ABCD Australian Petroleum Production & Exploration Association Limited (APPEA) Gas Market Report May 2010 Advisory May 2010 This report contains 123 pages © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation. ABCD Gas Market Report Advisory May 2010 Contents 1 Executive summary 1 2 Scope and approach 4 2.1 KPMG’s engagement 4 2.1.1 Gas resource base in Australia 4 2.1.2 Factors influencing the commercialisation of gas in Australia 4 2.1.3 Domestic gas market 4 2.1.4 Integration with LNG export markets 5 2.1.5 Carbon and renewable energy policy implications 5 2.1.6 Impact of potential interventionist policies 5 2.1.7 Outlook for the Australian natural gas market 5 2.2 Report structure 5 3 Australia’s gas market 7 3.1 Overview 7 3.1.1 Resources, reserves and production 8 3.1.2 Wholesale pricing 13 3.1.3 Pipelines 14 3.1.4 Gas-fired generation 18 3.1.5 Gas retailing 22 3.2 East coast 24 3.2.1 Suppliers 24 3.2.2 Wholesale pricing 25 3.2.3 Pipelines 26 3.2.4 Gas storage 32 3.2.5 Gas-fired generation 32 3.2.6 Retailers 35 3.3 West coast 36 3.3.1 Suppliers 36 3.3.2 Wholesale pricing 38 3.3.3 Pipelines 39 3.3.4 Gas storage 44 3.3.5 Gas-fired generation 44 3.3.6 Retailers 44 3.4 Northern Territory 45 4 Factors affecting gas field commercialisation 48 4.1 Land rights and access 48 4.2 Multiple land use classifications 48 4.3 Capital investment constraints 49 4.4 Infrastructure and labour availability 49 i © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation. ABCD Gas Market Report Advisory May 2010 4.5 Geology and geography 49 4.6 CSG water management 50 4.7 Ramp-up gas 51 4.8 Scale 52 4.9 Environmental regulation 52 4.10 Approvals time 52 4.11 Technology 53 5 Australia’s LNG export markets 54 5.1 Introduction 54 5.1.1 Trade flows 54 5.1.2 Pricing 56 5.1.3 Production 58 5.2 LNG demand base 60 5.2.1 Japan 62 5.2.2 South Korea 62 5.2.3 China 63 5.2.4 India 63 5.3 LNG rivals 63 5.3.1 Qatar 64 5.3.2 Malaysia 64 5.3.3 Indonesia 65 5.3.4 Papua New Guinea 65 5.3.5 Other 65 5.4 Existing LNG projects in Australia 66 5.4.1 Operational 66 5.4.2 Under construction 66 5.5 Proposed LNG projects 67 6 The role of gas in a carbon constrained economy 78 6.1 CPRS 78 6.2 Enhanced RET 79 6.3 Clean Energy Initiative 81 6.4 Issues for the LNG industry 81 7 Factors impacting the domestic gas supply market 83 7.1 Co-dependence on LNG exports 83 7.2 Joint marketing 83 7.3 Vertical integration 84 7.4 Price transparency 84 7.5 Acreage management 85 7.6 Pipeline policy and regulation 86 7.6.1 Gas quality specifications 86 7.6.2 Pipeline regulations 86 ii © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation. ABCD Gas Market Report Advisory May 2010 7.6.3 Approvals process 86 8 Gas market efficiency 87 8.1 National Gas Bulletin Board 87 8.2 Short Term Trading Market 88 8.3 National Gas Market Operator 89 8.4 Impact of interventionist policies on market efficiency 90 9 Gas policy initiatives 91 9.1 Mandatory domestic gas reservation 91 9.2 Retention leases 91 9.3 Royalty reductions or holidays 91 9.4 Broadening of gas quality specifications 92 9.5 Taxation reform to assist small exploration companies 92 9.6 Provision of infrastructure supporting exploration and development 92 10 Outlook for the Australian natural gas market 93 10.1 Short term outlook 93 10.2 Medium term outlook 93 10.3 Long term outlook 94 A Australia’s gas resource base 96 A.1 Conventional gas 96 A.2 Coal Seam Gas (CSG) 105 B Long term and medium term LNG contracts in force in 2008 (duration > 4 yrs) 109 iii © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation. ABCD Gas Market Report Advisory May 2010 Disclaimer Inherent Limitations This report has been prepared as outlined in Section 2.1 and Section 2.2. The services provided in connection with this engagement comprise an advisory engagement, which is not subject to assurance or other standards issued by the Australian Auditing and Assurance Standards Board and, consequently no opinions or conclusions intended to convey assurance have been expressed. References to ‘review’ throughout this report have not been used in the context of a review in accordance with assurance and other standards issued by the Australian Auditing and Assurance Standards Board. Any estimates or projections of future economic performance are impacted by numerous factors that may influence the various components of the estimates or projections, and are inherently indeterminable whether considered in isolation or in conflux. Although KPMG exercises reasonable care when making forecasts