With gas becoming an increasingly hot commodity in the Australian energy market, there is a growing need for an expanded pipeline network.
Domestic gas demand is rising strongly, thanks to a drought that has closed down hydro-electricity and restricted output from water-guzzling, coal-fired generators.
Demand for greenhouse-friendly gas is tipped to rise even further following the introduction of a carbon trading regime, which may bring a long-hoped-for phase change in prices for eastern states gas producers.
Recent gas discoveries and the rapid development of the coal seam methane industry mean Australia is not about to run out of gas any time soon. But will we have the pipelines to deliver gas to a domestic market with a much larger appetite?
This question is being hotly debated in the lead up to next year’s introduction of a new regulatory system for the gas transmission sector.
From 2008, the National Third Party Access Code for Natural Gas Pipeline Systems (the Gas Code), which operates under legislation in each state and territory, will be replaced by the National Gas Law and National Gas Rules. The Australian Energy Regulator (AER) will become the regulator in all states except Western Australia, bringing national regulation of gas and electricity industries under one entity.
Legislation for the new regulations in the national gas and electricity networks is expected in October in the South Australian Parliament, the lead legislator for all states. The new laws are expected to operate before year-end.
The Australian Pipeline Industry Association (APIA) says the new regime will not reduce the level of regulation or lower the economic barriers to investing in gas pipelines.
By contrast, AER says the new system addresses these concerns by allowing for lighter regulation, as well as creating transparent pricing and trading systems to promote investment.
The existing system does not seem to be holding back investment in gas pipelines, which is on an upward trend.
AER’s recently published report, State of the energy market 2007, notes that about $2 billion was invested in pipeline infrastructure between 2000 and 2006 – an average of about $300 million a year.
Three major projects accounted for the bulk of this investment – the $490-million Eastern Gas pipeline connecting the Gippsland Basin (Longford) to Sydney, the $526-million SEA Gas pipeline connecting the Otway Basin (Port Campbell) with Adelaide, and the $433-million stage 4 expansion of Western Australia's Dampier-Bunbury pipeline – the biggest capacity gas pipeline in Australia.
Looking ahead over the next five years to 2012, the major committed projects are QSN Link in the Cooper Basin ($140 million), a pipeline to bring gas onshore from the Blacktip field to join the Amadeus Basin to Darwin pipeline, and a $1.5 billion project to further expand the capacity of the Dampier-Bunbury pipeline. Another potential pipeline in this time period is from Wallumbilla to Newcastle (about $700 million).
Investment could be substantially higher if a green light is given to speculative projects such as the trans-Territory pipeline to bring gas from the Timor Sea to Moomba.
APIA chief executive Cheryl Cartwright acknowledges there is investment growth in pipelines, but says it is not efficient investment.
“Since privatisation and the introduction of the regulatory process, new pipelines in Australia are nearly always built to meet contracted demand and rarely built larger than initial requirements.
Clearly, it would be far more efficient to invest upfront in bigger diameter pipelines with extra capacity, but this invites the attention of the regulator.
“Pipeline owners build for contracted demand only, and when demand increases, invest later in looping and-or additional compression to squeeze additional capacity out of the original infrastructure.”
Cartwright said if spare capacity was built into the original design, there would be a risk that regulatory intervention could distort the value of the pipeline, forcing a less than optimal price for carrying gas.
“Transmission of natural gas is privately funded and does not need government handouts to expand,” she said. “It does, however, need regulators to step back and allow the development to progress.”
If the introduction of a carbon-trading system prompts a dramatic increase in demand for gas, the current system means delivery of that gas could be delayed, she warned.
But AER Chairman, Steve Edwell, says legislation for the new system had taken account of the issues raised by the pipeline industry.
“It adequately addresses those concerns and we’re confident it will deliver a balanced outcome. Under the new system, there is an avenue, as competition increases, for pipelines to become less regulated or not covered at all.”
He pointed out that three of the largest gas pipelines to be constructed in recent years – the SEA Gas, Tasmanian and Eastern Gas pipelines – had never been covered.
“At the end of the day, some pipelines do need to be regulated because they can impact on competition upstream and downstream.”
One of the major provisions within the new system to address the industry’s concerns is the possibility of exemption from regulation for greenfields pipelines for an initial 15-year period.
The new system also allows operators of existing, regulated pipelines to apply for “lighter regulation”.
The form of this regulation has yet to be spelled out, but it could take the form of price monitoring, rather than reference setting for tariffs.
AER says in its state of the energy market report that the market is generally moving towards deregulation, with no coverage for several major new pipelines and coverage revoked in whole or in part for 14 pipelines.
However, the path to an open market is not always smooth, as gas supply and transmission company Epic Energy can attest.
Epic applied in March to the National Competition Council (NCC) to revoke coverage of the Moomba to Adelaide pipeline under the Gas Code. This followed the completion of the SEA Gas pipeline from Port Campbell to Adelaide, which provided competition for gas supply into the Adelaide market.
In December 2005, the NCC recommended to the South Australian Minister for Energy, Patrick Conlon, that regulation be lifted, but two and a half years after Epic’s application, the Moomba to Adelaide pipeline is still covered by regulation.
Epic announced recently it would build a small amount of spare capacity into its 180km QSN Link, which will connect Queensland’s pipelines with the Moomba to Adelaide and Moomba to Sydney pipelines.
QSN Link was originally planned as a 350mm pipeline with a fully compressed capacity of 190 terajoules per day, with the majority dedicated to carrying gas for AGL. Epic now plans to boost the diameter to 400mm, which has a fully compressed capacity of 250TJ/day. The initial sizing of the pipeline means there is limited additional capacity without compression.
The additional capacity was achieved without adding to the original capital cost of $140 million. An engineering redesign removed a compressor, which offset the cost of an increased pipe diameter. The financial risks of inviting regulation were therefore minimal.
Epic Energy Managing Director, Steve Banning, said the strength of demand for gas pipelines meant projects such as QSN Link were going ahead, despite the regulatory environment.
He also shared APIA’s concerns about inefficient investment, and questioned whether new regulatory proposals were suited to gas pipelines.
“From next year, gas transmission and distribution will be in the same national system that regulates electricity, but they are fundamentally different businesses,” Banning said.
“As the owner of a gas pipeline, we always face the risk of a competitor building a pipeline in parallel to ours. It’s not monopoly infrastructure, unlike an electricity transmission network.”
He also said new regulatory proposals involved establishing price information and trading systems for the gas transmission sector that were more sophisticated than the market warranted.
“We’re getting a bulletin board of wholesale gas prices and possibly also a short-term trading market,” Banning said.
“These are based on market models from overseas. They add value in a market such as the US, where it’s not unusual to find 30 pipelines feeding into one market, and hundreds of companies trading gas.
“In Australia, our market does not need the pricing and trading mechanisms that are being developed. The cost of these systems will run into tens of millions of dollars, which will have to be carried by a relatively small number of operators and wholesale gas users.”
First published in the September issue of Petroleum magazine
