTION BY SECTOR

2% 7%o COMMERCIAL

.. RESIDENTIAL

o MANUFACT.

~ MINING

• OTHER58%

Figure 4. Australian Natural Gas Consumption by Sector in 1989/90.

Adapted From: Gas Supply and Demand Study. AUSlralian Gas Association July 1992

Narural Gas - An Australian GrOll',h Indus,ry ? 10

AUSTRALIAN NATURAL GAS DEMAND

1.400

1.200

V) 1.000t.<l...l~ 8000...,« 600f-<t.<l... 400

200

0

ISALES GAS PRODUCTIO FOR DOMESTIC CONSUMPTION I

YEARFigure 5. The Australian Natural Gas lndustry is demand not supply driven.

Adapted From: Gas Supply and Demand SlUdy. Australian Gas Association July 1992

ENERGY AND CARBON DIOXIDE

BROWN COAL

BLACK COAL

PETROLEUM

NATURAL GAS

~

139

JJ:j 91

J 68..Il 55.. ./

o 10 20 30 40 50 60 70 80 90 100

KILOGRAMS OF CARBON DIOXLDEFigure 6. Carbon Dioxide Emissions per Gigajoule of Energy Produced.

Adapted From: A National Str'<ltcgy for the Natural Gas Industry. AGPS. July 1991

Natural Gas - An Australian Growth Industry? 11

commercialisation of operations, no restrictions on the uses of naturalgas and free and fair trade in gas franchise arrangements. ll

The onshore and offshore production facilities remain remote fromcentres of population as shown in Figure 2. Eighty percent ofAustralia's current resource of natural gas is situated in the NorthWest of Australia as indicated in Figure 3. Potential exists for theutilisation of coal bed methane in the eastern states and the locationof additional eastern Australian resources is probable. The mainlandcapitals and larger provincial centres are generally supplied by a singlepipeline from each producing area. The production of gas hasremained a private sector activity, whereas pipelines and distributionhistorically have both private and State government involvement. TheFederal Government's major policy concern is to facilitate natural gasas a national market driven industry along with the privatisation ofpipelines. 12

The Australian natural gas industry has considerable regulation at alllevels of production, transmission and distribution. Due to theownership mix between private and public enterprises there is lessvertical integration within the natural gas industry than there is in theAustralian electricity industry.13 The Commonwealth Governmentannounced its intention to sell the Moomba to Sydney pipeline in the1992 Budget. AGL is currently negotiating the purchase of a halfequity share in the pipeline as it is the only customer of the NSW line.

The increasing importance of natural gas as a fuel has represented amajor change in the recent history of energy dependency in Australia,that is between 1975 and 1985. Similarly between 1985 and 1990 amajor change in export trade has occurred, that is, the production ofliquid natural gas from the North West Shelf Project for powergeneration in Japan. Natural gas provides 17 per cent of Australia'sdomestic energy usage and is the third most important energy sourceafter coal and oil. 1" The manufacturing industries in particular haveswitched into natural gas, especially where there is a strongrequirement for process heat. Liquid natural gas exports to Japan

11 Council ofAustrolian Governments (COAG) Communique, Hobart 25 February1994.

12 Alan Griffiths, Minister for Resources Media Release 31n/91.

13 Dalziell I., Noble K and Ofei-Mensah A, Electricity Gn'ds and Gas Pipelines inAustralia, ABARE Resean:h Report 93.12, AGPS.

14 Energy, demand andsupplyprojections Australia 1992-93 to 2004-05, AustralianBureau ofAgricultural and Resource Economics research report 93.2 ISSN 1037­8286.

