Australia energy crisis – Aon lifts the lid

Aon, the multinational insurance brokerage and risk management firm advises clients across the energy sector. The firm’s customers work in upstream/downstream energy provision, power generation, transmission and distribution. Other clients are retailers selling energy to households and businesses.

Matt Langham (pictured above), placement director for national power and utilities practice leader at Aon, said Australia’s gas manufacturers are feeling the heaviest pressure during this crisis.

“Spot prices for gas are placing pressure on our heaviest users of domestic gas, largely Australian manufacturers,” he said.

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Langham added that while many of the biggest energy users in the network are in long-term contracts, he foresees financial pressures when their contracts are up for renewal.

“The price increases that could be passed on will put severe strain on their financials, putting jobs and business viability at risk,” he said.

Langham said the regulators stepping in to cap the price of wholesale gas is an attempt to prevent “such a price shock occurring.”

“This is also contributing to calls for the gas supply guarantee mechanism to be enacted,” he said.

This mechanism aims to ensure a sufficient supply of natural gas to meet the needs of Australia’s energy users. The mechanism works by requiring liquefied natural gas (LNG) projects to limit their exports or find new gas sources if there is a supply shortfall in the domestic market.

Langham said the last major gas supply shock to the Australian economy happened in Western Australia in 2008 when a pipeline ruptured. The subsequent explosion at the Varanus Island processing plant led to almost a third of the state’s gas supply being shut off for two months.

“This shut down had a huge impact on the WA economy, leading to major manufacturers having to curtail or cease output, workers being stood down and government pleas to household consumers to limit their gas usage,” he said.

The current energy crisis, said Langham, is presenting businesses with “soaring business interruption exposures” and “notable valuation challenges” complicated by the current inflationary environment.

“This is increasing sums insured clients take to insurers but also the insurer’s exposure to loss in an elevated pricing environment. Wholesale electricity and gas price volatility is also a significant concern for insurers in the current environment,” he said.

Commonwealth, state and territory energy ministers met earlier in the week to try and resolve the crisis. The ABC reported that the new Labor government is under pressure from business and industry groups to address the growing cost of energy as the war in Ukraine fuels rising international demand for coal and gas.

The ABC also reported that Australia’s government has “a dearth of options to curb the costs, particularly the price of gas on the spot market.”

The public broadcaster reported that most of Australia’s east coast gas supplies are locked in to export contracts. According to the report, the federal government does not want to disrupt these arrangements and risk damaging future export markets.

Meanwhile, the Australian Financial Review reported that APA Group’s Rob Wheals said the current energy upheaval is an opportunity for Australia to plan for a future when even more coal-fired generation is removed from the energy mix.

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However, Santos CEO Kevin Gallagher said even if all desired forms of energy were used today, Australia’s energy crisis could not be solved.

“We can’t conjure up new gas,” said the boss of the oil and gas exploration and production company.

“What’s effectively happened over the last decade as gas resources have been used up and new projects have not been able to come forward and been developed and bring new supply to the market, all the buffer, all the slack in the system is being used up,” said Santos.

Earlier this week, Gallagher said he would attempt to fast-track his controversial Narrabri coal-seam gas project by up to a year because of the worsening east-coast energy crunch and the “frightening” lack of new projects to boost supply.