Australia is the world's leading exporter of liquefied natural gas or LNG.
In 2020, the country exported $25 billion worth of natural gas to markets in Asia.
Interestingly enough, the country also occasionally suffers from natural gas
shortages in their own markets at home. It is a demonstration of the country's sprawling size,
bountiful natural resources, and complicated energy politics.
In this video, I want to talk about how the land down under
became one of the world’s biggest natural gas exporters.
## Reserves
Australia is known to have significant amounts of
proven natural gas reserves - about 3 trillion cubic meters worth in conventional reserves.
If you add in unconventional gas fields like coal seam gas and shale gas - which are not generally
included into estimates - the country may have as much as 12 trillion cubic meters in total.
Unfortunately, much of this gas is unevenly distributed.
Almost 80% of the country's conventional gas resources are concentrated in its northwest.
For the majority of its history, Australia has exported coal to its trading partners abroad
and reserved natural gas production for its own domestic use. Australians have
been mining coal since the 1800s, and started exporting their production after World War II.
Today, Australia is the world's second biggest coal
exporter. Second only to Indonesia, of all places.
When the country's first commercial gas field went online in the 1960s,
natural gas was seen as a "premium fuel supply" with "low pollutant characteristics" - especially
when compared to coal. Australians started using it to generate electricity and conduct industry.
## Natural Gas
Let's pause a bit to talk about gas.
Natural gas is a complex mix of hydrocarbons and non-hydrocarbons.
Mostly methane, but also with a lot of hexane, ethane, propane,
butane, hydrogen sulfide, and so on. It is odorless, colorless and lighter than air.
Scientists believe that it comes from organic matter trapped within sediment deposits
many years ago. Like the salmon, it travels from the "source rock" where it spawns
to underground formations called "reservoir rock".
Geologists categorize natural gas fields into two buckets:
Conventional and unconventional. Conventional gas describes
"free gas" trapped in porous reservoir rocks like carbonates, sandstones, and siltstones.
Unconventional gas is an umbrella term that covers everything else. I know, really creative. These
are generally found whilst searching for other fossil fuels and are more difficult to tap.
They might be trapped in tiny pores within shale rock deep underground - shale gas. Or
they might be absorbed and trapped near the surface in coal deposits - coal seam gas.
## Liquefied
One of the major problems with natural gas is that it can be relatively difficult to transport.
Gas reserves have historically been located very far from the population centers where
they are used, so safe and reliable transportation methods are necessary.
For almost a century, the industry used pipelines.
They are very convenient and economical for shorter distances, but lack flexibility.
Furthermore, their construction is often intercontinental and politically controversial.
For longer distances - beyond 700 miles over sea or
2,200 miles on land - liquefied natural gas makes more economic sense.
When you cool natural gas to negative 260 degrees Fahrenheit under normal atmospheric temperature,
it turns into a condensed liquid. In this form,
gas takes up 1/600th of its former volume and is far easier to transport in tanker ships or trucks.
The most significant downside of the LNG approach
is the need to build expensive liquefaction plants - a big upfront cost.
There are other ways to transport natural gas,
but pipelines and LNG make up the majority of the market.
## Export Ban
Critically, Australia - a very large country - does not have an integrated
nation-wide gas pipeline system. This 47,000 kilometer patchwork quilt
is made up of three largely separate sub-systems: The northern, western, and eastern markets.
Each one of these markets are largely separate from one another. They rely on their own local
natural gas fields and transport gas through their own pipeline systems.
This patchwork system exists because of physical distance and varying
regulatory regimes - and it contributes to a significant national energy security problem.
Australia cannot get the natural gas from where it is plentiful to where it is most urgently needed.
In the 1960s and 70s, it became an issue as new natural gas fields were discovered.
One large gas field in Central Australia (Mereenie-Palm Valley) was attracting
foreign interests from as far away as California.
This foreign interest sparked feelings of economic nationalism. And in 1970, Australia's
right leaning federal government imposed a general export embargo on liquefied natural gas.
This was to make sure that Australia's own domestic requirements came first.
