In last year’s little predictive piece (on Got Gas), we opined that gas prices on the East Coast would likely spike due to declining fields. And, while prices did indeed climb to some rather eye-popping levels, it was also due to what no one could have predicted.

Namely: Russia’s invasion of Ukraine, which didn’t quite go the way that Russian high command was hoping.

With Russia wielding its gas exports to Europe like a big stick in response to European sanctions and OPEC choosing to cut production – ostensibly to maintain prices due to recession concerns – the world is now aware of just how important energy security really is.

Couple that with the growing realisation that 2050 isn’t actually that far away and that meeting those net zero targets would need some serious investment, and the shape of the energy sector in 2023 is likely to be interesting to say the least.


Oil still has legs

Oil prices are likely to remain elevated in 2023 with an EU cap on Russian oil products expected to reduce output from one of the world’s largest producers while OPEC+ is said to be mulling another production cut.

While OPEC+ is believed to be considering this in response on the basis of demand weakness – particularly in China – energy consultancy Rystad told CNBC that national traffic in the world’s most populous country is not down dramatically.

This has led some to speculate that OPEC’s real reason for considering further output cuts is to hide its inability to boost production.

However, Rystad then told Business Insider that as long as US shale oil production continued to grow, the market would move towards a “more normal equilibrium”.

On the local front, oil is a distant second from gas – no surprise given that production has been declining since 2009.

With development of Santos and Carnarvon Petroleum’s major Dorado operation only likely to see a final investment decision either this year or 2024, most oil exploration and development projects are likely to be smaller onshore plays or as part of larger gas projects.


Gas keeps the crown

Gas remains top of the pack due to ongoing concerns about supply security caused by a combination of geopolitics and years of underinvestment.

While the latest word has European gas prices slumping after mild weather and reduced industrial consumption led to an unusual build in inventories, Reuters reported that Europe’s storage capacity is designed to deal with seasonal swings and not serve as a strategic stockpile.

As such, there is a very real limit to how much conservation this winter can improve supply security in the winter of 2023-24.

In Australia, concern about high gas prices led the Federal Government to impose a temporary $12 per gigajoule price cap on domestic gas prices in the East – a move that drew both brickbats and bouquets.

The Australian Petroleum Production & Exploration Association was one of the detractors, saying the cap was directly responsible for Senex Energy pausing a $1bn domestic gas supply expansion that would have introduced new gas supply into the market.

Meanwhile, the high gas prices have also proven to be a boon for our LNG sector with EnergyQuest estimating that the value of exports hit $92.8bn in 2022 with 81.4Mt of LNG shipped.

This contrasts with export revenue of just $36bn in 2020 during the height of the COVID 19 pandemic.

However, the energy consultancy has flagged that exports are likely to fall in 2023 due to the depletion of the Bayu-Undan gas field and Darwin LNG awaiting the start-up of the Barossa field possibly in 2025.

“Any decision to trigger the Australian Domestic Gas Security Mechanism (ADGSM) would also cut exports,” EnergyQuest chief executive officer Greame Bethune noted.

Our take is that while prices have obviously been limited by the price cap, the fundamentals remain unaddressed.

While the green lobby would like nothing better than to see all fossil fuels go the way of the dodo, the fact remains that gas (and other fossil fuels) remains a large part of the energy mix and it will require far more investment and, perhaps more importantly, time before this is viable.

As such, more new supply would be required to replace existing declining supplies, something which isn’t happening as quickly as it should be.


Coal’s continued life extension

For a long time, commentators had been predicting the death of coal as the pressure to adopt net zero grew stronger.

Fast forward to the current day and energy security concerns have ensured that coal still has a role to play in keeping the lights on.

More recently, thawing relations have raised up the possibility that China will open its doors once more to Australian coal.

Fastmarkets quoted an Indian trading source as saying that the move could increase the price of premium hard-coking coal used for steel making.


Renewables continue to light up

For 2023, the share of renewables such as wind and solar in Australia’s energy mix is likely to continue increasing.

In 2022, renewables accounted for 34.8% of Australia’s electricity demand up from 31% in 2021.

There is good reason to believe that momentum will continue to build with notable companies such as Andrew Forrest’s Squadron Energy pushing to take the lead following its acquisition of CWP Renewables and Brookfield-EIG Group looking to accelerate the transition by bidding for Origin Energy.

Examples include Neoen’s fourth big battery in Australia – the 200MW/400MWh Western Downs Battery in Queensland, construction of which is now underway.