New gas fields in doubt even without safeguard, investors say

Powerful investors say plans to develop new fossil fuel projects in Australia are already facing major challenges and doubts about their viability in a decarbonising world, even before the federal government’s introduction of tougher emissions limits later this year.

The Albanese government on Monday struck a deal with the Greens over new laws that will force the nation’s 215 biggest greenhouse-gas polluters to cut emissions and set tougher controls on new fossil fuel projects from July.

Federal Greens leader Adam Bandt said changes secured by his party, including rules forcing real-world emissions reductions regardless of how many carbon offsets a company purchases, would stop some new coal and gas projects from going ahead. “Coal and gas have taken a huge hit,” he said.

Industry analysts said a requirement for new gas fields to have “net-zero” reservoir emissions would add further costs to potential future projects containing relatively high levels of carbon dioxide, such as Santos’ plans to develop the $5.8 billion Barossa liquefied natural gas (LNG) project off Northern Territory and Woodside’s $30 billion Browse LNG project off Western Australia.

However, representatives for shareholders in some of the nation’s largest energy companies on Wednesday said proposed new oil and gas developments were already facing significant hurdles to receiving final investment decisions amid financial markets’ growing concerns about climate-related risk.

The Investor Group on Climate Change (IGCC), a coalition of superannuation and retail funds investing on behalf of 7.5 million Australians, said about 40 per cent of fund managers nationally applied some level of exclusion on new oil and gas projects.

The LNG sector is facing soaring prices amid an ongoing global energy crunch – but its long-term future is less certain.Credit:Glenn Campbell

Despite soaring fossil fuel demand and prices this year due to the war in Ukraine, IGCC policy director Erwin Jackson said there were mounting longer-term concerns that new projects could face diminishing returns and become uneconomic – or “stranded assets” – due to green technology advances, shifts in consumer preferences and sudden changes in government policy.

“It’s not just about what is happening today, it’s about what the world is going to be like in 2030 or 2035 and whether these projects will be stranded,” Jackson said. “That’s a realistic scenario for any new major fossil fuel project.”

In 2021, a landmark report by the International Energy Agency (IEA) warned the world must avoid funding any new oil and gas fields to achieve the Paris Agreement’s goal of limiting temperature rises to 1.5 degrees, the level scientists say is necessary to avert the most catastrophic impacts of global warming.

The IGCC, which represents large Australian and international investors such as AustralianSuper, AMP, BlackRock, Fidelity and Vanguard, said the financial community was increasingly focusing on whether fossil fuel companies’ growth plans were Paris-aligned, and was demanding shorter payback periods for new projects.

Australia’s new safeguard mechanism would deliver much-needed policy clarity and draw more global capital to Australia, Jackson added, but also escalate investors’ scrutiny of those companies that fail to align their business models towards “net-zero” emissions.

‘It’s not just about what is happening today, it’s about what the world is going to be like in 2030 or 2035 and whether these projects will be stranded.’

“Those companies that do … will be more attractive to global investors,” he said.

The safeguard mechanism, which forms part of the government’s commitment to slash emissions by 43 per cent by 2030, is the first federal emissions-reduction policy since the Gillard government’s carbon tax from 2012 to 2014. The 215 facilities captured by the safeguard mechanism, which include sites such as coal mines, gas-processing plants, manufacturing firms and steel mills, are responsible for 28 per cent of the nation’s greenhouse emissions.

Coal miners have hit out at the policy, warning it will imperil the future of one of Australia’s most valuable export industries and lead to fewer jobs.

“The proposed safeguard reforms changes won’t meaningfully reduce global emissions – they fulfil a political objective built on a base demonisation of fossil fuels,” said Rob Bishop, chief executive of ASX-listed coal miner New Hope Group.

“This will be at the cost of Australian jobs and our reputation as a reliable supplier of energy and raw materials the world needs more, not less of.”

Resources Minister Madeleine King on Wednesday said gas had an important role to play in Australia’s energy transition by supporting renewable energy sources until big battery technology and hydroelectric projects are capable of plugging gaps when the wind isn’t blowing and the sun isn’t shining.

However, King added that the resource sector was responsible for about one-fifth of national emissions, and would need to “play its part for Australia to reach its national targets”.

“Through the safeguard mechanism reforms, we are providing the resources sector with the certainty it needs to invest in technologies and decarbonise its operations,” she said.

Tony Wood, energy director at the Grattan Institute think tank, said the Greens’ amendments to the safeguard mechanism had not derailed the original intention of the reform. He said the imposition of a “hard cap” of overall emissions made it harder for the emissions from new projects to blow the scheme’s carbon budget and force other companies to help pay the bill.

“I wouldn’t be catastrophising over those projects going ahead,” Wood said.

“This scheme will get moving, we’ll actually see real emissions reduction from the sector, and then we’ll see what happens next. I’m much more positive about this than I am concerned.”

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