my thoughts , page-52

Maaze this is worth a read too.

Gas price Explosion

The importance of gas in eastern Australia’s power supply system – home to more than 90 per cent of national electricity demand – over the next 10-20 years is a big debating point and becoming more prominent.

As I said in an earlier post, the Australian Petroleum Production & Exploration Association, Santos in particular and other companies are now working hard to ensure that the sector’s value in a decarbonising environment is understood – not least in the energy security white paper that Martin Ferguson is due to produce for the Rudd government later this year.

For eastern seaboard consumers – in particular large trade-exposed industrial users – the big issue is what power prices they will face if there is a large-scale shift away from coal to gas.

The availability of adequate reserves on the eastern seaboard has gone from being quite a worry earlier this decade to a second-tier (perhaps even third-tier) issue as the coal seam methane suppliers keep unveiling higher proven reserves.

The big consumers’ concern is that the combination of major coal seam methane exports from Gladstone and substantial local demand by generators nonetheless will push eastern seaboard gas prices towards export parity. The fear that this could see wholesale power prices double in the next decade – as demand pushes eastern Australia consumption from about 700 PJ a year now to more than 1,600 PJ by 2016 – has been expressed to Ferguson’s review team and in evidence to the Senate fuel and energy select committee.

Stuart Hohnen, chairman of the DomGas Alliance in the West, told the committee last month that WA gas prices have risen five-fold, with prices five times higher than in the east, despite the huge gas volumes available offshore, and he warned that the LNG developments in Queensland would “lead to significant price rises for (eastern) consumers.”

Santos boss David Knox is having none of it. He says eastern domestic prices are not going to reach LNG netback values because there are sufficient gas reserves in the Gunnedah basin (NSW), the Cooper basin (South Australia), Bass Strait and the Queensland CSG resources to keep supply below export parity.

His forecast, given in a recent conference call discussion with analysts, is for a “gentle move forward in prices as the gas market in the eastern states grows and becomes of increasing importance to baseload power generation.”

Knox notes that the newest and most efficient combined cycle gas turbines – the system needed for baseload power production as opposed to open cycle used to equip peaking plants – require 7.6 gigajoules of gas to produce one megawatt hour of electricity.

At present wholesale gas prices ($3 to $4 per GJ) that translates in to $30.40 per MWh, rather too expensive to compete with black and brown coal without an emissions trading system, but pretty viable when there is an ETS around $20.

By comparison, the Rudd government believes it will need a renewable energy target penalty of $65 per MWh – on top of the wholesale market going price for energy – to deliver its goal of 45,000 GWh of green power by 2020.

Even if this level of RET is achieved by 2020, on present projections of demand at the end of the next decade, more than 25,000 GWh a year of new supply will still be left to be met from conventional resources. Assuming some of the older coal-fired generation has fallen over by then, the energy required could be about 40,000 GWh (or more) annually.

Do the multiplication and you find that this would represent north of a billion dollars in wholesale gas sales revenue per year – no wonder Santos and Co are so keen on encouraging a dash for gas. Go downstream in to gas-fired power generation – as Santos and others are doing – and the value proposition is still more impressive.

As for future prices, the consumer cynics mutter on that, despite assurances, they will be decided by who and how many control the market in the end. It is not a debate that will go away any time soon.

http://www.businessspectator.com.au/bs.nsf/Article/Gas-price-in-the-future-pd20090724-U8V9J?OpenDocument&src=srch

(thanks to Backsheesh1 on esg).