12 Natural Gas - An Australian Growth Industry ?

from the North West Shelf Project make up a large contribution toAustralia's current account; around $1.3 billion in 1994 with strongincreases forecast. 15

Future developments in the natural gas industry are likely to centrearound partial substitution of natural gas for liquid petroleum,increased residential reticulation and possibly the development ofnatural gas fired power stations. Figure 5 indicates the extent towhich the Australian natural gas industry is demand driven.Additional demand would be expected to reduce the realistic life of thegas resource, which presently is projected to be adequate to at least2035. However, the current gas resource has only been estimated withregards to today's circumstances. 'Deliberate offshore exploration forgas is unlikely and even if gas is found during exploration for oil, itwill have little effect on the current supply so long as adequate gasdiscoveries are made in the onshore Cooper and Eromanga Basins.'16The location of additional natural gas resources is likely to occurwhere there is a market incentive for securing the additional resource.The location by BHP of the Minerva field off Victoria during 1993 isan example of this. Similarly the Lark discovery made in 1993 and theLink field discovery made by Bridge Oil and Petroz in March 1994 arelikely to be readily connected to the existing gas gathering system.These recent finds and others likely to be made in the future couldsupplement existing Eastern States gas output for some time. 11

Natural Gas Usage

The North West Shelf Project is the largest resource development inthe history of Australia, contributing one per cent to Gross DomesticProduct during the production phase. IS This exported gas is used forbase load electric power generation by numerous power companies andfor gas fuel by gas reticulation companies. Natural gas pricing isdetermined by the relationship between gas price and the price ofother substitutable commodities, rather than on a spot basis as withmost other commodities. The Australian policy of parity pricing whichended in 1988 has largely divorced energy prices from the costs of

15 Agriculture and Resources Quarterly, ABARE, Volume 5 Number 4 December1993.

16 Gas Supply and Demand Study, The Australian Gas Association 1985, ISBN 085852 128 8, pp39.

17 Howarth I.,Early prcxluction likely (or Link field gas find, Financial Review 15March 1994.

18 Powell A. and Higgs P., Australia's North West Gas Project, Resources PolicySeptember 1992.

Natural Gas - An Australian Growth Industry? 13

production. Even at competitive prices gas is only substitutable to alimited degree. Gas has proved successful where alternative sourcesof fuel for electricity generation are expensive. Since 1988 theprincipal electric power stations in the Northern Territory haveemployed natural gas fuel.

The value of natural gas in Victoria is currently high and the futurevalue of Bass Strait natural gas for electricity supply involves anumber of issues. The State Electricity Corporation ofVictoria's plantcould increase its gas fired plant capacity in the future. Gas forelectricity has low capital costs and short lead times, and offersversatility in meeting peak and intermediate loads. Future gas pricesin Australia are inherently uncertain but deregulation should providesome downward impetus. 19

The environmental benefits of natural gas are clear in terms of thegreenhouse gas emissions per unit of energy produced as shown inFigure 6. In December 1992, the Senate Standing Committee onIndustry, Science and Technology recommended a switch to fuelswhich emit low volumes of carbon dioxide, such as natural gas.However, other factors must also be considered, especially the issue offluid versus solid fuel available for transport. That is, natural gas canreadily be applied as a vehicle fuel using existing technology; to usecoal as a vehicle fuel would be extremely expensive, as conversion toa fluid would be required. The Electricity Supply Association ofAustralia (ESAA) argues that community attitudes may dictate that amore appropriate priority for natural gas is in the replacement of oilas a transport fue1. 2o Natural gas resources are substantial under theexisting usage patterns but if natural gas were used more extensivelyfor electricity generation the resource could be rapidly depleted.

Gas turbines fuelled by natural gas are technically and economically aviable option for electricity generation. The capital costs of a combinedcycle ~lant is approximately two thirds that of a black coal fired steamplant. 1 Where the infrastructure costs for gas production andpipelining are considered the situation is reversed to the extent thatgas produced by coal gasification is a more economic source of energy.Also the technology for utilising coal is improving with plants using

19 McColl G, 1987, The Economic Framework for Considering Options forElectricity Supply in Uncertain Environments, Natural Resources andEnvironment Committee, Victoria.

