Four and a half years ago, at the national conference of the AWU in 2013, general secretary Paul Howes issued a warning:
- Howes warned that unless some gas was reserved for domestic use, and limits on coal seam gas extraction were lifted, the massive investment boom in LNG would soon affect the supply and price of domestic gas. And consumers, business and manufacturers would all suffer.
“This is one of the most important resolutions we’ll debate at this conference,” he said.
- “It is bizarre that this country has gone through a massive expansion of natural gas right across every state and yet we can’t seem to keep any of this gas, to add value here.”
Philip Coorey at the AFR reports that Howes received support from such well-known ratbag socialists as the Australian Industry Group and Dow Chemical boss Andrew Liveris.
Howes now scratches out a living at KPMG. Martin Ferguson, resources minister at the time, who now chairs the Advisory Board to the Australian Petroleum Production and Exploration Association (APPEA), was not impressed. While he agreed on lifting the limits to CSG extraction, he claimed that a gas reserve would “deter the very investment needed to deliver more gas to the domestic market”.
- Howes berated Ferguson, arguing he “should be there talking about what resources can do for this country, not for the companies that extract them in the first place”.
Of course, Turnbull now blames Bill Shorten, who at that time was probably Minister for Employment and Workplace Relations and Minister for Financial Services and Superannuation and new to cabinet.
Labor did take a proposal for a form of gas reserve to the last election, and was slammed by the Coalition as being protectionist.
Labor energy spokesman Mark Butler says at the time gas companies gave assurances that they would not drain domestic gas supplies to fill export contracts and that domestic gas would cost the same as the Asian price. He says they lied.
Butler puts the story in this Lateline interview with Emma Alberici. The price was always going to go up to export levels when we started exporting, that’s Economics 101. Then the companies assured Labor that domestic supplies would not be affected. When they were Labor took a gas reserve police to the election, but was criticised by Turnbull for sovereign risk and being economically irresponsible.
The government is still concerned about sovereign risk although Giovanni Di Lieto of Monash University explains in some detail why it is not an issue in this case. Labor prefers to pull the regulatory trigger set up by the government, saying only this can provide the certainty needed. The government has done a deal short of regulation with the main suppliers who have promised gas for the domestic market for the next two years.
The companies say that in fact there has never been a shortage – they have been supplying gas beyond their contracts to the Asian spot market, which itself is essentially over-supplied.
- Ian Macfarlane, a former federal resources minister turned Queensland gas lobbyist, said Queensland’s gas exporters would offer to sell it back to Australia’s domestic market for the LNG netback price – under $10 per gigajoule – but domestic buyers had to guarantee they would buy it by signing contracts.
The so-called “LNG netback price” is the Asian spot market price, less the cost of getting it over there.
His call for contracts relate to the fact that buyers of gas have been holding off to see what happens with government action. Angela Macdonald-Smith in the AFR points out, however:
as one buyer ominously pointed out, the electricity forward price in the eastern states edged up $2 a megawatt hour on Wednesday afternoon after the gas deal was announced.
That would signal that those in the know anticipate gas prices will be higher than they might have been under the Domestic Gas Security Mechanism, not lower.
The ACCC has come up with benchmark prices, but suppliers say they can’t supply at the marginal cost of production. Macdonald-Smith:
- Today’s price offers for gas to industrial customers of $10-$16 a gigajoule are a world away from the “benchmark prices” quoted by the Australian Competition and Consumer Commission of $5.87 in Queensland and $7.77 in Victoria.
Gas and petroleum exploration and the production, treatment and marketing of natural gas, crude oil, condensate, naphtha and liquid petroleum gas; transportation by pipeline of crude oil.
In reality, prices much closer to the $10 mark are probably the best major Victorian manufacturers can expect, with smaller users a little higher.
LNG sources in Queensland quote about $6 a gigajoule for a marginal cost price from the “dry” – and so expensive – gas extracted from coal seam gas seams in the state, which has become the dominant source of available gas on the east coast.
When up to $3.50 a GJ of transportation costs to the south are added, the total still looks out of reach of some manufacturers.
