Don’t be fooled by the ‘Gas Crisis’

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In the next few weeks there will be an announcement that a large, gas-intensive Australian manufacturer is to lay off about 1000 workers. The ripple effects this will have on society will be devastating and most certainly could have been avoided.
It is likely this news will be made to the backdrop of an opportune reaction from the Turnbull government: there is a gas “crisis” in Australia and workers have lost their jobs because of skyrocketing electricity prices.

Either the Prime Minister or one of his ministers will swiftly propose the solution: extract more gas and lift the fracking moratoriums.

What will be strategically left out of this narrative is that onshore coal seam gas has proven to be very high-cost. It is globally uneconomic in a low-cost gas world. We are currently experiencing a massive international glut in the supply of gas that is keeping prices at historic lows. Producing high-cost onshore gas is not going to bring the price of domestic gas down and stop further job redundancies. But it is financially advantageous for the handful of gas companies running this national sideshow – Origin, Santos, Shell and BHP/Exxon.

To find a policy response that will bring down domestic prices, save gas intensive industry and jobs and lower electricity costs for the domestic and industrial consumer, we do not have to look far – just to Western Australia.

In WA, industrial consumers of gas pay less than $6/GJ for gas. On the east coast, however, prices have recently been in the range of $10 to $16/GJ. Why is this? The answer is simple: WA has a domestic gas reservation policy.

WA introduced a domestic gas reservation policy in 2006, which requires new gas developments to supply the equivalent of 15 per cent of their gas exports to the state’s domestic gas market. The aim of the policy is to maintain domestic gas prices below export parity. This is exactly what it has done.

Detractors of this policy label it anti-business and state that it will crimp investment.

APPEA, the peak body for the oil and gas industry states, “Gas reservation policies actually impair local gas supply and affordability, rather than improve it”.In WA nothing could be further from the truth. It has not stopped investment nor has it interfered with the state’s burgeoning LNG exports, nor has it seen Sovereign Risk increase. It has protected the domestic consumer from anti-competitive pricing that the ACCC says has occurred on the east coast.

Since 2006 we have seen an investment boom in offshore LNG projects in WA with the large Wheatstone and Gorgon projects being recently completed and investment in the Prelude project. More investment has occurred in the West Australian gas industry in the 11 years since the domestic reserve policy was introduced than in the previous 20 years.

The obvious question arises: why don’t we have a similar policy in the eastern states?

The industry protests that a domestic reserve policy is retrospective in that they have already signed their binding export contracts. This is historical revisionism at its worst.

When the three export plants at Gladstone were originally proposed, the Queensland government’s Department of Economic Development and Innovation acknowledged the development of an export LNG industry may cause problems for the domestic market and suggested some sort of domestic gas reservation policy. Essentially the public service did their job, it assessed the situation and recommended a sensible policy response.

Politicians at a state and federal level ignored the sage advice of their public servants and blindly accepted the gas companies’ assurances in their official approval documents that their projects would not affect the domestic market.

Santos asserted in the environmental impact statement for its Gladstone GLNG plant that it would not contribute to a future shortage of gas in the east coast market:

“The project may initially supply domestic gas markets, but it is not diverting gas from local markets to export markets.”

Despite the official assurances by Santos in approvals documents for the government and in investor briefings, it has been unable to supply its export plants and is buying gas out of the domestic market instead.

Gas prices on the east coast are essentially a political problem.

Flagrant disregard of sensible advice has lead us to the situation where thousands of jobs will be lost for no good reason. The rippling effect this will have on society will be devastating and will affect generations to come.Eastern Australia is one of the only parts of any nation that does not have some form of domestic reservation policy.

Just as the problem has been caused by politicians it can be solved by them.

The solution is clear.

Enact a domestic gas reservation policy with clear price aims as exists on the west coast of Australia.

Bruce Robertson is a gas analyst with the Institute for Energy Economics and Financial Analysis.