There are a wide range of factors impacting on the economics of gas and especially fracked gas, including:
- Since 2018 the economics of the gas industry have exposed fracking as a loss making venture.
- Global energy economics have turned against fossil fuels as renewables have become cheaper.
- The fracking industry has been shown to have serious economic flaws and as detailed in the box below would be economically destructive in the NT.
- Fracked gas is the most expensive form of gas because of the processes it entails.
- Fracked gas it is also the riskiest form of gas development in terms of environmental and water risks.
- The fracking industry would also mean that genuine economic opportunities, such as renewable energy opportunities, would be lost because of the focus on gas production.
There is a very real risk that the current economic climate in the NT will lead to poor decision making, further compromising the economic future of the NT and regions like the Barkly. When you factor these elements and the offsets requirements.1 it is unlikely that any economic benefits are going to accrue from fracking to the NT and federal Government, especially in the next decade. Investing in fracking gas creates a huge risk of stranded assets.
In a major new report released on Monday June 29 2020, consulting and tax advisory firm Deloitte details the current state of the U.S. shale industry. Chock full of interesting data, the study concludes that the overall shale business peaked in 2019 without turning a profit in aggregate. One of the study’s major findings is that, since 2010, the industry as a whole in fact “registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies.” See details here
For some time now financial markets have been aware that fracking does not make money It would be incredibly risky to try to use this loss making industry as a basis for economic recovery in the NT or to try to build an economic future based on Fracking.
This is not just a case of the fracking industry being at risk but this industry damages local economies as it did in Miles in QLD and it also poses great environmental risks especially to water. It is not only the actual costs of fracking but the damage it does to other industry sectors and the lost opportunities for genuine growth in industries like renewables that need to be considered.
The economic problems with fracking are not just because of the Covid-19 pandemic. Fracking companies were massively in debt in 2019 before the virus and the changes created in global energy markets have made the situation worse. Most important here is that the high cost of Fracking gas means it will not recover.
Since the NT Government lifted the moratorium on fracking in the NT, consultancy Wood Mackenzie have said to the Australian Financial Review, "Even with the lifting of the fracking ban we are still at least a decade away from large-scale commercial volumes possibly reaching the east coast. And it's all still just a big maybe. After factoring in pipeline transport costs ... any new gas supply will have to achieve an impressively low cost base before it could make a major impact on domestic prices."2
The Western Australian (WA) Government recently commissioned a renewable energy export feasibility study, finding it would be feasible to export solar energy from northern Australia to Indonesia via a high voltage direct current (HVDC) cable, under the ocean. This project would capitalise on the significant – and continued - increase in renewable energy demand in ASEAN nations.3 The pilot project could potentially generate up to 2,000 permanent jobs in the Pilbara region in WA and more than 12,000 jobs across the state. The NT could be a player in this space and regional renewable energy plants could be feeding power into an HVDC grid to the Eastern states and Asia as well as producing hydrogen for export.
It is so short sighted for the NT and Australian Governments to be supporting and subsidising Unconventional gas development when we could be investing in a sustainable carbon free energy future. The gas pipeline being discussed should be HVDC cable links. Much cheaper and much more beneficial to the NT in future.
In its report to the NT Fracking Inquiry, economics firm ACIL Allen found that the most likely scenario for the NT fracking industry is that exploration takes place but that the industry fails to commercialise - adding nothing to gas supply. See the VERY HIGH probability for ‘Shale Calm’ scenario, below.4
ACIL Allen reported the ‘Shale Calm’ scenario is “very high probability” of zero long term jobs and zero long term revenue. The ‘Shale Wind’ scenario with a “low to moderate” probability of occurring would bring just 252 long term jobs (a 0.1% share of the NT workforce to 2042) and $81 million increase in annual revenue (around 1%).
There are especially problematic issues with gasfield development based on fracking and these relate to shale gas as well. Industry-funded studies on gasfield development outcomes conducted in collaboration with the CSIRO found strong evidence that rapid unconventional gas booms disrupt local economies and destroy jobs in other sectors, while creating negligible spill-over employment.5
In Queensland’s Darling Downs region the study found overall, 9 jobs were lost in the services sector for every 10 new gas jobs, and 18 agricultural jobs were lost for every 10 people employed in the gas industry. Local businesses reported a deterioration in community wellbeing, local skills base, infrastructure quality and the environment, with fewer than one in four local people approving of the industry.
The same report shows business, community and local government stakeholders surveyed all reported a worsening in the following indicators:
Boom and Bust Cycle
Most unconventional gas industry jobs are required for the short initial construction phase only. According to the Office of the Chief Economist, the three major unconventional gas projects in Queensland cut employment by over 80% as the projects entered their operational phase3. Despite detailed social impact plans intended to manage the effects of a gas rush, regional economies such as Miles and Chinchilla were devastated by the short boom and major bust once big gas took hold of the region.
Gas industry contributions to the Australian nation via royalty payments are falling well short of expectations. CSG revenues in Queensland in 2015-16 were only $22 million from thousands of gas wells.6 Forecasts for future royalties from oil and gas in QLD have been revised down. The forecast back in 2012-13 of $636 million by 2017-18, is now down to a forecast of $147 million in the actual 2017-18 budget.7 Any claims of high royalties by the gas industry should be taken with a grain of salt. In its analysis of the economic context for shale as in the NT, ACIL Allen estimates that royalty payments from the most likely NT shale gas development scenarios would be very small.7
Higher retail gas prices: Increased production of onshore gas in the Territory does not mean lower prices for NT consumers. Since the three new export gas plants in Gladstone came online in 2015-16, domestic gas prices in eastern Australia have increased by up to 500%8. This has caused significant hardship for Australian consumers. The export plants linked the Australian gas market to higher priced export markets and redirected our domestic gas resources overseas. A 2017 report9 revealed that Queensland residential gas prices are the highest in the nation and more than twice the national average.
The QLD Treasury mid-year review in 2013-14 forecasted $482 million for petroleum royalties to flow during 2015-1610. However, in its Mid Year Fiscal and Economic Review actual royalties from onshore oil and gas were just $36 million in total from all CSG and conventional gas in 2015-16 - just 7.5% of projected payments. If a shale gas industry in the NT were to repeat or even double this modest ‘success’ scenario, would mean a 1% increase on current revenues.
But even this modest outcome would come at significant cost to other industries and local governments responsible for service and infrastructure maintenance.
2 Australian Financial Review, April 2018, http://www.afr.com/business/energy/gas/top-end-shale-gas-still-a-big-maybe-for-east-coast-20180419-h0z07e#ixzz5DBvFPYLu
3 Fitzgerald, “Solar Energy Exports from the Pilbara to Indonesia the Focus of New WA Government-Backed Study”; Pilbara. Development Commission and Government of Western Australia, Pilbara Solar Export Pre-Feasibility Study
5 Fleming, D & Measham, T (2015a) “Local economic impacts of an unconventional energy boom; The coal seam gas industry in Australia”, The Australian Journal of Agricultural and Resource Economics 59(1) pp 78-94.
6 TAI. 2015. Be careful what you wish for. Originally from Queensland Budget Papers 2012-2015. http://www.tai.org.au/sites/defualt/files/Be%20careful%20what%20you%20wish%20for%20FINAL_0.pdf 2017/18 data drawn from 2018/18 Queensland budget papers.
7 ACIL Allen Consulting. (2017). The economic impacts of a potential shale gas development in the Northern Territory. October 2017. http://www.acilallen.com.au/cms_files/ACILAllen_ShaleGasNT_October2017.pdf