Introduction

The Future Direction of Natural Gas Transition in Victoria

Progress of APA's Three Key Events

Investment: APA's Growth Stability is Assured

Oil giant ExxonMobil recently issued a warning: it is expected that by the winter of 2024, the number of natural gas wells operated by the company in the Bass Strait off the coast of Australia will be halved.

As we all know, natural gas, as one of the main sources of energy in Australia, plays an extremely important role both in energy exports after the Russia-Ukraine conflict and as an alternative fuel for power generation domestically.

So, what message does this warning convey behind the scenes? The Australian Financial Investment Research Team will further help readers understand the impact of the depletion of natural gas in the Bass Strait on related natural gas companies.

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Victoria Will Become a Net Importer of Natural Gas

What exactly are the oil wells in the Bass Strait referring to?

The oil wells in the Bass Strait, which have been exploited since 1969, are composed of numerous conventional oil and gas fields in the well-known Gippsland Basin along the southeast coast of Victoria.The project encompasses an integrated network of offshore platforms and subsea tiebacks, connected to onshore processing facilities in Longford and Long Island Point through an extensive pipeline infrastructure.

Schematic diagram of oil wells in the Gippsland Basin, with the gas field area marked in red.

Currently, the main production capacity in the Bass Strait is controlled by two joint ventures. The first is the Gippsland Basin Joint Venture, which is equally owned by Australian gas giant Woodside (ASX: WDS) and ExxonMobil. The second is the Kipper Unit Joint Venture, which is controlled by Woodside, ExxonMobil, and Japanese Mitsui & Co.

Question 1: How significant is the impact on Woodside?

According to the gas giant Woodside, the Bass Strait currently meets 40% of the natural gas demand on the east coast, making it the largest supplier in the region. However, Woodside's current main increase in sales volume primarily comes from a significant demand for LNG exports to Asia and Europe, with a 50% increase in sales volume, thus WDS made a substantial profit in 2022.

Although natural gas extraction in the Bass Strait began as early as 1969 and it is now one of the main suppliers on the Australian east coast, it is not the most important part of WDS's overall business volume.

We can observe the P+P (proven and probable) reserves situation of WDS domestically in Australia. WDS's current main profit points come from the North West Shelf Venture and Pluto LNG projects in Western Australia, and the decline in production from the Bass Strait has a limited impact on WDS's sales.

However, it is worth noting that due to its geographical location, the Bass Strait supplies Victoria nearby. The depletion of the Bass Strait means that Victoria will transition from a net exporter of natural gas to a net importer, necessitating the importation of more natural gas from external sources or finding alternatives to natural gas.

Question 2: What is the future transformation direction for Victoria?

If Victoria needs to start importing natural gas in the future, additional transportation pipelines and storage facilities will be essential. Since the reserves of the Bass Strait have always been publicly available information and a warning announcement was issued in 2021, observing the actions of the Australian gas pipeline leader APA Group (ASX: APA) would be a good reference.By examining a series of recent moves by APA Group, we can outline several key events:

- Participation in the AusNet Services auction; AusNet Services is an Australian energy transmission services company, owning and operating over $11 billion in electricity and natural gas network assets;

- Acquisition of Basslink, which owns a 370-kilometer high-voltage direct current (HVDC) power interconnector, stretching across Victoria and Tasmania, aiding Tasmania's participation in the national electricity market;

- Participation in the New South Wales REZ (Renewable Energy Zone) construction bidding.

The implications behind this series of moves are also very clear: renewable energy will replace natural gas. The future is not about laying out more natural gas infrastructure, but rather transitioning towards renewable energy and power transmission infrastructure.

Chronology of Key Events for APA

As the largest natural gas infrastructure company in Australia, APA was established in 2000, spun off from the Australian Gas Light Company, and listed on the Australian Securities Exchange, owning and operating natural gas and electricity assets.

Starting with the Bass Strait's reserve warning announcement in 2021, APA has been preparing for transformation, frequently engaging in capital acquisition transactions.

Unsuccessful Acquisition of AusNet

The story must begin in mid-2021 when international capital had already set its sights on the promising future of high-quality Australian power infrastructure development.Private equity giant KKR completed the acquisition of Spark Infrastructure, a listed electricity grid company, which at the time owned well-known grid companies such as CitiPower, Powercor, SA Power Networks, Transgrid, and had just acquired the high-quality solar power plant Bomen Solar Farm with an EBITDA profit margin exceeding 85%.

Following the conclusion of this acquisition, only one electricity grid company, AusNet, remained among the listed companies in Australia. As expected, the North American consortium Brookfield soon made a takeover bid of AUD 9.6 billion for AusNet, and APA also joined the bidding war, offering AUD 10 billion.

Ultimately, Brookfield increased its offer to AUD 10.2 billion, ending the bidding war in February 2022, and APA did not get its wish.