20 Wilkinson R., Oil Patch, Australian Business September 25 1991.

21 Gas for Electricity Generation, Electricity Supply Association of AustraliaLimited, July 1991.

14 Natural Gas - An Australian Growth Industry ?

fluidised bed combustion and integrated gasification combined cycleentering commercial operation.

Natural Gas Vehicles

Compressed natural gas (CNG) is used for motor vehicles. The gas isstored in cylinders on the vehicle under high pressure. The pressurerequired for eNG storage is some twenty five times that required forLPG, due to the relative volatility of methane. Whilst natural gas andCNG are mainly methane, LPG is composed of the higherhydrocarbons, propane (C3H.) and butane (C.HII.!' Around the worldthe natural gas vehicle (NGY) is emerging as an alternative fuel usingoption. Nations involved in the development of NGVs include Italy,Canada, the United States and New Zealand. It is anticipated thatthere will be around two million NGVs globally by 1995. The reasonsfor the trend to the NGVs internationally are similar to those whichthe Australian Gas Association apply to Australia, namely, 'security ofsupply of fuel for transport, the environment and economicbenefits. ,22 The security of supply for natural gas on a national basisis excellent as the identification of Australian resources above makesclear.

Operation of NGVs in urban areas in particular offers a sharp loweringin ash and particulate levels.23 Other advantages include no leademissions, low carbon monoxide and nitrous oxide emissions and verylow aromatic emissions. The larger scale environmental benefits forNGVs are less clear with widely varying estimates on the benefits withregards to greenhouse gas emissions. The economic benefits ofindigenous energy supply versus imported fuel are immediate andpotentially massive. Australia's import bill for oil is expected to risefrom about $800 million net in 1992 to around $3 billion by the year2000.'" Any domestic production which reduces this importation willimmediately benefit the current account.

Trucks employing natural gas as a fuel have gone into service inQueensland. Two cylinders of ninety litre capacity for high pressurenatural gas are used. No black smoke results from the natural gas fueland fifteen percent less greenhouse gases are emitted compared with

22 Why Natural Gas Vehicles for Australia, The Australian Gas Association, NotDated. Gas Industry House Canberra ACT 2601.

23 StephensonJ., Natural Gas Vehicles 1990,lntemational Association for NaturalGas Vehicles.

24 Gomez B., Annual Oil Bill Tipped to Hit $3 BiJlion, The Australian, 28/12/92.

Natural Gas - An Australian Growth Industry? 15

diesel fuel. The fuel source can be switched to diesel if requiredproviding an excellent supplement to diesel.25 The development ofNGV technology can have additional export market benefits; forexample Western Australian interests are exporting technology onworld markets.26

The growth projected in the use of natural gas as a vehicle ruel inAustralia is concentrated in a few niche markets in the road transportsector. The main commercial advantage of natural gas for vehicles isthe relatively low fuel price, which reflects the fuel excise exemptionon natural gas. Changes in this excise arrangement could erode thenatural gas price advantage. Vehicles which annually travel largedistances with ready access to refuelling facilities are best able to takeadvantage of natural gas. Urban fleet vehicles such as delivery vansand buses along with heavy trucks on intercity routes best fit thesecriteria.27

Estimates vary widely for the potential growth in the Australian NGVindustry. However, all tend to agree that growth in consumption ofnatural gas will be greatest in this sector mainly due to the small baseof vehicles currently using natural gas. The Australian GasAssociation announced its aim in December 1992 for natural gas tocapture ten percent of the vehicle fuel market within ten years.ABARE's forecasts are less optimistic, the projected use of natural gasin 2004-05 being only 2.8 percent of the road transport energysector.2lI This can be compared with predictions of LPG in the 1970.which were around ten to fifteen percent of the vehicular fuel marketwithin a few years. Yet today the LPG only comprises 3.7% of theAustralian motor vehicle fuel market and is forecast by ABARE toremain around that level.

