Australia’s south-eastern states are facing a major shortfall of gas supplies within four years as production from historic fields in the Bass Straight falls away much quicker than demand for the fuel.

A new report from the Australian Energy Market Operator (AEMO) has painted a grim picture for gas users from 2028, when the agency says the closure of Victoria’s biggest gas plant will leave a major hole in supplies.

The report also warns “peak-day shortfalls” may emerge from as early as next year during extreme weather in winter, when demand for gas for heating as well as electricity can spike.

Similarly, AEMO said such “supply gas” would only get worse from 2026.

Demand for gas in southern states peaks in winter, putting the system under pressure.(Source: AEMO)

While the forecasts were backed by big business and those aligned with the gas industry, some analysts questioned whether the market operator had overestimated demand.

Kevin Morrison from the Institute for Energy Economics and Financial Analysis (IEEFA) also noted that Australia’s eastern states were not short of gas and therefore did not need more supplies.

Mr Morrison instead indicated that more of what the region produced could be directed to the local market rather than sent offshore as exports.

“AEMO could be setting themselves up for another year of overestimating demand,” Mr Morrison said.

Gas ‘essential’ for energy transition

In its report, the market operator highlighted what it said was a crucial role for gas to play in Australia’s energy transition.

AEMO chief executive Daniel Westerman said gas was a source of flexible electricity generation that would allow ever greater amounts of intermittent renewable energy to be added to the system.

He said this would be increasingly important as more coal-fired power stations retired — a reference to the planned closure of the giant Eraring plant in New South Wales during mid-2025.

“Flexible gas-powered electricity generation is an essential component of the energy mix into the future,” Mr Westerman said.

“Gas, along with batteries and pumped hydro, will enable higher rates of renewables and support electricity reliability as Australia’s coal-fired power stations retire.”

The Bass Strait has long been a major source of Victoria’s gas, but supplies are depleting.(Supplied: ExxonMobil)

According to AEMO, demand for gas was falling as more households and businesses turned away from the fuel and opted to electrify heating and cooking appliances.

However, the agency said production — particularly from the Bass Strait — was falling at a faster rate and this was imperilling supplies.

It said that unless new fields or sources of supply were urgently brought into production, there was a risk that gas could run short from as early as 2025 on some days.

Those risks would be heightened significantly once United States energy behemoth ExxonMobil retired one of two remaining gas plants at its Longford facility in South Gippsland during 2028.

Longford, which has been in service since 1969, is the biggest source of gas to Australia’s southern states of Victoria, South Australian, New South Wales and Tasmania.

Gas imports looking ‘unavoidable’

In Victoria, Longford helped underpin the development of the state’s modern manufacturing economy.

“Gas production is forecast to fall faster than demand in the south, driven by declining production from Bass Strait, which has historically supplied around two-thirds of southern Australia’s gas,” Mr Westerman said.

“While the report identifies the need to deliver new infrastructure by 2026, running gas-powered generators on liquid fuels [diesel] could provide temporary relief during periods of extremely high gas demand.

“From 2028, supply gaps will increase in size as Bass Strait production falls significantly.”

Rick Wilkinson, the boss of research company EnergyQuest, said AEMO’s forecasts were “perfectly consistent” with the firm’s own assessments.

Mr Wilkinson said the loss of Longford would be a huge blow to gas consumers in southern states and make them far more reliant on supplies from Queensland.

Supplies from the giant Longford gas plant in Victoria are forecast to dwindle from 2028.(Source: AEMO)

But he said this was fraught because there was arguably insufficient pipeline capacity connecting southern states to the north.

Ultimately, Mr Wilkinson argued, this would leave the eastern states’ gas system heavily out of the balance and push up prices for consumers.

Mr Wilkinson said it also meant the need for gas import facilities would be unavoidable despite Australia’s ranking as one of the world’s biggest exporters of the fuel.

“You’re starting to bring more and more gas down from the north … to meet south-eastern demand,” Mr Wilkinson said.

“Eventually, you hit the peak capacity of the pipelines, which was avoided previously because you had supply close to the demand centres, in Victoria particularly.

“You take that away and you’ve now got to move gas much longer distances, you’ve got to pay for that transport, you’ve got to pay for that gas being available for those peak days.”

Demand ‘perennially’ overestimated

Mr Morrison from IEEFA disagreed, saying AEMO and the gas industry “perennially” underestimated the speed with which people were moving away from gas.

He pointed out that in Victoria, where the state government was trying to phase out gas in homes, use of the fuel among households and small businesses plunged 13.5 per cent last year compared with 2022.

As well as this, Mr Morrison argued AEMO had consistently overestimated how much gas would be needed for electricity generation.

He also said Australia had plenty of gas without the need for new supplies “given three quarters of the gas produced in the region is used as a feedstock for liquefied natural gas exports or is consumed in converting the gas to LNG”.

Most of eastern Australia’s gas supplies are exported overseas.(ABC News: Michael Franchi)

“On the gas for power generation segment, AEMO got its forecasts horribly wrong last year,” Mr Morrison said.

“They estimated demand to be 54 per cent higher than what it was.

“They seem to ignore a trend whereby gas for electricity generation has declined for many years due to the higher penetration of renewables, high gas prices and greater competition from batteries.

“[It’s] only going to get more competitive as more utilities invest in batteries and electricity storage.”

Separately, the Victorian Chamber of Commerce and Industry released the results of a survey of its members, in which 86 per cent said the shift to renewable energy would affect “the quality of their output”.

The chamber said the survey, which received 503 responses, showed about half would not need to replace their gas appliances for the next 10 to 20 years.