Event 2: Acquisition of Basslink

After the failed acquisition of AusNet, APA, well aware that electrification is the future, did not give up on its vision for expansion in the power sector. Instead, it turned its attention to the submarine cable company Basslink, which was facing a bankruptcy crisis.

Basslink connects the electricity systems of Tasmania and Victoria across the Bass Strait. Tasmania has the richest hydro resources in Australia and has already achieved complete self-sufficiency in renewable energy through hydropower and wind power.

After 18 months of effort, APA successfully acquired Basslink for a transaction value of AUD 773 million, expanding its energy transmission footprint and playing a leading role in the energy transition.

With the establishment of more new energy power plants in Tasmania, it is entirely possible that the state's renewable electricity exports will become an alternative to Bass Strait natural gas in the future.

It is worth noting that APA's sights are not limited to this. The planning and construction of a large number of offshore wind energy projects in Victoria is also one of the reasons why APA purchased Basslink.

Several large offshore wind projects in Victoria, such as Seadragon, Great Southern, and Star of the South, have attracted substantial investment and government support, and are currently under construction. The construction of offshore wind farms will undoubtedly require the use of submarine cables, thus there is hope for more growth opportunities in Basslink's cable business.Investing in Photovoltaic Power Plants, Bidding for Orana REZ

In addition to offshore power projects, APA has also put in a lot of effort into terrestrial power transformation.

Firstly, there is a strong investment in a series of photovoltaic power plants, the most representative of which is the Mica Creek Solar Power Plant from Queensland.

Due to the significant power demand and emission reduction needs of local mines in Queensland, APA has signed 15-year power purchase agreements with Swiss Glencore and MMG (Minmetals Resources Limited) for their local mines, and has also signed a long-term lease agreement with the government for up to 32 years, ensuring the continuation of this profitable business in the long term.

The new energy construction in the wealthiest state of New South Wales (NSW) is naturally something APA does not want to miss. Unlike other states, NSW's construction planning is generally carried out on a different REZ (Renewable Energy Zone) basis, with unified construction of power transmission infrastructure based on the location of different new energy power plants within the REZ area.

APA, together with construction giant CIMIC Group, has formed the Network REZolution consortium to join the bidding for the Orana REZ power transmission project in the central-west of New South Wales. If they win the bid, APA and CIMIC will have the opportunity to jointly undertake the construction and long-term operation of the REZ.

Schematic diagram of the Orana REZ power transmission project, with the bar legend indicating the bidding project, image / Ashurst

In this REZ (Renewable Energy Zone), well-known companies such as Spanish new energy giant Accoina, Philippine energy leader ACEN, and Australian local energy manufacturers Origin, CWP Renewables, Tilt Renewables, etc., all have their layouts. If APA can secure long-term grid operation orders from these companies, it would be a very important step for APA's electrification transformation.

What is the investment outlook for APA?

In previous articles analyzing APA, the Australian Wealth Investment Research Team mentioned that the majority of the pricing increases for Australia's largest gas pipeline company, APA, are tied to the Australian CPI situation. Moreover, the company's average contract term exceeds 10 years, and there is no doubt about the stability of growth.From the data of the first half of the fiscal year 23, there is still no change in the situation. Revenue growth remains stable, while EBITDA and net income after tax fluctuate due to some internal investment expenditures and the repricing of Basslink debt, which is overall in line with expectations.

The trend towards clean energy transition will not affect the natural gas market so quickly. Heavy-polluting traditional energy sources like coal will be the first to be abandoned, and natural gas, as a relatively clean traditional energy source, will serve as a transition during the transformation.

According to the ACCC's research report, there will continue to be a supply shortage in several southern states of Australia in 2023, and the shortage will become more severe over time. Driven by market demand, APA continues to invest to ensure more pipeline natural gas transportation from north to south.

Although there is a guarantee of growth, APA will face some resistance in profitability due to some related regulatory policies. Affected by the previous power shortage in Australia, Australian regulatory authorities are becoming increasingly strict in their regulation of power generation.

APA currently needs to disclose its own revenue situation for each pipeline to the public. Although APA can obtain some subsidies under regulation, this will lead to public and transparent prices, making it impossible to obtain excessive profits. In the long run, this is more disadvantageous than advantageous to the company.

Austrade Investment Research Viewpoint

The depletion of natural gas in the Bass Strait has little overall impact on Woodside's production. What affects Woodside's performance is still the economic recovery speed and natural gas demand in Asia (especially China) and Europe. The current natural gas price has already fallen to a low point, and the Australian government is imposing regulatory pressure on energy companies that export and earn excessive profits. In the short term, there is more upward pressure on Woodside's stock price.

For APA, the natural gas transmission business is hardly affected. The current main growth point is focused on the renewable energy field. Investors need to pay attention to the new state's REZ bidding and whether APA can participate in more offshore wind energy projects in Victoria.