25 Natural Gas Vehicles 1990, John Stephenson.

26 Personal Communication, John Kain. Director Eronomics. Commen:e andIndustrial Relations Group. ParlilU11entary Research Service, 23 March 1994.

27 Holmes L.and Naughten B., Prospects for Natural Gas as a Vehicle Fue4ABARE Outlook 93 Conference Canberra 2-4 February 1993.

28 Holmes L.and Naugbten B., Prospects for Natural Gas as a Vehicle Fuel,ABARE Outlook 93 Conference Canberra 2·4 February 1993.

16 Natural Gas • An Australian Growth Industry ?

Outlook for Natural Gas

Manufacturing is the single largest end user of natural gas in Australiaas shown in Figure 4. Mining, residential and electricity generationare the other major consumers of gas. The consumption of natural gasis projected to grow least rapidly in manufacturing and mining. Themost rapid growth is forecast in the road transport sector, from a basenear zero. However, total consumption in this sector will not be large.Electricity generation is also forecast as a growth area for natural gasusage dependent upon gas fIred power station construction in WesternAustralia, South Australia and possibly Victoria.29

Exports of Australian LNG from the North West Shelf project areprojected to peak in 1994/95 at a value of $1564 million. Demand forNorth West Shelf LNG is almost entirely dependent upon the growthin the requirement for electricity generation in Japan, although some'spot' sales are made to Spain, Taiwan and South Korea. In recentyears Japanese demand for electricity has grown by an average, inrecent years of 6 per cent per annum. Lower economic growth inJapan is expected to constrain the growth in electricity demand to aslow as 2.8 percent per year. The full production capacity of the NorthWest Shelf project will be needed to meet even the lower end ofJapanese electricity demand projections. A fourth liquefaction unitwould be required to supply demand beyond that projected. Thefeasibility of installing another unit is being investigated; however,expansion of Australia's LNG production capacity is not expected tooccur until after 1997-98.30

During calendar year 1992, the global proven reserves of natural gasrose by 3 percent while consumption was down by 0.61 percent. Thefall in consumption is attributed to a warm northern hemispherewinter and the continuing economic recession.31 A major regionaldifference not accounted for in these statistics is the real fall inAmerican reserves. Overall, producers are demanding higher prices fornatural gas to develop fields while price is under pressure from lowcost oil. As a result the global natural gas industry is not optimisticabout short term opportunities.

29 Energy, demand andsupplyprojectionsAustralia 1992-93 to 2004-05, AustralianBureau of Agricultural and Resource Economics 93.2, ISBN 1037-8286 pp39.

30 Agriculture and Resources Quarterly, Australian Bureau of Agricultural andResource Economics, Volume 5 Number 4 December 1993, ISSN 1032-9722.

31 Heren P., Prices become the paramount factor, Petroleum Economist August1993.

Natural Gas . An Australian Growth Industry? 17

The Australian Bureau of Agricultural and Resource Economics(ABARE) predicts that natural gas consumption in Australia will growat a rate of 2.6 percent per year during 1991 to 2005.32 Productionfrom Australian gas fields is similarly predicted to grow at 3.5 percentper year to 2005. Figure 5 shows the relationship between domesticconsumption and the export of LNG.

At the 1994 COAG meeting in Hobart it was decided to defer Federallegislation on a national gas market. Primary Industries and EnergyMinister, Senator Bob Collins, announced the deferral on 27 February1994. The Interatate Gas Pipeline Bill 1993 was due to be debated inthe Senate in late February, in order to introduce a regulatoryframework for the National Gas Strategy of 1991. Under the proposedbill the ownera of gas pipelines would have to provide access tointerstate pipelines on negotiated tenns and conditions. The TradePractices Commission (TPC), or its successor, would be required toarbitrate where required when negotiations over access break down.The COAG decision means that arrangements will now be put in placeto allow gas consumers and producers in any state or territory to buyor sell in any other state or territory under normal competitivecommercial terms. The result should eventually be a market orientednational gas industry with an increased area of availability and theremoval of artificial regulatory barriers at state and territory borders.

