Nor is there a gas debate. Our national media exists on a diet of quotes from vested interests.
Yesterday the AFR offered a nice case in point. First running a piece on how Australian manufacturing is going to get killed by paying Japan-level prices for gas based upon quotes from the CEO of Brickworks. Then it ran a response which was no more than a press release from the Australian oil and gas lobby, followed up by an op-ed by its chief executive today, which argued:
Put simply, the best way to create downward pressure on gas prices is more gas, not more regulation.
Proponents of gas reservation applaud the shale gas experience in the United States and its provision of cheap energy. But it is important we consider how it is that the US came to have such abundant gas production and such low gas prices (now about $US3.50/million British thermal units).
The fact is that between 2002 and 2008, US gas prices tripled, peaking at more than $US13 in July 2008.
High prices provided the incentive for a massive exploration boom. At its peak, about 1500 rigs were drilling for shale gas.
Moving gas to the big US domestic market was facilitated by an existing and extensive pipeline network criss-crossing the country, limiting the need for additional infrastructure and reducing development costs.
Rapid commercialisation allowed prices to fall to where they are today; not interference with commercial incentives for gas producers.
…In all sectors of the economy (not just oil and gas), maintaining access to open and competitive markets – and rejecting protectionism – is in Australia’s long-term national interest.
This is half true. The US does interfere with gas markets, in a big way. It keeps its domestic gas price so low by restricting exports. And that’s the first major point I wish to make. All countries except Australia do this. There is no pure “market” for gas. Gas is an incredibly (mostly regional) fragmented market with wildly divergent pricing owing to strategic supply restrictions all over the place.
That may not be right in economic terms but it’s nonetheless true.
In current policy settings, which have Australian gas producers operating in the supply constrained North Asian regional market, the price for local Australian manufacturers will be set by the highest cost marginal buyer, not the lowest cost marginal producer. Here are those prices, and yes, they have risen some:
And this chart lags. Prices are now at $16Mmbtu or so.
I’m not arguing that what we need is a domestic gas reservation policy, even if everyone else has one. Australia has a history of being a mad free-trader and it’s served us well. Then again, I’m not arguing we don’t need one!
What I am arguing is that if you’re not going to do it then, yes, manufacturing is going to suffer some more. You must accept that as a consequence in this fragmented market. For how long it suffers is the question.
That brings us to the line being touted by the gas lobby, Marn, and gas firms, that local supply restrictions need to be lifted to bring more cheap gas to market. This is true in principle but not in practice (by my estimates). On current settings, the gas shortage in the North Asian market needs to be reversed before prices will correct locally. That is going to happen not because of anything we are doing. It depends much more upon the US shale gas boom and the degree to which the US administration determines that Asian exports will be allowed. If it is generous then the current process of integrating global markets will continue and North Asian gas prices will fall towards $10Mmbtu as oil-linked contracts fade.
The important point to make is that the comparable Australian supplies (coal-seam etc) are more expensive to produce than US shale so are likely to be displaced anyway. Australia itself is a very fragmented market, with a limited pipeline network that isolates eastern, western and northern states:
So, for local customers, once you subtract liquefaction and transport costs, this still means a local gas price of about $6Mmbtu if Japan falls to $10Mmbtu. Santos estimates that’s the marginal local cost needed to keep new supply coming online.
That’s where we come to our next vested interests driven story, this at The Australian (BTW 1 x Mmbtu is roughly 95% of 1 x gigajoule):
Former Arrow Energy chief Shaun Scott told The Australian the company could not get the support of domestic gas users in the early years of Queensland CSG production, so LNG was pursued instead.
Santos’ head of eastern Australia operations, James Baulderstone, said that in the past five years domestic gas users had been unwilling to lock in long-term contracts because they bet there would be excess CSG in the early years of the Gladstone LNG projects.
Calls for east coast reservation policies – to set aside an amount of gas production for domestic users – come amid a looming shortage of gas caused by the start-up of CSG export plants at Gladstone over the next three years. This will triple east coast gas demand and send prices beyond 2015 as high as $9 a gigajoule – three times current prices.
Mr Scott said early CSG players tried to get long-term sales contracts at $3 a gigajoule to create a viable domestic gas market. “Nearly all of them turned us down, in many cases arguing that there was so much gas they would just wait and get it cheaper,” he said.
“Ultimately we saw that the only way to create a viable industry was to link into the big markets of Asia via LNG, which is what we did.”
Expectations of cheaper gas were at the time driven by a now-abandoned plan to pipe gas from Papua New Guinea.
Whether this is true is hardly the point. This discussion should be about what kind of gas policy is in the national interest, not Arrow Energy. Of course that pales next to The Australian’s love of point-scoring.
Debating this is made even harder by the fact that the big deals are largely opaque. In WA, gas reservation sets aside 15% of supply to ensure that it is not overly exposed to the much higher prices available in North Asia. This seems to have worked for the big contract users, who pay in the $4 to $5Mmbtu range (though much more on spot) which is up from $2-3 historically but not unmanageable.
Basically, as gas becomes more and more a part of the global transitional energy mix in the next decade, it’s price is going to rise inevitably. However, global supply is already responding aggressively and I expect in ten years we will have a global market for gas which will drive prices much lower than the hopes and dreams of Australia’s current boom players assume. Whether or not Australia will have any industrial base left by that point is the question you need to ask and given the parlous state of the manufacturing sector I would have thought that answer is a rather unsettling “no”. As such, transitional price guards of some sort are worthy of consideration.
My final point of course is that so long as we have a media that prefers two-bit comments to actual research, there’s no hope of of the nation considering the best option, whatever that may be.
