by Alexander Anile, Michelle Bennett, Anne Beresford, Louis Chiam, Monique Evans, Leighton O'Brien, Jacqui Rowell, George Salter, Grace Vipen
From coal to gas to green: the transition pathway
The global energy mix is shifting, and the role of natural gas as a fuel source is under scrutiny in both policy and market debates. With mounting environmental pressures and ambitions to achieve net zero goals, questions are being raised about its continued role in the energy transition.
In Australia, the Federal Government's 'Future Gas Strategy' (FGS), released in May 2024, outlines the national plan for gas production and consumption, emphasising gas as an instrumental fuel source in Australia. Simultaneously, all industries are currently under pressure to significantly reduce emissions as the nation strives to achieve its net zero target.
What's the challenge
Amid the shifting energy landscape, the gas sector is working through several key challenges with the potential to shape its strategic direction and role in the future.
Opposition to new or expanding gas developments has intensified, with environmental activists challenging projects through the court system, leading to significant delays. Meanwhile, shareholders are meticulously questioning climate action plans, prompting gas producers to increasingly focus on securing social licence both locally and nationally. While addressing ecological and community concerns is not new for the gas sector, the energy transition has amplified the importance of environmental accountability and reputation management.
The impact of environmental concerns extends to the financing of gas developments. Gas producers are finding it increasingly difficult to obtain financing for new projects as Australian and international banks restrict lending to gas-affiliated projects and borrowers. This reflects a broader shift towards environmentally responsible investment practices and may lead to increased reliance on funding from private capital within the industry.
The need for emission reductions and effective carbon management, including under the Safeguard Mechanism, presents both a challenge and an opportunity for stakeholders in the gas sector. However, the practical implementation of viable technologies in this space faces its own challenges.
For example, while carbon capture and storage (CCS) has been recognised as one of the key instruments for reducing carbon emissions, the development of these technologies has been slow, and the support of state governments varies. Queensland has recently instituted a total ban on CCS projects in the Great Artesian Basin, while Western Australia has introduced legislation to facilitate CCS.
The deployment of CCS and other viable technologies on a larger scale requires substantial investment, innovation and expanded infrastructure, all of which will be heavily influenced by the level of government support and having a conducive regulatory framework in the future.
The CCS opportunity
Australia has the key ingredients required to be a global leader in CCS, including a skilled workforce, proximity to high-emitting countries, existing infrastructure and suitable geological formations. However, CCS has previously suffered from a lack of funding, economic and policy support at the federal government level, with its role in the energy transition often downplayed or dismissed in favour of other technologies.
While government support for CCS still lags behind that of other areas required for the energy transition, there has been a marked change in the narrative over the past 12 months. The role of CCS in Australia has recently been formally recognised by the Federal Government through a number of notable developments, including:
- a commitment to maintaining an acreage release for greenhouse gas assessment permits under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (ie the release of areas for project proponents to bid for the grant of a title on which they conduct exploration for a geological formation into which a greenhouse gas substance can be stored);
- an indication that it will accept amendments to an international treaty to facilitate the international transport of carbon dioxide streams for CCS projects, a precursor to negotiating bilateral agreements with key Australian trading partners to authorise the cross-border trade of carbon dioxide;
- a commitment to establishing a 'Transboundary Carbon Capture and Storage Program' to provide options for energy security and CCS services for Australia's regional partners; and
- provision of $566.1 million over ten years from 2024-25 to support Geoscience Australia in mapping out Australia to identify geological formations suitable for CCS projects, as well as other resources essential for the transition to net zero.
The industry being able to seize the enormous opportunity CCS presents will require both an increase in policy support at the state and federal levels, and the private sector continuing to pave the way for the development of Australia's CCS industry.
Recent years have witnessed unprecedented levels of government intervention in the gas market, including the implementation of the Federal Government's Gas Code of Conduct, which established a price cap for domestic gas sales of $12/GJ; reforms to the Australian Domestic Gas Security Mechanism; and the revamped Safeguard Mechanism.
The regulatory environment and Australia's climate policy framework will continue to evolve as governments grapple with managing the rapid decarbonisation imperative while ensuring a stable and affordable supply of gas and electricity. This challenge could be exacerbated by projected supply shortages on the east coast, and potentially the west coast as well.
What's happening now?
The Future Gas Strategy (the FGS), released in May 2024, outlines the Federal Government's stance on the future role of gas. It affirms that gas will serve two critical roles in the transition towards net zero by 2050: first, as a transition fuel to provide reliable power generation during the energy transition, both domestically and for Australia's global liquefied natural gas (LNG) customers; and second, to support the manufacturing and processing industries.
The FGS consists of six principles:
- Australia is committed to supporting global emissions reductions to reduce the impacts of climate change and will reach net zero emissions by 2050.