The natural gas industry, including the Australian PetroleumExploration Association (APEA) has endorsed the proposed changes bythe Federal Government as outlined in the National Gas Strategy.One aspect the industry has some concerns about is the level to whichthe Trade Practices Commission (TPC) can control the price of naturalgas haulage rates and the access to pipelines. Should the TPCprinciples be extended beyond the MoombaiSydney pipeline, the TPCpowers would be increased beyond those relating to trade practices andpossibly confer upon it the role of specific regulator for the gastransmission industry. The role of a specific regulator would becontrary to the recommendations of the Hilmer Report on nationalcompetition policy. Also of concern to the producers of natural gas isequity in treatment of all users of gas pipelines and between pipelineusers and owners. The gas industry believes that the TPC principlesare not commercially based and do not provide an adequate frameworkto facilitate equitable treatment. They also maintain that competitionbetween the gas and electricity industries and State Governmentimposed barriers to interstate trade provide greater constraint to freetrade than the perceived lack of competitive spirit within gas industry.

32 Australia's gas industry gaining new prominence, Oil and Gas Journal, July 191993.

18 Natural Gss - An Australian Growth Industry ?

The TPC's stated objective is to create greater competition in theAustralian gas industry. The current concern of the TPC is to ensurethat supply arrangements for the Moomba/Sydney pipeline are suchthat the acquisition of a majority shareholding by AGL would notsubstantially lessen competition in the supply of gas. Followingconsultation with the gas industry, the TPC has prepared a set of draftaccess and pricing principles for third party access to the pipelineunder fair trading terms.

The TPC has already been involved in the sale ofSagasco by the SouthAustralian Government and the sale of the Victorian Gas and FuelCorporation's Heatane Division by the Victorian Government. Futureactivities planned by the TPC include monitoring the effects of theHilmer National Competition Policy on the industry and involvementin future movements by State Governments in the gas industry.Additionally pricing behaviour which breaches the provisions of theTrade Practices Act will be investigated.

Senior executives at a number of Australia's major gas companies havevariously described the TPC draft guidelines as 'grossly intrusive"'unnecessary', 'commercially naive' and 'expansionary'. One of themajor impediments to the industry accepting the guidelines is theproposal that the Australian Gas Light Company (AGL), while able toacquire a 51 per cent stake in the pipeline, would only have votingrights equal to the other 49 per cent partners. The casting vote wouldbe given to the largest of the minority stake holders. Representativesof the industry are reluctant to enter into public debate on the matter,with negotiations continuing. Should the TPC's draft guidelines beaccepted it is unlikely that the $550 million sale of the Moomba/Sydneypipeline would proceed.

Conclusions

The Australian natural gas industry is largely demand driven. Therewill be adequate resources of natural gas in Australia for many yearsat the current rate of usage. Indigenous oil production is predicted toprovide a decreasing proportion of domestic oil demand into the future.Partial substitution of natural gas for liquid petroleum could reducethis import demand. Natural gas is widely recognised as causing loweremissions of greenhouse gases for each unit of energy produced,relative to coal or oiL The substitution of natural gas for petroleumfuel in urban areas would result in a significant reduction in local airpollution.

The development of a natural gas pipeline from the North West Shelfto the eastern States will not occur until it is economically viable, andthe resources presently used by the eastern states are nearing

Natural Gas • An Australian Growth Industry? 19

depletion. Successful exploration efforts in the South Eastern Statesare continuing onshore and offshore and the full natural gas potentialof these areas is yet to be realised. Additional potential exists for tbedevelopment of coal bed methane resources. A free market in naturalgas will have developed by the turn of the century. Natural gas forvehicular transport will have some difficulty in obtaining marketpenetration, mainly due to the existing use of LPG in Australia.Natural gas, however, should obtain reasonable markets in some nichessuch as fleet vehicles.

