Lifespan of Australia’s longest gas pipeline slashed as renewable energy turns heat up on fossil fuels
By Sourced Externally
March 24, 2021
The company that owns Australia’s longest natural gas pipeline has slashed the asset’s expected lifespan, saying renewable energy could make the business unviable decades ahead of schedule.
The owners of Australia’s longest gas pipeline want to shorten its expected lifespan by decades
Renewable energy and carbon pricing are cited as long-term threats to the business model
The move could add almost $100 million to users’ gas bills over the next five years
In a move that experts say highlights the seismic changes underway in fossil fuel industries including natural gas, the owners of the Dampier-to-Bunbury gas pipeline want to bring its effective end-of-life forward from 2090 to 2063.
It wants to dramatically shorten the depreciation schedule for the 1600-kilometre pipeline — Western Australia’s main economic artery — to reflect the changes.
The proposal is outlined in AGIG’s submission to WA’s economic watchdog, which regulates how much the company can charge customers to use a pipeline that runs from Dampier in the state’s Pilbara to Bunbury in the South West.
Gas from the pipeline is used by some of the country’s biggest industrial players including aluminium behemoth Alcoa.
It is also used to produce about 40 per cent of the electricity for WA’s biggest power grid.
Customers including energy provider Alinta and giant conglomerate Wesfarmers have flagged their opposition to the bid, saying it would add tens of millions of dollars in extra costs to users’ bills over the next five years.
Matthew Bowen, a partner at law firm Jackson McDonald specialising in energy, said the proposal was significant in a global context because it showed how radically the economics of fossil fuels were being reshaped.
Mr Bowen noted the Dampier to Bunbury gas pipeline had been the cornerstone of WA’s economic development over the past 40 years.
He said while the pipeline seemed indispensable to the state’s economy at the moment, that was set to change much quicker than AGIG had previously estimated.
“It is significant for two reasons,” Mr Bowen said.
“The first is if it results in higher prices on the pipeline if the Economic Regulation Authority agrees to this.
“The bigger reason why it’s significant is this is a concrete indication from an investor in energy infrastructure that the world is changing.
“That the world is moving to decarbonise and that their business model, which is based on transporting carbon-based fuels, faces a shelf life.
“Up until now, the way prices have been set for these regulated assets has been to forecast the engineering life of the asset and say this bit of pipe is expected to last for perhaps 80 years, so we’ll recover the cost of the asset over those 80 years.
“There’s really been an assumption that demand will always be there, that people will always be consuming the natural gas these pipelines transport.”
Energy Matrix consultant Michael Brooks, who has worked in the gas pipeline industry, said AGIG was also likely to be motivated by the commercial benefit of a shorter depreciation schedule because it would boost profits in the short term.
However, Mr Brooks said the Chinese-owned company was being forced to act by fundamentally changing market conditions.
“Over the last 10 years, a lot has changed and we’re seeing prices for renewable energy decrease substantially, different technologies being discussed,” Mr Brooks said.
Ten years ago, it was hard to imagine a world not requiring a [Dampier to Bunbury pipeline].”
Mr Brooks said there was growing uncertainty about the role gas would play in not only electricity generation as renewable sources became cheaper but also processing as cleaner options such as green hydrogen became more viable.
Shortened life ‘still optimistic’
Peter Milne, a journalist and former engineer in the oil and gas industry, said AGIG’s position was likely to draw widespread attention but other gas pipeline owners would have to follow suit.
Milne also suggested the proposed new lifespan for the Dampier to Bunbury pipeline was overly optimistic, arguing demand for gas would fall away faster than AGIG was forecasting.
“I can’t see it operating in 2063,” Milne said.
“Net zero by 2050… it’s real and countries are engaging it.
“And particularly now the US has turned under the new president [Joe Biden], the world has changed.”
Questions raised for politicians
For Mr Bowen, AGIG’s proposal has also raised significant issues about who should pay for regulated infrastructure such as gas pipelines when the business case for the assets diminishes.
“To take an example, Kodak, the film company, when the world switched to digital photography its investment in the machines, they used to make film stock had to be depreciated and written off,” he said.
“That’s normally what happens when the market for your services dries up.
“It is a little more complicated when one is dealing with monopoly infrastructure because up until the point that Kodak’s machines became valueless, Kodak had been able to set prices as it saw fit and as the market would allow it.
“The bigger question is whether the natural gas law, as written by governments around Australia, currently gives the right answer in this respect.
“And that’s why I say at the end of the day it’s a policy question for the state and commonwealth governments.”