Judith Sloan spouts rotten gas

By Leith van Onselen

The Australian’s Judith Sloan has today taken a swipe at Labor’s proposal to implementing a domestic reservation policy on new gas developments:

…consider Labor’s insane idea of enforcing a gas reservation policy where producers would be forced to sell to local users at less than world parity prices. This is surely a joke, designed to give Paul Keating and Bob Hawke a bit of a chuckle.

And don’t you just love this bit? It will only apply to new investments in gas production or major expansion of existing assets. That’s going to work out well in the context of global competition for investment dollars.

And does this mean that federal Labor will facilitate the exploitation of coal seam gas against the explicit wishes of a number of state governments, including the ­Andrews Labor government in Victoria?

Now let’s rewind back to March 2014 when Sloan denied that Australian gas would rise to world parity prices once the large export facilities were built, while talking-up the sharp fall in gas prices in the US thanks to the fracking boom:

…when these tame economists claim there is a world price for gas, that demand for gas is effectively limitless and the supply curve is perfectly elastic, they are talking through their hats…

…how do these apologists for the green movement explain the fact the price of gas in the US has fallen from $10 per 1000 cubic feet to less than $3?

That would be because of fracking and the dramatic increase in the exploitation of unconventional gas. More supply has driven lower prices — the basic laws of economics have not been suspended…

NSW, in particular, is facing a monumental shortage of gas, with close to 95 per cent of supplies coming from interstate. The domestic price of gas will go up and up and there is very little that can be done in the short term…

Increasing the supply of gas would mean lower domestic prices…

In the meantime, we can only observe with a sense of envy the developments in the US, where the price of gas has fallen by two-third.

As usual, Sloan failed to mention that one of the reasons why US gas prices are so low is that it has domestic gas reservation.

In the US, unlike Australia, significant export restrictions on domestic gas exist. The Natural Gas Act 1938 requires anyone who wants to import or export natural gas, including LNG from or to a foreign country, to first obtain an authorisation from the Department of Energy. The granting of export licenses are only a recent phenomenon, so the US gas price is not yet linked to the world market (although this is gradually changing as LNG export plants are built).

Accordingly, the huge positive supply shock from the shale gas boom has directly benefited domestic US gas users via lower prices, whereas if a similar coal seam gas (CGS) boom occurred in New South Wales or Victoria, chances are that much of the gas would be exported, therefore domestic gas prices would not be lowered to anywhere near the same extent as in the US (although it would likely provide some marginal downward pressure on prices).

So, without a domestic gas reservation policy, or better mechanisms to capture rents from exporting Australia’s limited supply of gas, the resulting shortages, higher prices, and loss of domestic competitiveness is very likely to trump the domestic benefits from LNG exports, whereby the majority of profits flow offshore.

As was noted by Houses & Holes last week:

The east coast gas crisis is already here. It’s not some figment of future policy. We’re not paying less than anyone else. Large industrial users are paying a lot more:

NSW:

VIC:

And SA:

There’s an ongoing crisis of competitiveness here that is wrecking Australian manufacturing. In Europe you can currently buy gas for $3.85mmBtu (AUD 5.35). In the US, for $2mmBtu (AUD 2.78). In North Asia for $4.40mmBtu (AUD 6.30). Everyone above is paying $6-11GJ (mmBtu and GJ are roughly comparable).

There is a massive and global gas glut yet by letting a small number of gas monopolists control domestic supply at home while shipping it offshore to the highest bidder we’ve completely $%#&*@ ourselves. Industry and consumers are literally subsiding the rents of a failing export industry. This is perhaps Australia’s truest example of Banana Repulicanism amid a plague of it right now.

There are a number of possible solutions to this including more investment or breaking up the gas cartel or applying domestic reservation. Given the global gas glut is so massive, domestic reservation makes the most sense. Thus, the only thing wrong with Labor’s policy is that it is not retrospective and does nothing to resolve and extant crisis.

But we all know why, don’t we? When journalists simply upload the oil lobby press release what hope is there of winning the debate?

Of course, Ms Sloan’s former directorships at Santos Ltd and Woodside are of no consequence here.

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