The author acknowledges the assistance of Bill Bak in formatting thispaper for publication.

20 Natural Gas - An Australian Growth Industry ?

Appendix

Unit and Conversion Factors

Metric UnitsSymbol Preftxk kiloM megaG gigaT teraP petsE exa

Ex:!'onential1010·10'1012

10"1018

Natnral GasStste or Territory

New South WalesVictoria --

Sales GasField and Plant Gas

Queensland --Sales GasField and Plant Gas

Western Australia --Sales GasField and Plant Gas

South AustraliaNorthern Territory

Town Gas--Synthetic Natural GasReformed GasTempered LPGCoke ovens gasBlast furnace gas

Megajoules percubic metre39.1

38.648.8

39.638.5

38.241.939.140.4

39.020.025.018.1

4.0

PARLIAMENTARYRESEARCH SERVICE PUBLICATIONS

No. TiUe AulboTJGroup Contact&tension

BACKGROUND PAPERS 1993

1 The 1942 Singapore disaster: assessing recent claims G. BrownlFADT 2451

2 Australia/New Zealand: Closer Defence Relations G. BrownlFADT 2451

3 Overview of ecologically sustainable development M. Emery 2475and pro es in Australia, 1990-92 consultant/ECm

4 Private sector input to the APEC process J. Adams 2475consultant/ECm

5 Labour Market Deregulation: the New ZealandExperience S. O'NeiWECIR 2474

6 Seeking Spratly Solutions: Maritime Tensions inthe South China Sea A. ShephardIF'ADT 2551

7 Monarchy or Republic? Constitutional optionsfor States A. Twomey/LPA 2431

8 The Multiculturalism and Immigration Debate1973 - 1993 J. Gardiner-GardenlSP 2411

9 Youth Issues A. Mi11bankconsultantlSP 2411

10 The Awakened Dragon: Chinese Foreign Policyin the 1990s B. MartinIFADT 2441

11 Politics in Fiji: Just a Question of Race? S. SherlockIF'ADT 2441

12 Methods of Choosing a Head of State A. TwomeylLPA 2431

13 Inflation Fighting and Reserve Bank Reform in N.Z. P. HanrattylECm 2474

14 Commonwealth Government Assistance for A. BurdonAdjustment in Agriculture consuitantJECm 2474

15 A Guide through the Mabo maze A. TwomeylLPA 2431

16 International Year of the Family 1994 S. McInnisconsultant/SP 2456

17 Monarchy or Republic? Reserve Powers of theHead of State Y. MarshILPA 2476

18 Monarchy or Republic? A comparative outlineof major Presidential powers I. IrelandILPA 2476

19 Sex Discrimination Legislation in Australia C. LannourlSP 2456

20 Comparisons of 1991 Census Characteristics:Commonwealth Electoral Divisions A. KoprnslStats 2482

21 void

No. TW. AutborIGroup ContactErlensH>n

BACKGROUND PAPERS 1993 (oontioued)