This graph from the ACCC report shows a distinct lack of competition:
ACCC are assuming a shortfall of 55 to 108 PJ in 2018 as forecast by AEMO, from Macdonald-Smith again:
From the ACCC report, domestic demand is shown as follows:
Blue in the first bar represents LNG. GPG (gas-powered generation) is yellow in both bars. The green of the first bar subdivides in the second into grey for industrial, and orange for residential and commercial.
The most difficult to forecast is the gas-powered generation because of the intermittency of its use.
Gas producers say they have the shortfall covered, but then their long-term LNG contracts also include increased supply. Before we identify where this may come from, I’ll put up the phantasmagorical map in the ACCC report, as per the AFR version:
First, a pipeline connecting Tennant Creek and Mt Isa is already under construction, to be completed in 2018. If the NT removes its fracking ban (unlikely) more gas could be sourced there.
Second, at the other end, AGL plans to build a gas import hub at Crib Point on Mornington Island.
Third, I heard that Queensland has now written to Malcolm Turnbull proposing a gas pipeline directly from the Bowen and Surat basins to NSW and Victoria. Turnbull seems to regard the Palaszczuk government as a caretaker government, so I’m sure he’ll ignore the request.
Fifth, according to Matthew Stevens in the AFR Santos is still progressing its Narrabri CSG project, currently valued at zero on its books. Stevens says no actual fracking is required, and the proposal is to sink diagonal rather than vertical wells, so that multiple wells can be sunk from one point with less surface disturbance. The cost of sinking such wells has now fallen from $3.2 million to $900,000 each.
However, all I can find elsewhere in the media is written by the likes of the Wilderness Society, hell-bent on stopping it.
Mark Ludlow in the AFR reports that Santos plans to drill up to 850 wells on 425 sites on the 95,000-hectare project area, mostly on private land with the agreement of the landholder who will be paid compensation. They submitted a 7,000 page EIS earlier this year, which evoked a record 23,000 submissions but only 500 submissions from the local area. Only 300 submissions most of them local supported the project.
It could supply about half NSW’s gas needs, with gas flowing from 2019-20. However, it is expected to remain in regulatory quicksand for at least another two years.
Turnbull’s calls for change to CSG development have been rejected by the states.
Sixth, Santos has engaged in gas swaps to make available gas to the domestic market. There is a credible story that the built the second gas train at Gladstone when they did not have enough gas to supply it.
Matthew Stevens back in April explained the Santos in fact owns the gas crisis. Essentially it bargained on the oil price staying above $70 per barrel. Also it assumed that CSG development in NSW would go ahead. Moreover, its own CSG ventures in Queensland have underperformed. Now it finds itself contracted to supply gas overseas cheaper than the price it could get in Australia. As 30% owner and operator of the GLNG joint project with three multinationals it now supplies the local market by doing swaps with its international partners to meet the overseas contracts.
Which of course affects the viability of its second train in Gladstone.
The whole new deal struck this week is still a work in progress, with a further meeting next Tuesday. There has been a suggestion that a gas-buying entity be set up by the government, so that the risk would be shifted to the tax payer.
The government as gas trader to keep the lights on. Surely not!
There is talk in the AFR of the Commonwealth Grants Commission penalising states that don’t develop their gas resources.
There is a precedent in that Western Australia is assumed to earn money from pokies in venues other than casinos, although WA has forbidden such pokies.
In other news, James Fazzino, outgoing CEO of Incitec-Pivot, has been warning about Australia’s looming gas train wreck for the last six years. In 2013 his company spent a billion dollars on an an ammonia plant in Louisiana. When he wanted gas there he had 50 companies bidding to supply.
One of his last tasks will be trying to secure gas for Incitec’s Gibson Island fertiliser plant in Brisbane. This will hinge on the Queensland government’s gas reservation strategy, which business supports, a stark contrast to the way the NSW and Victorian governments have dealt with energy policy.
Fazzino is leaving his job as CEO to become chair of Manufacturing Australia, although there may not be much to chair unless we sort out gas and electricity.