Thanks to The Australian, the gas oligarchs have a free run today:
Gas producers have warned that the reputation of Australia is falling so quickly amid political indecision creating sovereign risks for investors that the country could become an investment pariah like Argentina.
They have also cautioned that gas prices for the Australian consumer would continue to rise, not because of profiteering, but because the costs to develop and extract the gas was now three times more expensive.
In a hard-hitting discussion in London at the Menzies Centre for Australian Studies on Wednesday night, Santos chief executive Kevin Gallagher said the Australian government’s actions to redirect export gas supply to the domestic market was his biggest concern and highlighted how such political intervention had destroyed the Argentine export market.
The Turnbull government has just imposed the Australian Domestic Gas Supply Mechanism to restrict LNG exports in the event of a domestic gas shortage.
…“In Argentina back in 2000, the country tried to cap domestic gas at artificially low levels to stimulate economic recovery, but the result was they stopped all redevelopment because the price of gas was below the cost of development. Now we could get into that place pretty quickly if we are not careful. The last thing we need is a lack of ability to sell into free markets to scale off developments.
“In Argentina we saw lack of supply and that country went to export opportunities and pulling back gas. In five years, Argentina went from net exporter to net importer,’’ Mr Gallagher added.
Martin Ferguson, the former minister for resources and energy and an adviser to the Petroleum Production and Exploration Association, said uncertainty was being created by political indecision, and he warned of an energy crisis. He said the solution was to put more gas into the market by reducing the regulatory burden and facilitating onshore gas.
He added: “To put at risk our capacity of exporters to supply customers raises serious issues of sovereign risk in Australia. We have huge capital investment for LNG facilities, we need North West Shelf, remote gas, it’s very costly to develop.”
Santos lied to the Australian people that it had enough gas when it built its LNG white elephant:
As Santos worked toward approving its company-transforming Gladstone LNG project at the start of this decade, managing director David Knox made the sensible statement that he would approve one LNG train, capable of exporting the equivalent of half the east coast’s gas demand, rather than two because the venture did not yet have enough gas for the second.
“You’ve got to be absolutely confident when you sanction trains that you’ve got the full gas supply to meet your contractual obligations that you’ve signed out with the buyers,” Mr Knox told investors in August 2010 when asked why the plan was to sanction just one train first up.
“In order to do it (approve the second train) we need to have absolute confidence ourselves that we’ve got all the molecules in order to fill that second train.”
But in the months ahead, things changed. In January, 2011, the Peter Coates-chaired Santos board approved a $US16 billion plan to go ahead with two LNG trains from the beginning….as a result of the decision and a series of other factors, GLNG last quarter had to buy more than half the gas it exported from other parties.
…In hindsight, assumptions that gave Santos confidence it could find the gas to support two LNG trains, and which were gradually revealed to investors as the project progressed, look more like leaps of faith.
…When GLNG was approved as a two-train project, Mr Knox assuredly answered questions about gas reserves.
“We have plenty of gas,” he told investors. “We have the reserves we require, which is why we’ve not been participating in acquisitions in Queensland of late — we have the reserves, we’re very confident of that.”
But even then, and unbeknown to investors, Santos was planning more domestic gas purchases, from a domestic market where it had wrongly expected prices to stay low. This was revealed in August 2012, after the GLNG budget rose by $US2.5bn to $US18.5bn because, Santos said, of extra drilling and compression requirements.
Marn is a card-carrying mining apologist. Both are so compromised on this issue that neither should be quoted as a reliable source.
The IEA states the truth today that nobody but MB will say Downunder:
The International Energy Agency has slammed administration of Australia’s gas network, saying it is a “market failure” for domestic prices to have risen above those charged to export customers.
The agency, which represents the energy interests of advanced nation governments, blames gas and pipeline monopolies for soaring prices and says the situation has been made worse by the bans on gas development by state and territory governments.
The IEA’s global review of gas markets says there is “a lack of competition and transparency in the Australian gas market” that is allowing companies to make monopoly profits. “Monopolies in the network and high domestic transportation costs contribute to making LNG exports more lucrative for gas companies on the eastern market,” the IEA says. Australia will soon become the world’s largest exporter of LNG.
“The situation has been exacerbated by restrictions on both unconventional and conventional gas by some state governments in the east coast market, denying one of the LNG developers a potential source for that market. These restrictions on onshore gas development at the state and territory level, and increases to the marginal cost of production from more unconventional developments, are placing pressure on gas supply and prices.”
Lifting fracking bans will help a little. That gas is also expensive in the $7-9Gj range but with contracts going for $20 the room for competition driven price falls is obvious. However, the reserves in NSW are largely held by the same cartel. The reserves in VIC are somewhere between unproven and stranded. The communities involved will turn to activism and politics boil over so it probably won’t work.
It isn’t fashionable to say so but the best solution is to accept the market failure and use draconian laws to fix it. That means domestic gas reservation and strict use it or lose it laws for current reserve holders. And if that does not work then straight forward price controls. Purists will argue that that will retard development by lowering prices. But what an absurd argument that is when you face a rampantly gouging cartel that is already limiting supply to sustain high prices. There is no shortage of gas. There is not even a shortage of idled gas. There is a cartel refusing to release it and making monopoly profits via discriminatory pricing.
This is obvious in the IEA’s gas demand outlook:
Gas will grow faster than oil and coal over the next five years, helped by low prices, ample supply, and its role in reducing air pollution and other emissions. In our new five-year forecast to 2022, gas demand will grow at 1.6% per year, a slight upward revision from last year’s forecast of 1.5%. This means that annual gas consumption almost reaches 4 000 billion cubic metres (bcm) by 2022, from around 3 630 bcm in 2016. Almost 90% of the anticipated growth in demand comes from developing economies, led by the People’s Republic of China (hereafter, “China”).
That is far too slow to absorb the global surplus:
Thus QLD’s Curtis Island, which is the global marginal cost producer, will be forced to curtail more output and shipments, meaning there is more gas available to the east coast economy.
Japan has the right idea:
Japan’s Tokyo Gas, the biggest city-gas supplier in the world’s largest importer of liquefied natural gas (LNG), is in talks to renew supply contracts and will push to revise terms to get more flexibility and cut prices, a senior official said on Thursday.
The push for easier terms, a major concern among Japanese utilities after the Fukushima nuclear disaster six years ago led to a surge in LNG imports and drove prices higher, got a boost when the country’s anti-trust regulator last month ruled restrictions in supply contracts were anti-competitive.
“We have re-negotiations under way, including price review,” said Takashi Higo, senior general manager at the gas resources department of Tokyo Gas.
“There will be tough negotiations (with suppliers) and it will take a lot of time,” he added, speaking to reporters at an energy conference.
The decision by Japan’s Fair Trade Commission to rule that so-called destination clauses that restrict resale of LNG cargoes are anti-competitive is likely to lead to more trading by buyers in Japan and could prompt challenges to similar restrictions elsewhere in Asia.
Asian customers don’t even want the gas they’re being forced to take and are rewriting contracts to prevent it.
Likewise, the Australian Government should force sufficient gas into the local market and enforce price controls at the export net back price, roughly $7Gj today.
The alternative is so crazy that it is probably the path that this loony country will take. The gouge will force major demand destruction across the east coast as gas and electricity prices smash industry and force retrenchment in households. As gas and electricity consumption falls, and gas cartel volumes fall too, it will raise prices even more.
So on and so forth until the Lord take us.