22 Federal Elections 1993 G. Newman/Stats 2481

23 The Mabo debate - a chronology J. Gardiner-GardenlSP 2411

24 Federal Elections Results 1949-93 G. NewmanlStats 2481

25 void

26 Monarchy or Republic? A oollection of argumentsfor and against A. TwomeylLPA 2431

27 Japanese politics and the July 1993 election:continuity and change M. UnderdownIFADT 2441

28 void

29 The Australian Loan Council (2nd Edition) D. James/ECIR 2461

30 An Overview of the Commonwealth Budgetary Process(3rd Edition) D. JamesIECIR 2461

31 Election Dates B. McMahonILPA 2431

32 Residential Care for the Aged R. Le GuenlSP 2411

33 The Development of Federal Industrial Powers S. O'NeilllECm 2475

34 Australian Mining Leases: State and TerritoryProcedures P. KaylSTER 2421

35 Commonwealth Road Funding since 1980 D. James/ECIR 2475

36 Trends in Unemployment and Underemployment T. KrygerlStats 2482

No. TItle AutborKlroup ContactEzteDsion

ISSUES BRIEFS 1993

1 Index to Parliamentary Questions on Defence: 1992 G. BrownlFADT 2451

2 Racial Vilification and Freedom of Speech A. TwomeylLPA 2431

3 1993 Elections: Preliminary Results G. Newman/Stats 2481

4 Report: Outlook 93 Conference (Minerals and Energy) P. KaylSTER 2421

5 'Office of Profit under the Crown' and Membership ofthe Commonwealth Parliament K. ColeILPA 2431

6 The Voyager Disaster: A 30 Year Saga D. AndersonIFADT 2451

7 Cambodia Prepares for Elections F. Frost/FADT 2441

8 Data-matching in Commonwealth Administrations M. Mason/LPA 2431

9 General Revenue Grants and the 1993 FinancialPremiers' Conference D. Batts/ECIR 2474

10 Waste not? Recycling and waste minimisation B. McCormicklSTER 2421

11 Australian Battles on the Western Front During WWI D. ADder.30nlFADT 2451

12 Petrol Prices Beat the Budget - Taxing without Y. MarshILPA 2431Authority

13 Sales Tax and Refunds: the Mutual Pools Case B. Bailey/LPA 2646

14 Taking risks for Peace: the Israeli-PLODeclaration of Principles M.On¢'ADT 2441

15 Effects of Sub-clinical levels of lead in Children R. PanterJSTER 2421

16 Immigration and Unemployment - a symposium report P. HanrattylECIR 2474

This series bas been disoontinued. From 11 November these publications will be known asCurrent Issues Briefs.

No. TiUe AuthonGroup COntactE:rleDsiOD

CURRENT ISSUES BRIEFS 1993

1 APEC's Seattle Meetings: Issues for Australia F. FrostIFADT 2441

2 Are State revenues safe or does the confusionremain?: The High Court Decision in the CapitalDuplicators (No 2) Case B. BaileylLPA 2431

3 The Native Title Bill . Impact on the States A. TwomeylLPA 2431

4 When the talking had to stop: The end of theUruguay Round M. WarbylFADT 2441

No. 7iUe AutborAJroup Contact&tens;on

RESEARCH PAPERS 1993

1 Mghanistan: the politics of disintegration R. TomarlFADT 2451

2 The Defence Commercial Support Program: Saving$200 Million a Year for Defence Procurement? A. ShephardfFADT 2451

3 International Trade and the Global Environment P. HanrattylECIR 2457

4 Australia's Defence Cooperation Program A. ShephardIFADT 2451

5 Further Processing of Agricultural Products in A. WatsonAustralia: Some Economic Issues (consultant) ECIR 2457

No. Title AutboTJGzuup ContactErleDsWn

BACKGROUND PAPERS 1994

1. House of Representatives By-elections 1949-1994 G. Newman/Stats 2481

2. Medicare. Private Health Insurance and Proposals P. MackeylSP 2412for Change

3. The Sad Lack of Magic Pudding; Problems with M. Warby/Stats 2485Protectionism

No. TItle Autborft]roup

CURRENT ISSUES BRIEFS 1994

1 -Restoring Full Employment-: An Overview S. O'NeillG. Winter &D. Daniels ECIR/SP 2457

2 Report: Outlook 94 Conference (Minerals and Energy) P. KaylSTER 2421

3 Reducing Unemployment: A Conference Report

4 Assessments of the Economic Outlook

P. HanrattylECm

J. Kain/ECIR

2457

2460

No. Till. Autbor/Group ContactE:rlension

RESEARCH PAPERS 1994

1 National competition Policy: Overviewand Assessment J. KainlECIR 2460

2 Natural Gas - An Australian Growth Industry P. KaylSTER 2422