AUSTRALIAN ENERGY CHAOS

The Oxford Institute for Energy Studies - 22.04.25 - Australia Gas: Policy Failures Risk Domestic Shortages

Summary

A decade of policy failures, public opposition, and planning delays has raised the risk that Australia’s population-dense eastern states will face physical gas shortages which will only be alleviated through the higher-priced imports of LNG. Unlike Western Australia, which embedded a domestic gas reservation policy when it approved world-scale LNG developments on the Northwest Shelf, a combination of complex federal and state regulation and political divisions over climate policy has left New South Wales and Victoria short of domestic gas which will be critical in partnering renewable power as that sector expands through the second half of this decade.

Australia’s east coast gas industry has faced a flurry of inconsistent but largely negative headlines so far this year. Back in December the Australian Competition and Consumer Commission (ACCC) expected a surplus of gas production for 2025, and in March the Australian Energy Market Operator (AEMO) pushed back its forecasts of shortfall risks under peak conditions to 2029. Then the ACCC weighed in again in late March, warning, ‘the east coast outlook for Quarter 3 2025 has worsened. The market will need access to LNG producers’ uncontracted gas to mitigate the risk of shortfall’. This was followed shortly afterwards by the federal opposition promising to introduce an east coast domestic gas reservation policy if it wins the forthcoming federal election on 3 May, which would ‘require a proportion – between 50-100 petajoules (PJ) of spot cargo exports – to be delivered to the domestic market’.

It is a chaotic situation, and it is rare to see gas markets – traditionally boring and well-run – hitting the headlines. Now, the east coast faces the prospect of gas shortages or LNG imports, due to the hurdles that have been thrown in the way of gas development over the last decade. In one state, Victoria, it now takes much longer to approve gas supply projects than it takes to build them.

Even when projects are approved by regulators, they are still subject to appeal and litigation by activists and even if these appeals ultimately fail in the courts, they succeed in delaying projects and increasing costs.

This Comment details the increased regulatory burden that particularly affects the gas supply to Australia’s two most populous states, New South Wales (NSW) and Victoria, which face a looming gas shortage, as illustrated in Figure 1.

The legacy east coast gas fields in the Gippsland, Otway and Cooper basins are declining quickly. Gas supplies from Queensland coal seam gas fields are largely committed under LNG export contracts for another decade. There are two other major sources of partial east coast replacement: the Narrabri gas field in NSW and the Beetaloo sub-Basin in the Northern Territory. However, as detailed below, the development of these fields has been hampered by public opposition and complex and lengthy regulatory requirements. Even with these developments, as assumed in Figure 1, there is still likely to be a supply gap requiring LNG imports in Victoria and NSW. In the absence of Narrabri and Beetaloo, the need for imports will be even greater. The greatest need for imports will be in Victoria where the development of LNG import terminals has also faced lengthy delays. To complicate matters further, the Queensland LNG foundation contracts come to an end in the early-to-mid 2030s, after which significant gas volumes are likely to become available for the southern domestic market, albeit still with a likely supply gap.

Further investment is needed to address the longer-term gaps in supply in the southern states. However, federal government interventions, such as a wholesale gas price cap and enhanced powers to divert gas from LNG projects to the domestic market, have added further risk to investment.

One rationale for restricting gas investment has been to encourage renewables and reduce greenhouse emissions. However, the looming east coast gas shortage is being pushed down the road by governments extending the lives of old, dirty coal-fired power stations, which have higher emissions. Gas prices on the east coast are also significantly higher than in Western Australia, where gas development is encouraged.

Since 2015, eastern state wholesale gas prices have increased three-fold while those in Western Australia have remained flat. Household gas prices, as measured by the Australian Consumer Price Index, have increased by 57 per cent for all eight capital cities (dominated by the east coast) but by only 22 per cent in Perth, Western Australia.

Australia is not unique in facing these challenges. Restricting or even banning gas development has been pursued in many countries and jurisdictions to jump-start the development of renewables and reduce greenhouse emissions and potentially reduce energy costs. However, the Australian experience demonstrates that this approach can easily have perverse consequences, results that are neither good for the environment nor the economy. Speaking about oil and gas investment, the Head of the International Energy Agency was recently reported as saying at CERA Week, “I want to make it clear ... there would be a need for investment, especially to address the decline in the existing fields. There is a need for oil and gas upstream investments, full stop." This is finally starting to be appreciated in Australia, at least by the major political parties.

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