Steve Davies

Policy Adviser

Australian Pipeline Industry Association

October 2013

The Evolving East

Coast Pipeline Grid

Overview

• Gas flows of today and tomorrow

• Potential developments

• Pipelines and gas supply

• Need for innovative policy

• Transparency and liquidity

• Pipeline utilisation and capacity trading

Eastern Australia gas flows

Source: NERA

TODAY

Historical domestic gas demand forecasts

Current total gas demand forecast

Source: AEMO GSOO 2012

Eastern Australia gas flows

TOMORROW

Could gas pipelines help solve anticipated supply shortages mid-decade?

Not if we focus on pipeline markets

Transparency and liquidity

• Many calls for increased transparency and liquidity

• APIA view – Makes sense from an economic theory POV

– Can marginally improve efficiency

– Doesn’t address main issues

– Doesn’t recognise initiatives of last five years

– Transparency and liquidity evolve as depth of market increases

Liquidity needs depth to have utility

So how deep is Australia’s gas market?

Australia USA (lower 48) Louisiana

Area(sq km) 7,692,024 8,080,464 134,642

Population 23,022,387 306,675,006 4,533,372

Gas consumption (PJ) 1,515 27,450 1,576

Gas export (PJ) 1,086 1,782 6183 (to other US states)

Major pipelines 12 210 30

Pipeline length (km) 28,500 488,000 78,500

Storage facilities 2 400 21

[1] Australian gas statistics are from Energy in Australia 2013 and APIA’s pipeline data, US and Louisiana gas statistics are sourced from the US Energy Information Administration. Population statistics : Australian Bureau of Statistics and US Census Bureau (2010 Census). Area statistics: United Nations Statistics Divisions and US Census Bureau (2000 Census)

Capacity trading

• Multiple calls for capacity trading

– Transparency, liquidity, flexibility

– Reduce congestion

– Increase pipeline utilisation

• Light on details

• SCER RIS process

– Only two private sector submissions gave qualified support for facilitated trading

Flexibility

• Producers – Can sell gas into whichever market values it

highest at the time

• Emerging retailers – Can respond more easily as portfolio changes

• Major gas users – Need long-term security of supply to justify capex

• Infrastructure investors – Need long-term revenue security to justify capex

Pipeline congestion and utilisation

• Capacity demand is cyclical

• Congestion and utilisation linked directly to peak times

– At other times, if demand is being met neither congestion or under-utilisation is happening

• If gas sellers need increased access to unused capacity – where is the new demand coming from?

Solutions

• Pipelines want more throughput – ‘As available’ capacity option on all pipelines

– Historical data and increased info provision to BB make more useable

• Capacity trading options without pipeline engagement tend to be ‘bare’ transfers

• Pipeline led solutions can make use of ‘operational’ transfers – Allows nominations and allocations to be

managed in right place

Accelerate market evolution

• Grow gas usage

• Technology neutral electricity policy

• Accelerate gas supply development

• Increase pipeline utilisation

– Encourage large user downtime during peaks

– Encourage counter-cyclical demand

– Increase overall usage

• Peak and non-peak differentials relatively smaller

Could gas pipelines help solve anticipated supply shortages mid-decade if we consider physical operations?

Yes

• Existing pipelines can expand to increase supplies

– Most likely scenario is increased gas flows from Victoria to NSW and SA

• New pipelines could be built to connect new supply to existing demand

– Queensland to Hunter Valley Pipeline

…. but

• In reality, pipeline capacity is not a substitute for gas supply

• Supply problem is driven by two key issues • Price

– Sellers and buyers can’t agree Sellers want export parity – even those without export capability

• Production rates – CSG-LNG producers appear to have been optimistic of

ability to get gas out of the ground – Weather, well flowrates, community reaction and

regulation not best case

Could gas pipelines help solve price and production rate issues?

If they can accelerate the development of gas reserves

Infrastucture and development

• Infrastructure is vital to open remote regions to exploration and development

• Infrastructure investments are capital intensive

– Face sunk capital risks

– Must be underpinned by firm revenue streams – long term contracts

• Chicken and egg dilemma

Policy innovation

• Government could play a role getting potential projects over the FID line

• Support new infrastructure through: – Revenue or loan guarantees – Infrastructure bonds

• Could apply to many forms of linear infrastructure – Electricity transmission – Rail – Gas pipelines

What might that mean for pipelines?

Could it work for gas?

Conclusion

• Pipeline flow and operation will change in response to market change

– Not the driver

• To solve supply issues need more supply

• Efficiency gains in small markets are not particularly useful

• Increased gas usage will lead to greater market evolution

THANK YOU