Gas and LNG continue to make headlines in Australia. The media remains focused on the North West Shelf approval, the proposed Santos takeover and government consideration of a gas reservation scheme in the eastern states.
Getting less coverage is the risk of the Australian gas industry locking in a new source of demand – in iron and steel production – and locking out truly green alternatives.
Australian governments are increasingly interested in the prospect of processing Australia’s iron ore onshore for higher-value exports via direct reduced iron (DRI) plants. DRI is a mature technology that runs on gas, but if the gas is replaced with green hydrogen – made via renewable energy – it can produce green iron.
In Sweden, Stegra will begin producing green iron and steel in this way at commercial scale from next year. Here in Australia, the federal government has established the A$1 billion Green Iron Investment Fund. The South Australian government has its Green Iron and Steel Strategy while Western Australia is formulating its Green Iron and Steel Action Plan.
But with green hydrogen project development slowing globally, gas producers may take the opportunity to try and lock DRI onto gas permanently.
With gas producers dumping green hydrogen plans, gas is not a transition fuel for iron and steel
Earlier this month, Woodside officially joined the NeoSmelt project, which aims to develop technology that allows use of Pilbara iron ore in DRI-based iron and steel making, a process that currently requires higher-grade ore than most of Western Australian production.
Other members of the project consortium include iron ore miners Rio Tinto and BHP, and steelmaker BlueScope. Woodside will supply gas to the pilot plant, planned to become operational in 2028.
The project consortium has indicated it aims to replace gas with “lower-carbon emissions hydrogen” in the future. Presumably this means blue hydrogen – made from gas coupled with ineffective carbon capture and storage (CCS) – rather than green hydrogen. Meanwhile, Woodside has cancelled its planned green hydrogen projects.
Santos also clearly sees the DRI opportunity. Before being forced into administration, the GFG Alliance’s Whyalla steel plant signed a memorandum of understanding (MoU) with Santos for gas supply to its planned DRI plant. GFG also signed an agreement to be an off-taker of the South Australian government’s planned green hydrogen project. Since then, the green hydrogen project has been shelved, and South Australia’s Office of Hydrogen Power has been disbanded.
Grey iron is no substitute for green
The phrase “green iron” has become familiar as Australian governments, miners and steelmakers have increasingly highlighted this new export opportunity.
If Australia hosts COP31 next year, it’s a phrase we’ll likely hear even more.
As with previous COPs, it can be expected that Australian fossil fuel companies will have a strong presence. Because using gas to make iron entails lower emissions than using coal, watch out for gas companies co-opting the phrase “green iron”.
In truth, you cannot make green iron and steel with gas. Gas-based DRI releases lower emissions than coal-based blast furnaces, but it remains emissions-intensive at 1.4 tonnes of carbon dioxide per tonne of crude steel produced, according to Worldsteel. Iron produced for export via gas-DRI could at best be described as “grey iron”.
We’ll be told CCS can make gas-based iron green. Santos’s gas supply MoU with Whyalla included an intention to capture carbon from the plant and store it hundreds of kilometres away at Moomba to “support the green steel transformation” of the steelworks. Infrastructure SA recently published a report advising the South Australian government that CCS for Whyalla could be the foundation for a wider CCS ecosystem for the state.
It’s worth noting that ADNOC – currently attempting to acquire Santos – owns and operates the world’s only commercial-scale CCS plant for steelmaking, at Emirates Steel’s DRI-based steel mill in the UAE. But the CCS plant captures only around 25% of its Scope 1 and 2 carbon emissions. In no way can the iron and steel produced be described as “green”.
A key obstacle for CCS is cost. Capturing carbon at various different sources of the iron and steelmaking process and transporting it hundreds of kilometres away would be very expensive. It was no surprise when Meg O’Neill, CEO of Woodside, made clear in April that CCS is too expensive, citing costs of US$200-US$500/tonne.
DRI is potentially a large source of new demand for gas producers
DRI uses a lot of gas. Steelmaker BlueScope has noted that “Operating a DRI production facility with output similar to Port Kembla Steelworks would require 30 to 40 petajoules (PJ) of natural gas per year, equivalent to seven per cent of natural gas demand on the Australian east coast in 2024…”
With the Australian Energy Market Operator (AEMO) forecasting future gas supply shortfalls in both Western Australia and the eastern states, there are questions as to whether a fleet of DRI plants could even be supplied. The cost of domestic gas is also an issue, particularly in the east coast market where prices are closely linked to international LNG prices.
A domestic gas reservation scheme in the east coast market may help address this issue. In addition, the approaching global LNG supply glut may see prices moderate. Furthermore, gas producers’ confidence over long-term LNG demand looks highly questionable.
Any concerns over demand for LNG globally and domestic gas in Australia may further encourage gas producers to turn to DRI as a significant new source of demand. The gas industry may use supply concerns to justify opening up new reserves to serve Australia’s “green iron” opportunity.
Even if domestic gas prices come down, Australia will find it hard to compete with the Middle East, where DRI technology is already widely used, gas is cheap, and plans to produce and export iron to Asia are underway.
Australia’s long-term competitive advantage lies in green hydrogen-based iron production. But, Australia faces global competition from countries like Brazil, Canada and Oman that are now planning green hydrogen-based iron production and export.
The global slowdown in green hydrogen development has one benefit – it has led to some more unlikely applications for green hydrogen being discounted, leaving iron and steel making as one of the few sectors where its use makes sense. Green hydrogen exports look structurally expensive; Australia should focus on production for domestic use.
Green iron and steel strategies cannot be fulfilled if DRI becomes shackled to gas. Australian governments will need to avoid gas lock-in if the truly green iron export opportunity is to be realised.
