ANALYSIS

Two months ago, Prime Minister Scott Morrison pulled ex-iron ore miner Nev Power out of semi-retirement to head the Federal Government’s efforts to kickstart the economy after the necessary COVID-19 induced shutdown.

Power has a vital and challenging job. While society is freeing up as the number of COVID-19 cases diminish, the economic hit has hardly started. Australia is living off its fat: cash, withdrawn superannuation, finishing contracts signed in better times and an avalanche of funding the Federal Government plans to curtail soon.

“The Commission has two key roles: to help minimise and mitigate the impact of the COVID-19 on jobs and businesses, and to facilitate the fastest possible recovery of lives and livelihoods,” Power said.

The Power-led National COVID-19 Coordination Commission must “through its own inquiries and analysis of matters referred to it, ensure the Government receives the most comprehensive advice available to meet with challenges ahead,” according to its terms of reference.

It did not take long before Power was championing a west to east gas pipeline as a “great opportunity for Australia” and the Commission has supported the idea, according to a leaked report.

Power supported the pipeline as long as 3½ years ago, but worryingly his stance seems to be unaffected by new information. An independent report by ACIL Allen for the Federal Government in 2018 concluded that the pipeline was not “the best or most economical option for dealing with the supply issues currently facing the gas market in Eastern Australia.”

The pipeline looks even worse in the new context of ensuring “the fastest possible recovery” from COVID-19.

strike one – jobs start too late

If the Federal Government funded a feasibility study to start in July, the project would not begin until mid- 2022, according to the ACIL-Allen pre-feasibility.

Schedule for the west-east gas pipeline. Source: ACIL Allen report.

Detailed design and gaining approvals would then take two years before the labour-intensive construction could start.

The pipeline is not a so-called shovel-ready project. Jobs are needed now, not in mid-2024, for the Australian economy to recover.

strike two - no help to the east coast for years

The east coast would receive gas from WA in mid-2026 at the earliest. A possible reduction in gas and power prices in six years is hardly facilitating “the fastest possible recovery” Power is charged to deliver.

strike three – the schedule is unrealistic

This already too-late pipeline schedule is impossibly optimistic in assuming the pipeline could achieve financial close in two years. Getting a raft of companies with different drivers to agree on a technical and commercial solution takes time.

Woodside has spent two years trying to win approval from participants in the North West Shelf and Pluto LNG projects to build a pipeline a few kilometres long between the plants and has not yet closed the deal.

A pipeline across a continent is orders of magnitude more difficult.

The gas producers that are all complex joint ventures have to commit to the long-term supply of gas.  Customers in the east have to make long-term commitments on gas prices, pipeline tariffs and gas volumes. In the middle, there is some assemblage of financiers and constructors backing the pipeline. Good luck sorting that out in uncertain economic times.

strike four – a vision for the future stuck in the past

Andrew Liveris, the former Dow Chemicals chief executive, is another member of the COVID-19 Commission with a penchant for gas and pipelines.

“We could put in gas turbines to replace the coal-fired turbines and retire the coal fleet, and you would get the best of both worlds,” Liveris told The Australian last year.

With even oil majors like BP pursuing green hydrogen instead of making it from gas and plunging battery costs threatening the role of gas to firm up solar and wind power, a focus on gas as an economic saviour is dangerously out of date.

strike five – not developing a useful capability

The pipeline construction, estimated by ACIL-Allen to take 2½ years, would undoubtedly create jobs but it is a one-off sugar hit of no lasting value. There is no long-term need for the capability to build gas pipelines. Government intervention in the economy is best focused on areas where the expenditure brings long-term gains.

strike six – the pipeline is already built

One argument for the west-east gas pipeline is that it could deliver to support new gas-intensive industries. That pipeline already exists.

The Dampier to Bunbury gas pipeline from the Pilbara to the South West of WA can move 845 terajoules of gas a day and currently has about 200 TJ a day of spare capacity.

Investors that want to manufacture with gas in Australia can consider WA. There is no need to wait two or more years to know if WA gas will flow east and then four more years for it to arrive.

strike seven – there is not enough gas

The ACIL-Allen study envisages 600 TJ a day of gas flowing east from WA.

The Australian Energy Market Operator’s review of the WA gas market in December had a base scenario with potential gas supply exceeding WA demand by less than 300 TJ a day in 2026 when the west-east pipeline could start.

strike eight – the gas will be too expensive

Gas from WA will not be cheap. A simplistic view of vast reserves ignores that gas producers understandably develop the cheapest gas first. As the gas gets deeper, dirtier or more distant, it costs more to produce.

The offshore gas game has little in common with coal seam methane in Queensland that, simplistically, involves a few trucks in a Queensland paddock drilling a shallow hole.

Chevron spent $82 billion to build its Gorgon LNG project and just two years later committed to another $5 billion to drill just 11 additional wells to maintain gas supply. The next stage for Gorgon is the installation of cutting-edge compression equipment on the seabed to keep pumping the gas as the pressure in the reservoir falls.

The days of cheap gas are over.

Gas from Woodside’s Scarborough project would cost about $US4.50 a million Btu, or $6.50 a gigajoule, to land unprocessed at the beach, according to oil and gas consultancy Wood Mackenzie.

With a $5.35 a GJ pipeline tariff calculated by ACIL-Allen and ignoring processing the gas at the beach WA gas would cost $11.85 a GJ.

Last month Minister for Energy and Emissions Reduction Angus Taylor celebrated the fall of east coast gas prices to $5.63 a GJ.

strike nine – the West will be penalised for its smart energy policy

The price of gas in WA is well below the cost predicted for Scarborough because LNG producers must reserve gas for local use. Selling gas to the domestic market is the payment for putting an LNG plant on WA soil. The cost of production does not determine the gas price.

Sucking gas east would inevitably push up the price of gas in WA. The proponents of WA gas for east coast jobs need to explain why the future of workers at Alcoa’s gas-intensive alumina operations in the South West of the State should be sacrificed.

strike ten – there are better, cheaper, faster solutions to east coast energy prices

The west-east gas pipeline is a solution without a problem.

LNG imports, unblocking transmission constraints to connect more large wind and solar farms, the use of ever-cheaper batteries and yes, gas-fired peakers, are all sensible parts of the east coast energy mix. However, as more batteries, hydro storage and demand management is rolled out, the volume of gas consumed by the peakers will not be huge.

ten strikes and you’re out

The case for the west-east pipeline is so weak it will not happen but is an unfortunate distraction when Australia needs thoughtful and intelligent leadership more than ever.

The pipeline is ridiculous purely on medium-term economic grounds. This analysis has not covered the broader problem of committing to large-scale gas infrastructure when the nation needs to reduce its greenhouse gas emissions.

That Nev Power and at least some of his fellow commissioners are pursuing such a daft idea shows they are not up to the job. The post-COVID19 recovery is the nation’s most significant economic challenge since the Great Depression. It should not be left to amateurs.


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Main picture: Possible west east gas pipeline route. Source: ACIL Allen West-East Pipeline Pre-Feasibility Study.