But then came the North West Shelf venture.
## North West Shelf
The North West Shelf project started off as a joint venture between a mix of Australian players
like Woodside Petroleum and Mid-Eastern Oil as well as some foreign multinationals - Burmah
Oil Company, Royal Dutch Shell, British Petroleum, and a company called California-Asiatic Oil.
In the mid-1960s, the joint venture received a license to explore
a vast area in northwest Australia. For many years, they experienced little success, which
put financial strain on the marriage. Some of the venture partners dropped out, replaced by others.
But then finally in 1971, success! Natural gas was discovered at Scott Reef,
an atoll-like reef about 270 miles off the coast of Western Australia.
Additional large discoveries were then made at North Rankin and Goodwyn - some 80 miles
off the Western Australia industrial port city of Dampier. Those two fields combined
were estimated at the time to have over 300 billion cubic meters of natural gas.
These three discoveries offered more than sufficient natural gas supplies
to supply the Western Australian market in which they were located.
Thusly, the joint venture members started pulling together a massive $12 billion project
to develop these resources, build a LNG plant, and begin exporting LNG into the world market.
## Obstacles
However, there was a problem. The nation-wide natural gas export ban was still in effect.
The federal government at the time was left-wing and among other things resented the involvement
of foreign multinationals in the LNG project. They requested at least 50% local ownership.
Natural gas projects are complicated, capital-intensive things.
Woodside, North West Shelf's primary operator, was an Australian company,
but they needed foreign funds and expertise to fully exploit the resource.
So long that the natural gas export ban was in effect,
the project would not move forward. The Western Australian market was far too small to justify
the billions of dollars needed to develop the project.
Well, what about Australia's other two markets? Again,
the problem was distance and the lack of an integrated pipeline system.
It is roughly 3,202 miles from Dampier to Sydney - longer than the distance between
Los Angeles and New York City (2,445 miles). This was too far for private actors to build
an economically sustainable pipeline, leading to a form of economic gridlock.
The Whitlam Federal Government proposed to build a National Pipeline Grid. And in 1973, they took
over an ongoing 1,200 mile pipeline project from Moomba to Sydney as part of that project.
That project faced substantial political and environmental challenges. It took 3 years to
complete with some additions afterwards. By then, however, the political tides had turned once more.
## Changes
In 1975, the Australian government changed seats
and a more right-leaning and business-friendly regime entered power. They were more eager to
see energy projects get started. One by one, the previous obstacles fell away.
First, the local ownership threshold,
proposals were floated to "redefine" what it means to be an Australian company.
But the venture reached the 50% local ownership threshold naturally. Burmah ended up selling
their ownership stake to the Australian mining giant BHP - the "Big Australian".
So in 1977, the federal government lifted its export embargo and allowed
the North West Shelf Venture to move forward. They noted:
> "The government has decided that it will continue its policy of allowing exports of
reasonable quantities of gas but exports will be permitted only after the government is satisfied
that domestic requirements of gas and gas liquids ... have been considered"
To start, the North West Shelf Venture was allowed to export 50% of its gas production.
The Western Australian state government was enthusiastic.
They would be able to receive natural gas supplies for Perth to replace the declining Dongara field.
The state governments in Australia's eastern
markets - the country's largest - were disheartened. They apparently
had been hoping for the nationwide gas pipeline project to move forward.
And finally to grease the rails, the new government kicked in a few tax benefits.
They extended an existing 20% investment allowance 2 more years,
introduced an income tax rebate, and waived several other oil and resource taxes.
In 1978, the venture struck deals with eight large Japanese customers
to supply Japan with liquefied natural gas. Buoyed by favorable oil market conditions - the Iranian
Revolution had just occurred that year - the project started construction in 1980.
## The Field
The North West Shelf Venture was Australia's biggest project to date.
And for a time it had been the world's single biggest engineering project.
Built in two phases, it involved offshore platforms, undersea gas pipelines,
a massive LNG plant capable of processing 12 million tons of natural gas each year,
$800 million Australian dollars worth of LNG tankers, and a pipeline from Dampier to Perth.
