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To Frack or Not to Frack? Australia's NatGas Dilemma

Posted by April 19, 2018

The decision by the government of Australia's Northern Territory government to allow the resumption of fracking for natural gas will do little to immediately solve the country's energy woes, but will likely sharpen political battle lines.
The territory's government said on April 17 that it has lifted a near two-year moratorium on hydraulic fracturing, known as fracking, accepting the recommendations of its own commission of inquiry into the practice.
Northern Territory is a vast, sparsely-populated 1.4 million square kilometre (540,000 square mile) part of central and northern Australia, and home to two potentially rich basins of natural gas.
The remote region is ruled by the centre-left Labor Party, which is in opposition at a federal level. The Labor Party also controls state governments in Queensland, Victoria and Western Australia.
The decision to permit fracking, subject to rigorous regulation, came as a surprise to many observers, given the opposition of many Labor supporters to this method of natural gas production.
The territory government was elected on a platform of placing a moratorium on fracking and holding an inquiry into whether it was safe and what were the environmental risks.
In some ways the territory's commission merely confirmed what other similar inquiries in Australia have already found, namely that the risks of fracking can be managed with robust regulation.
The government of New Territory Chief Minister Michael Gunner must have known, however, that allowing the resumption of fracking would alienate part of its support base, and make it a target for well-funded, well-organised green activists.
The natural gas industry has welcomed the lifting of the moratorium and Australian energy major Origin Energy (OGFGF.PK) said it aimed to resume plans "as soon as practical" to drill and frack the Beetaloo Basin, which the company says contains as much as 6.6 trillion cubic feet in reserves.
Such a level of natural gas reserves would provide a welcome boost to Australia, which is struggling to balance the needs of three large liquefied natural gas (LNG) plants in Queensland with the demands for cheap and reliable supplies from industry and consumers along the populous east coast.
It's this dynamic that is creating political headaches for both state governments and the centre-right Liberal Party of Prime Minister Malcolm Turnbull.
The natural gas industry maintains there is no actual shortage of the fuel, but says that to ensure that this situation continues, the states and territories will have to permit exploration and production.
Currently, four states - New South Wales, Victoria, Tasmania and Western Australia - have either bans or moratoriums on at least some forms of natural gas exploration and production.
It remains to be seen whether NT's decision to lift its fracking moratorium will encourage other jurisdictions to do the same, but any politician considering this will be aware of the furious reaction it would generate from environmental activists.
The other issue for Australia is that domestic natural gas prices have risen sharply, and are now trading more in line with Asian spot LNG prices.
The price of natural gas at the Wallumbilla hub in Queensland, as assessed by Argus Media, was $5.77 per million British thermal units last week, while spot Asian LNG <LNG-AS> was $7.25.
Once the cost of the LNG is netted back to the hub, the two prices are more or less in line, meaning Australia's domestic customers are paying for their natural gas at values linked to international prices.
This is a shift from what happened prior to the three LNG plants being built in Queensland, when domestic natural gas was cheaper and generally sold in long-term contracts.
Adding natural gas from the territory to Australia's supply mix may help lower prices for both feedstock for the LNG plants and domestic customers, but the point is that this extra production is still several years away.
In the meantime, pressure is going to mount on domestic natural gas suppliers and consumers, leading to political fallout and seemingly odd solutions, such as bringing a floating re-gasification ship to Melbourne and importing LNG.
It seems ludicrous that Australia, which will overtake Qatar as the world's top exporter of LNG once the last of eight new projects comes online later this year, will turn to importing the super-chilled fuel in order to meet domestic demand.
It seems logical to develop onshore natural gas resources rather than import LNG, but this ignores the increasing influence of environmental activists, who are committed to ending all fossil fuel production in favour of renewable energy.
While some green groups ignore the scientific evidence that supports fracking, others simply shift to say that natural gas production contributes to climate change and should be banned for this reason.
Any company engaged in fracking in Australia can expect to be targeted by activists, which may deter some oil and gas companies, given they have become increasingly publicity shy.

The end result of the Northern Territory's decision to allow fracking may be some additional natural gas supply. But it will certainly up the political temperature and raise the risks of populist policies triumphing over cheap energy supplies that are cleaner than Australia's existing coal-dominated power plants. 


By Clyde Russell

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