Australian gas blunders set example in N. America

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The AFR’s John Kehoe has an interesting piece today on LNG:

Australia is setting an example to the United States Congress: how not to open up an energy market. ­Manufacturing companies and their lobbyists are briefing legislators on Capitol Hill that Australia’s natural gas prices have tripled because of the extra demand from overseas buyers.

Congressional Republicans introduced legislation last week that would loosen the United States’ historic restrictions on gas sales overseas. The idea is for the US to ­supply more gas to allies in Europe who are beholden to Russia for energy.

The debate on whether the US should lift restrictions on gas exports is drawing in big Australian names.

BHP Billiton, the biggest foreign investor in the US shale gas sector, is pitted against Dow Chemical chief executive and US-based Australian Andrew Liveris and Melbourne-headquartered chemical producer Incitec Pivot, which is building a manufacturing plant in the southern United States.

…A report by Australia’s Deloitte Access Economics was sent last week to all 535 members of Congress by the Industrial Energy Consumers organisation. It asserted rising gas prices in Australia would diminish manufacturing output by $118 billion over the next seven years and cost 14,600 manufacturing jobs.

US senator Tammy Baldwin expressed concern the US would follow Australia’s gas export policy.

This debate is ongoing but has largely been resolved already in favour of exports. The US Department of Energy (DOE) has already approved exports of 70-80 million tonnes per annum, 10-20% below Australia’s magnificently expensive seven. It can do so because nearly all of this volume is brown fields investment involving the retrofitting of LNG import terminals. That makes it cheap to do with big export upside. The effect on domestic gas prices will be to rise but nothing like those prices rises seen in Australia. The debate is now about whether to push further and in that context Australia is a useful warning.

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Underlining just how useful is the fact that the Deloitte report at the centre of the debate went almost completely unreported in the Australian press (except at MB), showing that once the kind of Dutch disease that is apparent in Australia takes hold then the resources interests that seek its perpetuity are in near complete control of the economic agenda.

Another country that should be learning from Australia’s poor example is Canada. There is a mad dash on in British Columbia with more than a dozen green fields projects in planning. This is a recipe for cost-input inflation disaster, noted already by a number of prospective projects, which kills the projects return on equity and pushes break even up the cost curve in an increasingly competitive market.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.