Australia has long been sensitive about the percentage of its materials made locally.
In this case, the LNG tankers were built outside the country,
but the rest were over 75% locally sourced.
The first LNG exports started heading to Japan in 1989. Japan has been a regular
customer ever since - later joined by the People's Republic of China.
Together, the two countries purchase 75% of Australia's output.
Today, the gas fields of Western Australia still make up a vast majority
of the country's proven reserves - about 80%. Over $25 billion dollars
to date have been invested in the project - including the massive Gorgon gas project.
## Domestic Markets
The North West Shelf project coming online was a good thing for the state of Western Australia.
The project is required by law to reserve a significant portion of
production for domestic use, so natural gas provides 64% of the state's energy needs.
The country's two other markets - the northern and eastern - face bigger supply challenges.
And particularly the eastern market, which covers Brisbane,
Sydney, Adelaide, Melbourne, and Hobart. Basically Australia's biggest and fastest growing cities.
Additionally, Australian energy demand at home is growing at a very fast pace.
On average, consumption has grown at about 0.6% annually - driven by increased industrial demand.
Despite being the 55th largest country by population,
Australia's electricity consumption per capita ranks 19th in the world.
Australia's energy mix has drastically changed in recent years as the country lurches towards
renewables. Wind and solar energy's contributions have surged from 2% in 2010 to 18% in 2020.
Renewables have taken share largely from coal - falling from 81% to 67% - and a little from
natural gas. Which makes sense, since coal tends to be the dirtiest, carbon-wise.
Anyway, the Australian energy market's size and rapid growth incentivized new
developments in unconventional natural gas, particularly coal seam gas.
## Coal Seam
The southern and eastern regions of Australia lack conventional
natural gas fields, but do have a lot of coal.
And absorbed within the natural seams of this coal are large deposits of methane, a natural gas.
Mining the coal releases this methane, which is a workplace hazard to say the least.
So companies vented it into the atmosphere. Methane has global warming potential 21
times higher than carbon dioxide, so this is wasteful and polluting.
Throughout the 70s and 80s, companies like Conoco Australia, Mitsubishi,
and Houston Oil and Minerals have tried to harness this methane for commercial production.
Finally in 1996, BHP broke through at the Bowen Basin in Queensland - kicking off a coal seam gas
boom in eastern Australia. Gas production grew ninefold due to domestic eastern market growth.
Critically, state governments have helped this along by pushing for a
switchover from coal to gas. For instance, the Queensland Gas Scheme in 2005 - which
required electricity retailers to produce 13% to 15% of their electricity from gas.
## Exporting Coal Seam Gas
The Bowen Basin is one of the world's largest deposits of prime and delicious coal.
Its coal seam reserves can conceivably serve the eastern markets for many years.
But again, the export markets beckoned. The Queensland state government approved
three consortia to build LNG plants and export coal seam gas to the Asian markets.
The first of these plants, operated by Santos, came online in December 2014.
A second, operated by APLNG, started in January 2016. Today, there are three LNG plants operating
out of Curtis Island - in total capable of producing 26 million tons of LNG each year.
This new capacity tapped into the region's currently existing energy
export infrastructure to rapidly scale. Eastern Australia is also relatively close to Asia,
giving their LNG a price advantage to balance out a relatively higher labor cost.
## Conclusion
In 2020, Australia dethroned Qatar as the world's leading exporter of LNG.
The two countries remain neck and neck for the lead spot.
The kangaroo country's rise as a natural gas export power combined with its reputation as a
reliably Western-aligned country has greatly helped to stabilize the energy markets.
In light of recent events, Australia's natural gas exports are now more needed than ever. Yet
at the same time, its domestic markets face significant energy shortages
and rising prices - impeding growth and causing political awkwardness.
There are plenty of ideas floating around - a transcontinental pipeline, a gas reservation
policy nationwide, so on. But there is no silver bullet. And Australia's natural gas dilemma won't
be fixed until the country can incorporate all of these ideas into a coherent, nation-wide strategy.