What is the future for natural gas in Australia?

By Louis Chiam, Anne Beresford, George Salter, Alexander Anile
Energy Oil & Gas

Two (complicated) paths forward 9 min read

As part of the global transition to net zero, the energy mix is shifting, and this includes a changing role for natural gas.

In this Insight, we explore the two possible pathways for the natural gas sector—a fast transition away from natural gas as a source of fuel, or longer-term use of natural gas as a transition fuel in the journey towards net zero—and the related implications for Australia.

Where are we? Mixed messages on gas

The current state of play in the natural gas market (and the wider hydrocarbons market) involves a mix of different sentiments and outlooks.

On the one hand, investment into the oil and gas sector remains strong, and we have seen a number of high-value transactions in the oil and gas sector over the past five years, both in Australia and internationally. These transactions include:

  • the proposed acquisition of Origin Energy Ltd for $18.7 billion by a consortium of Brookfield Asset Management Inc. and MidOcean Energy, LLC, which is managed by EIG Management Company, LLC, which was announced on 10 November 2022 but was ultimately rejected by Origin shareholders on 4 December 2023;
  • the proposed acquisition of shale gas producer Pioneer Natural Resources Company by ExxonMobil Corporation for US$60 billion, which was announced on 11 October 2023 and is expected to close in the first half of 2024;
  • the merger of Woodside Energy Group Ltd with BHP Petroleum International Pty Ltd for approximately $19.3 billion, which was announced on 17 August 2021 and completed on 1 June 2022;
  • the sale of a 49% interest in the Pluto Train 2 Joint Venture by Woodside Energy Group Ltd to Global Infrastructure Partners for 49% of the project's capital expenditure (estimated to be US$5.6 billion), in addition to approximately US$822 million for construction capital expenditure, which was announced on 15 November 2021 and completed on 18 January 2022; 
  • the sale of a 26.25% interest in the Queensland Curtis LNG Common Facilities by QGC Common Facilities Company Pty Ltd (a wholly owned subsidiary of Shell Plc) to Global Infrastructure Partners Australia for US$2.5 billion, which was announced on 21 December 2020 and competed on 16 March 2021; and
  • the proposed merger between Woodside Energy and Santos, which has an estimated value of AU$52 billion and was confirmed, after media speculation, on 7 December 2023. This proposed transaction remains ongoing.

On the other hand, gas producers are facing increased scrutiny over their environmental impacts, are experiencing significant environmental activism and are finding it increasingly difficult to obtain finance, with a number of large Australian and international banks restricting lending to gas producers.

There has also been an unprecedented level of government intervention in the gas sector in Australia recently, with the Federal Government's Gas Code of Conduct and associated price caps now law, and significant reforms having been made to the Australian Domestic Gas Security Mechanism.

In September 2023, the International Energy Agency (IEA) released the 'Net Zero Roadmap: A global Pathway to Keep the 1.5°C Goal in Reach' report (2023 Report), which provides an update to its landmark 'Net Zero Emissions by 2050: A Roadmap for the Global Energy Sector' report.1 In October 2023, the Government released the 'Future Gas Strategy' consultation paper, with the goal of developing a plan to provide for natural gas production, consumption and substitution in Australia to 2035 and 2050 (the Future Gas Strategy Paper).2 The 'Future Gas Strategy' is expected to be released in mid-2024.

The Future Gas Strategy Paper notes an inherent tension in the global transition to net zero—this strategy needs to achieve sufficient, but not excess, supply of natural gas to meet demand at all stages of the energy transition to avoid various harmful consequences.

To further explore this tension, Allens hosted a webinar on 31 October 2023, which explored two contrasting scenarios for future gas use:

  • scenario one, a fast transition away from natural gas; and
  • scenario two, the longer-term use of natural gas as a transition fuel.

Scenario one: a fast transition away from natural gas

The IEA's 2023 Report projects that achieving net zero carbon dioxide emissions by 2050, such that there is 'limited overshoot of the 1.5°C limit' set in the Paris Agreement, requires no new investment into long lead time upstream oil and gas projects, and predicts that oil and natural gas demand may decrease by 20% to 2030.3 However, the 2023 Report also acknowledged that continued investment in existing oil and gas assets and already approved projects is needed, including to reduce emissions intensity.4

One way of achieving these goals is through a rapid transition away from fossil fuels such as natural gas. Proponents of this rapid transition believe it will encourage innovation and allow net zero to be achieved more quickly. However, achieving a fast transition away from natural gas is not without its challenges.