or predictions, factors in the process, such as market behaviour, are inherently uncertain. As such, future events may not unfold as expected and actual results achieved for the forecast periods covered will vary from the information presented. Any estimates or projections will only take into account information available to KPMG up to the date of the deliverable and so findings may be affected by new information. Accordingly, we do not warrant or guarantee that any outcome presented in this report will be achieved. Further, events may have occurred since we prepared this report which may impact on it and its findings. No warranty of completeness, accuracy or reliability is given in relation to the statements and representations made by, and the information and documentation provided by market participants consulted as part of the engagement. KPMG have indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within the report. KPMG is under no obligation in any circumstance to update this report, in either oral or written form, for events occurring after the report has been issued in final form. The findings in this report have been formed on the above basis. Third Party Reliance This report is solely for the purpose set out in Section 2.1 and Section 2.2 of this report and for APPEA’s information, and is not to be used for any other purpose. This report has been prepared at the request of APPEA in accordance with the terms of KPMG’s Engagement Letter with APPEA, dated 18 September 2009. Other than our responsibility to APPEA, neither KPMG nor any member or employee of KPMG undertakes responsibility arising in any way from reliance placed by a third party on this report. Any reliance placed is that party's sole responsibility. We understand that this report may be made available on the APPEA website. Third parties who access this report are not a party to our Engagement Letter with APPEA and, accordingly, may not place reliance of this report. KPMG shall not be liable for any losses, claims, expenses, actions, demands, damages, liabilities or any other proceedings arising out of any reliance by a third party on this report. iv © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Liability limited by a scheme approved under Professional Standards Legislation. ABCD Gas Market Report Advisory May 2010 1 Executive summary KPMG have been engaged by the Australian Petroleum Production & Exploration Association (APPEA) to undertake a study of the natural gas market in Australia, its structure, efficiency and future outlook. The purpose of the report is to assist APPEA in establishing a current base of information to communicate with its stakeholders. The topics covered in this Gas Market Report include: • an overview of Australian gas reserves and resources; • the nature and structure of the Australian natural gas market; • factors affecting the commercialisation of domestic gas resources (including those for Liquefied Natural Gas (LNG) export); • the impact of the gas export market on the efficient operation of the domestic gas market; • analysis of potential impacts of interventionist policies aimed at domestic gas volume/price control; and • an outlook for the Australian gas market. Gas production in Australia services both domestic gas demand (56%) and the export LNG markets (44%).1 While coal is the predominant fuel in Australia, the use of natural gas has accelerated at a rate greater than that of coal (average consumption of gas has increased by an average of 3.5% pa, compared to 2.4% pa for coal). The strong growth to date has been driven by sustained population growth, strong economic growth, alongside its competitiveness as a fuel source and governmental policies to encourage its uptake.2 The outlook is furthermore positive, as gas is projected to be the fastest growing fossil fuel over the period to 2029-30.3 Primary gas consumption is projected to rise by 3.4% per year, its share of primary energy consumption projected to rise to 33% by 2029-30.4 This forecast growth in demand is driven primarily by the electricity sector, as the share of gas fired generation (GFG) in the energy mix is projected to increase considerably over the medium to long term, reflecting the shift to less carbon intensive fuels in a carbon constrained environment.5 While Australia accounted for 2% of world gas reserves and production in 2008, it is the world’s six largest LNG exporter, accounting for 9% of the world’s LNG trade in 2008.6 Since 2006-07, gas exports have increased by 12%.