High global gas prices may threaten Australian fossil fuel megaprojects as growth forecasts for the industry are reduced by as much as a third.
The International Energy Agency (IEA) significantly revised down its forecast for global gas demand until 2024 by almost two-thirds on Tuesday after prices rose to record levels thanks to Russia’s invasion of Ukraine.
“Global gas consumption is forecast to contract slightly in 2022, with limited growth over the next three years, resulting in a total increase of about 140 bcm [billion cubic metres] between 2021 and 2025,” the report said. “That is less than half the 370 bcm increase seen in the previous five years and well short of the exceptional jump in demand of close to 175 bcm seen in 2021.”
Asia is expected to account for 60% of new consumption but the IEA warned that even this growth was at risk as high prices pushed countries to seek alternative fuels.
Australia vies with Qatar as the world’s largest gas exporter and has several large new developments planned, including Woodside’s $16.5bn Scarborough gas project and Santos’s $4.7bn Barossa project.
Gas exports are estimated to double in value to $70bn over the next year as Australia fills the gap left by Russian supply.
Government planning has relied on strong growth in the sector driving production until 2040 but Bruce Robertson, an LNG energy finance analyst with the Institute for Energy Economics and Financial Analysis, said new projects were now at risk from “permanent demand destruction”.
Permanent demand destruction occurs when the price of a commodity is so high it becomes unaffordable for too many consumers.
“It simply makes gas an unaffordable fuel. And that’s what has occurred. We’ve seen major falls in gas demand,” Robertson said. “The pressure on the gas industry is all one way.”
Robertson said this was also true for the Australian domestic market, where the price of gas in New South Wales hit $45 a petajoule this week, and was capped at $40 a petajoule in Victoria. He said these prices would result in a permanent loss of demand.
The oil and gas industry is aware of the risks. The chief executive of Santos, Kevin Gallagher, told The Australian in March that persistent high gas prices threatened the industry.
“I don’t like when oil prices go too high, it concerns me, because you get supply and demand destruction,” Gallagher said.
“We’ve seen gas prices that have spiked at levels that are even more unprecedented than the oil prices,” the Woodside CEO, Meg O’Neill, was quoted as saying.
However, the IEA warned in its report that the situation did not automatically guarantee a shift to renewable energy and the government still needed to drive the transition.
Tim Buckley, the director of Clean Energy Finance, said conditions were ideal for governments to drive a structural shift to renewables and other technologies that do not rely on fossil fuels like gas.
“In just one year, two-thirds of the growth in gas demand globally has been taken off the table by the IEA,” Buckley said. “Hyperinflation in fossil fuels is forcing a rethink strategically. Absolutely.”
Buckley said there would be “no going back” to gas.
One of the industries poised to benefit is photovolatic (PV) solar. Jenny Chase, the head of solar analysis at BloombergNEF, said that despite PV solar having experienced price rises due to supply chain issues, “the cost of fossil fuels have gone up more”.
“The only limit [for solar] is polysilicon production and local bottlenecks like installation labour in Germany,” Chase said.
BloombergNEF’s benchmark price for fixed axis solar is currently US$45/MWh, but drops as low as $35MWh in sunny countries such as Australia. This compares with more than $107/MWh for coal.
Chase said 241GW of new PV solar was expected to be built globally in 2022, and 274GW in 2023, up from 182GW in 2021.
A study published in Nature in May found existing oil and gas projects worth US$1.4tn would lose their value if the world moved decisively to cut carbon emissions and limit global heating to 2C.
The bulk of these assets were owned by pension and superannuation funds in developed countries.
