Think about this — Australia is now the world's biggest exporter of natural gas, yet we're looking at importing gas to deal with a domestic "shortage".

If this happens, Australia will be using huge amounts of energy and spending large sums of money to compress, liquify and ship its abundant gas reserves to markets overseas.

Then gas will be shipped back, with all the costs and resources involved, to supply the local market.

Does that make sense? Go figure.

But there's money to be made from it.

Andrew Twiggy Forest, iron ore baron, philanthropist and one of the nation's shrewdest businessmen, is backing a proposal to import gas through Port Kembla, NSW.

Welcome to the world of Australian gas policy.

'Pure stupidity'

Alistair Donaldson, a fourth-generation farmer from outside Boggabri, north-west of Newcastle, has been fighting coal seam gas development in the region for 10 years, but he's equally appalled by the gas importation plan.

"It would have to be the purest form of stupidity imaginable," the plain-talking cattleman says.

"Given that Australia is now the largest exporter of natural gas, it just beggars belief that we are considering importing gas."

The Donaldsons have been farming outside Boggabri for four generations. ( ABC News: John Gunn )

Fund manager and commentator David Llewellyn-Smith from MacroBusiness calls the idea of exporting gas, with all the attendant costs, and then re-importing gas at a further cost "economic suicide".

But for landholders such as Mr Donaldson, the alternative isn't palatable either.

New gas deal revives prospects of Narrabri project

Last week, Prime Minister Scott Morrison revived hopes for gas giant Santos's controversial Narrabri gas project in north-west New South Wales, which involves ambitions to extract gas from coal seams lying deep beneath the Pilliga Forest.

According to Mr Morrison, the answer to the price problem is more coal seam gas.

"We need to get the gas from beneath our feet," he recently declared.

The Narrabri project is currently awaiting final planning approvals, but bringing on the project was the subtext of a deal Mr Morrison has announced with the NSW Government.

The Narrabri gas project has faced opposition from the local community and farmers. ( ABC News: John Gunn )

The deal involves Commonwealth money for renewables and electricity network upgrades in return for the NSW Government setting a target of delivering 70 petajoules a year of new gas into the market.

By a strange coincidence, that's precisely the estimated output of the Narrabri project.

Citing supply and demand, the Prime Minister pitched this as a sure way to lower prices for gas and electricity: "You get more gas into the system, you drive down prices."

But it's not that simple.

Production costs in dispute

The problem is that the Narrabri gas is relatively expensive to produce.

According to an estimate from the Australian Energy Market Operator (AEMO), the cost at the well head is $7.40 a gigajoule.

Add in the costs of transporting the gas to markets in the south and a profit margin for the developer, and gas at that cost would likely be around current prices and provide little relief.

The production cost of Bass Strait gas is well under half of AEMO's Narrabri estimate at $2.85 a gigajoule, while some of the gas from the Bowen and Surat basins in Queensland is in the $2 to $3 range, and some Victorian gas as low as $2.10 to $2.50.

"It won't give you low-cost gas. It will give you more gas, but not cheap gas," Mr Llewellyn-Smith says of the Narrabri project.

Bruce Robertson, a gas analyst with the pro-renewables Institute for Energy Economics and Financial Analysis, agrees.

"You can't produce high-cost gas and lower the cost," he says, maintaining that a pledge by Santos to reserve the Narrabri project gas for the Australian market should be taken with a pinch of salt.

"Santos is going to … export the cheaper gas and sell the Australian domestic consumer the expensive gas," he says.

Santos disputes AEMO's estimate. Chief executive Kevin Gallagher maintains that it is "based on old data and simply wrong".

Santos CEO Kevin Gallagher disputes the AEMO's estimate of the cost of producing gas at Narrabri. ( ABC News: Mitchell Woolnough )

"The Narrabri project will get the benefit of our Queensland experience," Mr Gallagher says.

"Here we have reduced connected well costs by a massive 84 per cent, through innovation, since the end of 2015.

"Production costs are also lower than they were just a few years ago."

He argues "Narrabri gas will always be cheaper for NSW customers than gas imported from other states or overseas, particularly when LNG prices are high in Asia."

Yet there's a glut of LNG in Asia at the moment, and prices have plummeted from about $15 a gigajoule to $4.50.

When the three big gas consortia overcapitalised and built three expensive export terminals side by side in Gladstone, Queensland, the opposite was occurring.

Gas prices in Asia were sky high and Australian gas was cheap.

The trio were happy to exploit the price differential by exporting their gas to Asia, which sent domestic prices soaring, and arguing Australians had to pay the export price for gas.

They're reluctant to honour that situation now that export prices have crashed.

The good old days

Even if new supply from imports or new coal seam gas can lower prices, it's unlikely that Australia will enjoy the halcyon days of just a few years ago when industry could buy gas at about $3 a gigajoule — back before governments from both sides of politics backed the gas industry's export push.

After she stood at a podium with Mr Morrison last week announcing their "memorandum of understanding" on energy, NSW Premier Gladys Berejiklian was quick to downplay speculation that her Government's agreement with the Commonwealth meant the Narrabri gas project would go ahead.

She knows there is sizeable local opposition.

Last year, Shooters, Fishers and Farmers Party candidate Roy Butler wrested the state seat of Barwon from the National Party on a platform of ending all new coal seam gas development.

A survey by the Gas Industry Social & Environment Research Alliance (GISERA), an industry-sponsored division of the CSIRO, found 30 per cent of people in the Narrabri shire completely rejected the deal and a further 27.5 per cent would "tolerate it" but were opposed.

Fossil water concerns

Among people on the land, the opposition is even stauncher.

Agriculture in the region depends on groundwater.

Studies by GISERA and Santos have found the impact on groundwater will be minimal, but Mr Donaldson is not reassured.

"In this environment where we are so dependent on groundwater, it's a risk we cannot accept," he says.

Grazier Alistair Donaldson has been fighting coal seam gas development for 10 years. ( ABC News: John Gunn )

The grazier is also concerned about the ancient "fossil water", which will be extracted from coal seams lying more than 800 metres underground as part of the gas production.

"The produced water that is coming out of these coal seams is extremely salty," he says.

"In layman's terms, a gravel truck tipped into an Olympic swimming pool. [It] contains all manner of components, salts, carbonates, anything down to radioactive components, arsenic."

Nearly six years on, the impact of a spill of that wastewater in the Pilliga Forest is still evident, with replanted vegetation appearing as if it's struggling to grow.

Santos chief executive Mr Gallagher says the water "can water be treated to irrigation standards and 80 per cent of it can be safely used by farmers or for other beneficial uses".

He also says "Santos would never develop the project if we weren't certain that we could protect water and the environment".

Reserve cheap gas for home?

Whether or not north-west NSW becomes the next region for coal seam gas development, there's a question that remains for many.

Why doesn't the Government enact a gas reservation policy that ensures cheap gas is available for the local market before the gas producers send reserves offshore?

The Australian Domestic Gas Security Mechanism commits the producers to avoiding a domestic shortfall, but it doesn't deal with prices.

Mr Donaldson's response is cynical.

"Because they are beholden to the gas companies, simple as that," he says.

He points to people passing through a revolving door between politics and the fossil fuel lobby.

In questions of policy, it's not always that simple; invariably there are competing interests and objectives, and arguments for and against.

But it is certainly true that the gas industry has a powerful lobby and gas reservation is a policy it would be unlikely to accept.