- Gas must remain affordable for Australian users throughout the transition to net zero.
- New sources of gas supply are needed to meet demand during the economy-wide transition.
- Reliable gas supply will gradually and inevitably support a shift towards higher-value and non-substitutable gas uses. Households will continue to have a choice over how their energy needs are met.
- Gas and electricity markets must adapt to remain fit for purpose throughout the energy transformation.
- Australia is, and will remain, a reliable trading partner for energy, including LNG.
The FGS is a high-level guide to policymaking, and does not introduce any regulatory or legislative changes. However, the Government has identified several immediate actions focused on increasing production and reducing environmental impacts:
- updating federal retention lease policies to encourage more timely development of existing gas resources and considering a firmer 'use it or lose it' policy;
- working with regulators and industry to reduce—and, where possible, eliminate—gas venting and flaring, unless required for safety purposes;
- continuing to release offshore acreage for greenhouse gas storage;
- establishing a new Transboundary Carbon Capture and Storage Program; and
- clarifying consultation requirements for offshore petroleum and greenhouse gas storage activities, as part of a broader three-year review of the offshore environmental management regime.
We do not anticipate further regulatory intervention in the gas sector of the magnitude seen with the Gas Code of Conduct and Australian Domestic Gas Security Mechanism reforms in recent years. However, these policy measures may be maintained in response to predicted gas shortages.
The Federal Government has introduced measures to encourage the development of emissions reduction technologies, particularly CCS and hydrogen projects.
To promote CCS projects, the Government:
- has committed $12 million over a three-year period to provide regulatory and administrative certainty for offshore CCS projects;
- is establishing a new Transboundary Carbon Capture and Storage Program, and an initiative regarding regional cooperation for this program;
- is offering a $15 million Carbon Capture Technologies Program grant to encourage innovation; and
- is offering a Powering the Regions Fund to support uptake among existing industrial facilities.
To promote hydrogen projects, the Government:
- has introduced a hydrogen production tax incentive equal to $2/kg of hydrogen produced using renewable energy;
- committed additional funding of $1.3 billion to the Hydrogen Headstart Program;
- committed additional funding of $19.6 million to update and deliver the National Hydrogen Strategy; and
- committed additional funding towards grants to support early stage development of hydrogen projects.
This substantial increase in government investment and innovation suggests there will be growing opportunities for stakeholders to develop and utilise CCS (including as a tool for achieving emissions reduction obligations under the Safeguard Mechanism), and green hydrogen (including as a substitute energy source for gas).
The reforms to the Safeguard Mechanism are now in force, and require a 4.9% year-on-year reduction of each covered facility's (facilities with more than 100,000 tonnes of scope 1 emissions per annum) baseline emissions up to 2030 (with a slightly slower rate of decline after 2030). In line with the FGS, the Government will use the reformed Safeguard Mechanism to accelerate emissions reductions related to gas. We expect this ongoing reduction to encourage participation in CCS projects as a carbon abatement and offset strategy.
What's next?
Amid the energy transition, corporates, funders and developers must chart a unique course forward. Below is a summary of what's next for each.
- Large electricity buyers should welcome the commitments set out in the FGS, as a suggestion of more positive policy positions that will support sustainable gas production into the future. The Government's policy intent is that this support will lead to increased gas production and supply domestically. If this increased gas supply is used to fuel gas-fired electricity generation facilities, it should ultimately result in lower costs and more consistent supply of electricity.
- Large electricity buyers that currently offset their emissions may look to CCS as a way of decarbonising their activities.
- Large electricity buyers should continue to monitor developments in this space.
- The increasing hesitancy of banks to fund gas developments, coupled with the positive outlook for the gas sector outlined in the FGS, strengthens opportunities for private capital investors to become more involved in financing the gas sector.
- Private capital investors should take note of the acknowledgments in the FGS that the gas sector will play a key role in the energy transition until at least 2050.
- There may also be increased opportunities for investment in carbon management projects, such as CCS, and in hydrogen production facilities.
- The modern resources landscape increasingly requires Australian natural resource companies to rely on a 'social licence' to operate. Developers will need to prepare clear plans to decarbonise, to avoid the reputational risks and potential economic consequences of non-compliance with environmental standards.
- The focus on, and significant investment into, geological storage of carbon dioxide in the FGS (including on a broader regional basis) will also provide opportunities for the development of CCS projects. These projects are expected to be effective tools for meeting the emissions reduction obligations under the Safeguard Mechanism. Developers should be aware of project structuring considerations, including risk allocation and liability across the CCS value chain.
- The Government will update its federal retention leases, and is considering a stricter 'use it or lose it' policy, to encourage more expedient development of existing gas discoveries. Developers will need to adapt to these stricter rules and may need to focus on achieving timelier development of existing gas facilities.