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LNG here to stay, to withstand ESG pressures: Moody’s

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By Charbel Kadib
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3 minute read

Gas will remain an essential fuel over the medium-term, offsetting power system intermittences associated with Australia’s transition to renewable energy, according to the ratings agency.

The Commonwealth government’s commitment to achieve net zero emissions by 2050 and reduce greenhouse gas emissions by 43 per cent by 2030 has fuelled investment in the renewable energy sector.

This has spurred investment in environmental, social, and governance (ESG) funds, with energy producers reshaping their practices to meet ESG standards and attract capital.

But according to ratings agency Moody’s, non-renewable energy sources would continue to play a key role during the National Electricity Market (NEM) transition.

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Natural gas producers, in particular, would offset “power system intermittence”.

“We expect natural gas to retain its essential role as a transition fuel in Australia,” Moody’s noted.

“Gas is essential as a backup generation fuel during prolonged periods of low sunshine/windless days, because of the limitations of current low-emission, long-duration storage technology.”

“…Moreover, gas remains a commonly used household fuel in Australia’s more populous eastern states, and we believe that households will take many years to switch to electric appliances.”

This would help mitigate risks of asset stranding among natural gas producers.

However, Moody’s acknowledged LNG’s contribution to energy consumption is projected to “gradually decline” over the long term.

These pressures would be exacerbated by a heavier regulatory burden in the form of price caps under a proposed mandatory gas code of conduct.

Moody’s also noted the Commonwealth government’s power to redirect LNG exports to the domestic market on a quarterly calendar basis under the Australian Domestic Gas Security Mechanism (ADGSM).

The proposed code would stipulate the terms on which domestic gas producers and sellers would enter into contractual arrangements and would include an initial two-year price cap of $12 per gigajoule (GJ) of LNG.

“Our central scenario is that the government will seek to maintain the efficient operation of domestic gas markets and will only intervene if there are looming supply shortfalls,” Moody’s stated.

“However, the uncertainty around both the level of future prices and the extent to which producers would be eligible for exemption from the cap decreases revenue visibility and under a downside scenario could reduce future exploration and production activity.”

According to Moody’s, this uncertainty could result in gas production shortfalls, “relative to the aggregate domestic demand and export commitments”.

“…We expect the government to prioritise electricity system security as the NEM increasingly transitions to renewable generation, to avoid reduced reliability resulting from shortages of gas during peak demand,” Moody’s observed.

“This highlights the important role of gas-fired generation.”

Australia’s largest LNG producers have continued to gain value on the equities market despite longer-term uncertainty.

Perth-based Woodside and Sydney-based Origin Energy have grown their share prices by over 20 per cent over the past 12 months, while Adelaide-based peer Santos has gained 5 per cent in value over the same period.

LNG here to stay, to withstand ESG pressures: Moody’s

Gas will remain an essential fuel over the medium-term, offsetting power system intermittences associated with Australia’s transition to renewable energy, according to the ratings agency.

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