AGL Energy chief executive Michael Fraser has warned that western Sydney will bear the brunt of expected shortages in natural gas in NSW that are predicted in just over two years, resulting in job losses and higher energy bills.
Mr Fraser’s comments to Financial Review Sunday came as AGL released new research forecasting 21 days of gas shortages in NSW in the 2016 winter as gas is sucked north to the Queensland LNG export projects.
“The bottom line is New South Wales is going to face gas shortages,” he said. “Winter 2016 is when it starts.”
NSW has big gas purchase contracts rolling off in the next few years, but plans to develop coal seam gas in the state that could replace those supplies have been slowed by changing regulations in the industry.
Food producers, large manufacturers and industry groups have all been warning of the escalating risks to companies and jobs because of a pending gas supply crisis in NSW, which produces only about 5 per cent of its gas requirements, relying on other states for the rest.
“We all know that manufacturing in Australia is under a lot of pressure right now,” Mr Fraser said.
“A lot of businesses are simply not going to be able to afford to pay the higher prices, let alone deal with supply shortfalls.”
Wholesale gas prices, which historically have been about $3 a gigajoule, have surged above $8 in recent contracts. Some analysts are advising prices could spike to $12 in the next few years before likely softening again to below $10. AGL is among retailers proposing to hike household regulated gas tariffs in NSW by about 20 per cent from July 1 because of higher gas costs. ‘The clock is ticking now’
Mr Fraser said that – as the largest users of gas – food processing, building products and fertiliser makers would be the worst affected and many of those were in western Sydney.
AGL has been badly hit by the tightening regime around CSG in NSW, and the expansion of its Camden project south of Sydney and its Hunter project are now in doubt. Its Gloucester project in the Upper Hunter, which already has environmental approval, also cannot yet go ahead because AGL still needs NSW government approval for a fracking project near the site.
Mr Fraser said approval for the Waukivory pilot project was needed “over the next month or so” to allow the Gloucester venture to get gas into the market for the 2017 winter. He already advised last month that the final investment decision targeted for the project in the September quarter may be pushed back into 2015 because of the delays.
“The clock is ticking now,” Mr Fraser said. “The longer there are delays, the longer we are going to have problems.”
He said renewing big gas supply contracts set to expire was just “part of the solution” to the problem, as were AGL’s own negotiations under way for new supplies from the Bass Strait and elsewhere. The company’s gas storage plant under construction in Newcastle would also help.
However, the start-up of the three LNG projects in Queensland will triple demand for gas on the east coast within two or three years, meaning more was needed to head off shortages, Mr Fraser said.
Because of the delays in NSW CSG, even if the new projects now proposed are developed, they will not start up soon enough to prevent the supply gap. ‘Doing nothing is unacceptable’
In a research paper by AGL chief economist, Paul Simshauser, and head of economics and sustainability, Tim Nelson: “The most sobering aspect of our analysis is that we cannot identify any supply side expansion options inside the NSW boundary constraint prior to 2017 due to moratoriums placed on natural gas developments by successive administrations in prior periods.
“The forced exit of price-sensitive, gas-intensive manufacturing loads in NSW would seem almost inevitable.”
Mr Fraser denied AGL was being alarmist and pushing its own barrow in its warnings about the supply shortfalls, noting that the Australian Energy Market Operator had recently come to similar conclusions.
Santos, which also aims to develop a CSG project in NSW, has voiced similar worries, although Origin Energy, which has no CSG resources in the state, has played down the issue. Origin has recently inked new gas purchase contracts with the Esso/BHP Billiton venture in the Bass Strait.
“There are real issues. Doing nothing is unacceptable,” Mr Fraser said.
AGL’s forecast for a supply shortfall already takes into account that east coast gas demand, excluding the LNG projects, is likely to drop 20 per cent in the next few years due to rising prices.
Mr Fraser also said AGL could take “a couple of weeks” to decide whether to appeal the competition regulator’s veto of its $1.5 billion takeover of NSW power producer Macquarie Generation, which he described as a “very poor decision”.
He said AGL also had not decided yet whether to bid for Delta Coastal, the next NSW power generated slated for privatisation, if it didn’t acquire MacGen. Nor was it clear whether AGL would be able to bid for Queensland power generators that may be sold by the state until the detailed reasonings were released behind the Australian Competition and Consumer Commission’s ruling.
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