Australian upstream firms stranded with transition pace

Australia's energy transition is gathering pace, with Queensland's state-owned utilities to end their reliance on burning coal for power generation by 2035 and utility AGL bringing forward plans to exit coal by the same date.

Queensland is Australia's largest coal exporting state and derives significant royalty revenues from coal production. Coal accounted for around 73pc of Queensland's electricity generation over the past 12 months and most of electricity is generated by plants operated by state-owned utilities Stanwell and CS Energy, which accounted for around 70pc of the greenhouse gas (GHG) emissions generated by Queensland's coal-fired power stations in the 2020-21 fiscal year to 30 June.

Coal is an important part of Queensland's economy and has played an influential role in state politics. But politics in what is often labelled as Australia's most conservative state is changing. The May federal election saw three Greens candidates elected for the first time to the Australian lower house of parliament, the House of Representatives, from electorates based in the state capital Brisbane. This followed significant flooding in Brisbane and in rural Queensland, attributed to climate change.

"We are facing a climate emergency," Queensland premier Annastacia Palaszczuk said in announcing Queensland's energy and jobs plan, which also included a renewable energy target of 80pc by 2035 and plans to build new transmission lines to link three renewable energy zones to the existing grid.

Increasing grid-scale renewable energy to around 40GW by 2039-40 from around 2.6GW at the end of 2020-21 will also create a platform to build its green hydrogen ambitions.

Queenslanders have also embraced renewable energy with 4.5GW of roof-top solar installed at the end of 2020-21, which is more or less the amount that was installed in New South Wales, Australia's most populous state, and almost a third of the national total.

Utilities step up CO2 cuts

AGL Energy has brought forward the closure of Australia's most emissions-intensive power plant the 2,210MW Loy Yang A in Victoria to 2035 compared with 2045, which was only revised in February from a previous target of a shutdown in 2048.

The accelerated shutdown of AGL's coal-fired power plants, with a full exit by 2035, follow the emergence this year of Australian billionaire Mike Cannon-Brookes as the largest shareholder of the Australia utility with a 11.28pc stake. He used his stake to vote against and ultimately halt the proposed demerger of AGL into two companies and a commitment to review its coal assets.

AGL also plans invest up to A$20bn ($12.9bn) to accelerate its deployment of renewable energy and firming power to 12GW before 2036. Solar and wind accounted for almost 11pc of AGL's electricity output in 2021-22 compared with around 84pc for coal-fired power plants.

Fellow utility Origin Energy last week said it will divest its 77.5pc interest in the onshore Beetaloo gas venture in the Northern Territory to a firm jointly owned by Australian independent Tamboran Resources and its substantial shareholder Bryan Sheffield. It also sell all upstream exploration permits outside acreage associated with its operatorship of the upstream operations of the 9mn t/yr Australia Pacific LNG.

Origin's reduction in its gas interests will be accompanied by a boost to its renewable energy investment. Both Origin and AGL have said their decisions to reduce emissions will incur one-off charges.

Business as usual upstream

But Australian upstream firms Woodside Energy and Santos conversely plan to boost their oil and gas production.

Santos last month approved the development of the 80,000 b/d Pikka oil field in the North Slope region of Alaska in the US, with first output expected in 2026.

Woodside this month unveiled plans to develop the 13.9 trillion ft³ (368bn m³) Browse gas fields in the Browse basin offshore Western Australia (WA). Woodside shelved any intention of accompanying the Browse gas field development with carbon capture and storage, which is had previously flagged would be part of any future browse development.

Both Santos and Woodside said their respective upstream developments will use carbon offsets to cover their scope one and two emissions for the new projects. Woodside has also argued that it will need financial assistance in a submission to the Australian government about its plans to revise the safeguard mechanism. The mechanism is the policy tool to reduce emissions among the nation's top polluters to reach Canberra's goal of a 43pc cut in emissions by 2030 from 2005 levels.

Woodside also wants to use international carbon credits, which are currently not allowed in Australia, to meet its emissions reduction targets under the safeguard mechanism. Woodside argues that as a trade exposed exporter the imposition of reducing emissions would put it at a disadvantage to competing LNG exporters in countries without such a mechanism.

Woodside's plea for state assistance comes after it reported a profit of $1.64bn in the first half of 2022, up by 417pc from $317mn in the same period a year earlier. The plea is a similar tactic upstream firms have used in the past to any government initiative to reduce GHG emissions.

Mining firms seek alternatives

The stance also puts Woodside in contrast to even mining firms that have pledged to reduce their emissions.

Australia's iron ore producer Fortescue Metals Group pledged to spend $6.2bn to switch iron ore operations in WA to run on renewable energy from coal and gas to meet its 2030 net zero emissions target.

UK-Australian mining company Rio Tinto plans to spend $7.5bn to decarbonise its assets, including sourcing electricity from renewable sources instead of coal plants for two of its aluminium smelters in east Australia.

The outcome of the safeguard mechanism may be a test on the lobbying strength of the upstream sector as it relied on support from the large mining firms, large polluting utilities, as well as state governments with significant resource exports, all part of a coalition that is now fragmenting.

By Kevin Morrison