  • To achieve a fast transition away from gas, there needs to be a viable alternative energy source available. Sources such as hydrogen and hydrogen-based fuels and sustainable bioenergy, along with carbon capture and storage, are 'critical' to achieving net-zero emissions. However, development of these technologies has been slow and 'rapid progress' is needed by 2030.5
  • Electricity transmission and distribution grids need to expand by approximately 2 million kilometres each year to 2030 to meet the distribution needs of the scenario considered by the IEA's 2023 Report. This, combined with other necessary changes to energy infrastructure such as the need to rapidly decommission existing gas assets (eg pipelines and gas-fired power stations), involve vast logistical challenges and costs. It is important that any large-scale changes to energy infrastructure are managed in an orderly fashion.

Although there has been substantial technological development in recent years and increased investment into renewable energy (eg global investment in clean energy in 2023 was US$1.8 trillion)6 it remains the case that:

  • consumers may not be willing to pay the full cost of the energy transition or the increased cost of renewable energy sources. For example, hydrogen (which may be used in various circumstances, including as a feedstock in a production process) is currently significantly more expensive than natural gas and it may be some time before the cost of hydrogen converges with the cost of natural gas. This is particularly the case where a reliable and cheap source of electricity is necessary for hydrogen to be cost competitive; and
  • the need to maintain investor returns represents a hurdle for a rapid transition, because natural gas continues to maintain a higher rate of return than renewable energy and fund managers charged with vast sums of capital (eg superannuation funds and private capital) are subject to various legal and ethical obligations to act in the best interests of their investors, including to deploy capital to realise appropriate returns on investment.

Finally, it is important to note that the path away from gas in Australia can be differentiated from, yet is also influenced by, broader global dynamics, particularly gas use in Asia. Demand for gas in Asia remains strong, with the transition away from gas being slower across the Asian region. As a significant supplier of LNG to Asia, it will likely be the case that even when domestic gas use declines, Australia will continue to produce gas for export. The Future Gas Strategy Paper recognises the importance of Australia's reputation as a trusted trade and investment partner being maintained, even while domestic decarbonisation occurs.

Scenario two: the longer-term use of natural gas

Both the International Energy Agency and the Federal Government have recognised the role that natural gas can play in the energy transition—that being to support a shift to renewable energy infrastructure.7 In this scenario, natural gas remains part of the global energy system for a longer period, and there may be higher levels of energy stability and security, at least in the short to medium term.

Over the short to medium term in Australia, substituting current coal-power station capacity with natural gas power station capacity may ensure that:

  • higher sources of emissions (ie coal-power stations) are replaced with lower sources of emissions (ie natural gas power stations) in an orderly fashion; and
  • there is a reliable source of firming capacity in Australia's electricity grids (ie there is a power source that can be easily deployed to maintain electricity supply and sustain the electricity grid over a particular period), which can be deployed to stabilise intermittent renewable energy production (eg when the sun is not shining, or the wind is not blowing).

However, the longer term use of natural gas may, in the long term, represent a riskier and less orderly transition to net zero. Among other things:

  • this scenario will involve inevitable delays, and may result in a more chaotic 'rush to the finish' in the future;
  • the energy transition is complex, and changing the global energy system will require significant political capital and courage; and
  • the energy transition is affecting, and will affect, every aspect of people's lives, and adversely affecting people's lives risks losing political and democratic consensus to facilitate a transition to net zero.

No simple solutions

It is critical that the global transition to net zero is effected in a manner that is cost effective and facilitates reliable energy supply. Achieving this may mean having to choose between unattractive options.

For example, it may be the case that natural gas will continue to play a significant role in the global energy system for at least the next 10-15 years. Advocates of longer-term use of natural gas point to the possibility that it will enable a smooth and cost effective transition to renewables by allowing coal to be phased out and providing firming capacity to support renewable energy production while other technologies such as hydrogen are developed. A counter argument is that prolonged gas use will simply delay the inevitable transition and result in a more chaotic energy environment in the future.

Some of our further thoughts about the energy transition are available in other Insights. In particular, see our commentary on the hydrogen industry (here) and the CCS industry (here), including our view that it is collaboration between the private sector and government that will ultimately unlock Australia's CCS potential.

If you are interested in learning more about these topics, please reach out to one of our key contacts below.


  1. International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach (Report, September 2023) 3.

  2. Department of Industry, Science and Resources, Future Gas Strategy Consultation Paper (Consultation Paper, October 2023) 1.

  3. International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach (Report, September 2023) 56 and 75.

  4. See, eg, International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach (Report, September 2023) 16.

  5. International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach (Report, September 2023) 15.

  6. International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach (Report, September 2023) 15.

  7. See, eg, International Energy Agency, Net Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach (Report, September 2023); Department of Industry, Science and Resources, Future Gas Strategy Consultation Paper (Consultation Paper, October 2023).