Coal and renewables squeeze out gas generation

coal

Coal continued to be the mainstay of east coast electricity generation in the opening quarter of the current financial year (Q3), according to the latest quarterly report by Australian energy economics group EnergyQuest.

Even though Q3 coal-fired generation was the third-lowest since Q4 2014, coal plants still accounted for 70 per cent of electricity generation. The report shows that while coal-fired generation was down in NSW and Queensland compared with Q3 2017, coal-fired generation actually increased in Victoria.

However, the big winners in Q3 were renewables and hydro, with record September quarter use of solar and wind for electricity generation, with hydro power at the highest in more than five years.

The report shows that renewables for electricity generation, excluding hydro, increased by 23 per cent quarter-on-quarter (qoq) and accounted for 13.2 per cent of the National Energy Market (NEM) generation. Wind generation increased by 16 per cent and solar generation was up 38.3 per cent.

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The big loser in Q3 in east coast generation was gas, which was impacted by the resilience of coal and the growth in renewables to the extent that gas generation in the September quarter was down 25 per cent qoq to its lowest in more than two years. Gas-fired generation fell by 1.3 Terawatt hours (TWh) qoq while coal-fired generation was only down by 0.5 TWh. On average gas generators only operated at 14 per cent of capacity.

Chief executive officer of EnergyQuest Dr Graeme Bethune said, “Gas is cleaner than coal and more reliable than wind and solar so, if it continues, this trend is bad news for both the environment and electricity reliability,” commented Dr Bethune.

Gippsland Basin gas production continues to fall

Gippsland Basin gas production, on which both Victoria and NSW rely was down by 17.3 per cent qoq to 79.3 petajoules (PJ), the lowest September quarter production since 2014.

“The fall in Gippsland Basin production results from the natural decline of the increasingly-mature gas fields that have provided Victoria with abundant gas for half a century,” Dr Bethune said.

“However, these fields are now well past their prime. Unfortunately, there was further bad news in the September quarter when two exploration wells drilled by ExxonMobil turned out to be dry.”

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Queensland sending gas south

Equity gas production by the three Queensland LNG projects was 336.3 PJ in Q3, representing a surplus of 21.1 PJ over the 315.2 PJ used in LNG production. Queensland exported 8.4 PJ to the southern states in Q3 2018, maintaining a trend of net southerly gas flows over the year to September.

The three major coal seam gas producers in Queensland – QCLNG, APLNG and QLNG – all achieved record gas production in the latest September quarter.

The biggest contributor to the latest records was QGC’s Woleebee Creek field with 50.4 PJ of September quarter – nearly two-thirds as much as the Gippsland fields produced. The seven best CSG fields in Queensland each produced more gas than either the Cooper Basin or the Otway Basin.

“However, our detailed analysis of Queensland gas reserves has found that the state is unlikely to have sufficient gas reserves to make up for gas shortfalls in southern states,” Dr Bethune said.

“This increases the urgency of other southern supply initiatives such as LNG imports into Melbourne and Sydney.”

Surging LNG output and petroleum production

Dr Bethune said total Australian petroleum production set new records in the September 2018 quarter and almost took the country to a run rate of one billion barrels of oil equivalent per annum.

“National petroleum production gained a fresh burst of speed in the latest quarter thanks to an impressive start by Wheatstone LNG’s Train 2 in Western Australia and strong performances by other west coast LNG projects,” he said.

“There was strong performance by Australian LNG projects, shipping 18.1 Mt, up by 24.0 per cent qoq. The start-up of the Ichthys project in October has placed Australia in a position to overhaul Qatar as the world’s biggest LNG producer.

“Annualised LNG production in October hit 76 Mtpa, while total LNG capacity reached 79.7 Mtpa with the start of Train 1 at Ichthys. This exceeds Qatar’s nominal capacity of 77 Mtpa.”

China LNG import record

Chinese gas demand is growing rapidly as the Chinese government works to reduce some of the world’s worst urban air pollution. China’s LNG imports reached a record 13.2 million tonnes (Mt) in Q3.

Australia supplied 47 per cent of Chinese LNG imports in the quarter. About one-third of the increase in Chinese LNG imports came from Australia, spread between Queensland (30 per cent of the quarterly increase) and WA producers (Wheatstone, Gorgon and the North West Shelf) (70 per cent of the quarterly increase).

As a result of meetings between Chinese President Xi Jinping and US President Donald Trump at the recent G20 meeting, China has agreed to increase its energy imports from the US. There have been suggestions that this could disadvantage Australian LNG producers. However, most Australian LNG is sold under long-term contracts and two of the three major Chinese national oil and gas producers – Sinopec and CNOOC, have significant equity interests in Australian projects.

Can President Trump cut east coast gas prices?

US President Trump is, with some success, aiming to reduce oil prices to cut US petrol prices. If sustained, lower oil prices translate into lower oil-linked LNG prices and lower LNG spot prices. Movements in oil prices take time to feed into LNG prices but in theory the fall in oil prices from a peak of US$86.07/barrel in October to US$58.41/barrel in late November should also translate into lower east coast natural gas prices. Oil-linked netbacks (the value of gas for LNG) as measured at Wallumbilla in Queensland would fall from $14.02/gigajoule (GJ) to $9.23/GJ as a result of the fall in the oil price.