Should Australia have a gas reservation policy?

ScreenHunter_18 Feb. 11 10.19

By Leith van Onselen

Last month, the Australian manufacturing industry is stepped-up lobbying efforts to have a proportion of Australian gas supplies set aside for domestic use, as occurs in the United States and Canada. Specifically, the Australian Industry Group (AIG) released a report warning of a looming domestic “gas crisis” and seeking a “national interest test” for new LNG export facilities, whereby potential costs on domestic industries would be weighed-up against benefits before an export approval is granted.

The lobbying follows concerns that Australian industry is facing escalating gas prices and, in some cases, struggling to access gas altogether, as more and more LNG is exported overseas. Accordingly, Australia risks immense harm to employment and economic activity unless adequate, affordable gas supply is made available.

Today, The Australian has published an article warning that with the commencement of LNG exports to Asia from mid-decade, which is expected to triple eastern Australian gas demand, New South Wales faces higher gas prices, job cuts and a significant risk to the state’s energy security unless it begins to develop the coal-seam gas sector:

James Baulderstone, vice-president of eastern Australia at Santos, said without indigenous gas of its own, NSW had no ability to control its energy supply security.

“NSW faces prospective gas shortages as long-term contracts underpinning the state’s gas supply expire over the next two to three years, the very time in which the commencement of LNG exports from Queensland will see annual gas demand in eastern Australia triple,” he said.

“Looming natural gas shortages in NSW could be avoided by the timely and balanced development of the state’s already discovered reserves of natural gas.”

With a “gas cliff” expected in 2016 as major east coast LNG export terminals come on line, gas shortages and rising domestic prices are likely to become more pressing, forcing Australia into developing unconventional gas supplies like coal-seam gas, with potentially risky outcomes for agricultural security.

Go the other way and there’s a risk that for every dollar earned from exporting gas to Asia, Australia faces losing some portion of it in lost value-added local production.

We know that the US shale gas revolution is exporting more of its output to Asia and doing so on Henry Hub based contracts, which suggest that the current North Asia landing rice of $16mmbtu will come down to something more like $10-12:

ScreenHunter_42-Aug.-08-14.35

However, the new wave of local gas production sits on the cost-curve at just this price range so the price will struggle to fall below $12:

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Assuming the volume of US exports is great enough, and it is probable that they will be with 15 million tonnes of export capacity already approved and much more in the offing, Australian projects are going to need to find efficiencies to lower their cost bases.

It costs about $5mmbtu for Australian gas to be liquified and shipped so in this scenario the local price is likely to settle around $7.  This is a more than doubling in the price from a few years ago but it has largely already happened. Add a likely falling dollar and in a few short years Australian and US gas prices will have equalised, meaning Australian manufacturers are at no disadvantage to their US brethren.

Should we reserve then? The regional price is going to fall. Reserving will inhibit that. It will also put a lot of pressure on the new mega-projects that already have questionable margins as they’re forced to sell cheaper gas locally.

It bares close watching but for now it may be better for all sectors to let markets adapt.

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Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Crocodile Chuck

    90% of natural gas in Australia is exported:

    http://www.nytimes.com/2013/08/16/business/energy-environment/foreseeing-trouble-in-exporting-natural-gas.html?pagewanted=all&_r=0

    “Go the other way and there’s a risk that for every dollar earned from exporting gas to Asia, Australia faces losing some portion of it in lost value-added local production”

    ‘Value added local production’? The companies exporting our gas are foreign owned, and have foreign shareholders.

    And the answer is to place our agricultural land at risk, as well as our potable water supply, in the driest continent on Earth, through fracking, the wells of which in the United States have decay curves of up to 90% within 12-18 months?

    Leith, you need a better argument than this. See Andrew Liveris’ in the NYT piece.

      • “Bleeding foreign scum, how dare they invest their capital here……”

        I don’t place any blame on foreign investors but I do think we should be far more wary of selling off our country’s assets.

  2. NO DOMESTIC QUOTAS!

    Some inefficient industries can’t handle a higher gas price, that’s too bad.

    Simply put, Asia needs gas more than we do and can better utilise that gas, hence the higher price. This is just another rent seeking group looking for protection. I place them in the same group as the auto industry and farmers.

    If we want prices to be lower then we should encourage more production instead of stifle it with labour and environmental regulation, which just results in FLNG projects because constructing onshore facilities are too expensive.

    http://www.businessspectator.com.au/news/2013/8/20/resources-and-energy/woodside-flng-push-another-blow-barnett

    • Crocodile Chuck

      Mate, mineral wealth in this country belongs to all Australians.

      And the rent seekers you impugn happen to be households in SE Australia.

      • That’s what royalties and company tax are for.

        It doesn’t matter who the rent-seekers are, domestic or foreign, I don’t discriminate.

      • Croc I’ve never bought the ‘minerals belong to us all’ myth. Even the Constitution grants ownership rights to the States, not individuals.

        They are not yours, they are not mine.

        Capitalist is correct, royalties and fair corporate taxes are deployed to capture revenues from the mining rights granted and profits if achieved.

    • Some inefficient industries can’t handle a higher gas price, that’s too bad.

      Why view it from that end of the prism?

      Would efficient industries better handle a cheap gas price?

      or in other words, benefit from comparitive advantage?

      Simply put, Asia needs gas more than we do and can better utilise that gas, hence the higher price.

      Put more simply, our demand will be eternal.

      Our supply will not.

      The Australian born in the year 2087 could benefit from cheap energy, a benefit that some may wish to deny them for immediate gratuity.

      The bogan of today has shown no inkling other than to piss this benefit up the wall.

      So our choices are to offer ourselves cheap energy and make our way in the world by exploiting this energy via enterprise.

      or find a natural endowment and ship it out, requiring little enterprise.

      I can point to which ones develops more admirabel long term behaviour.

      • Yes if they were more efficient they wouldn’t be complaining but with high labour regulation and compliance costs, Australian governments are to blame.

        There’s no way of knowing what will happen in 2087 or the long-term. Energy could be cheaper due to advances in technology (Thorium etc.).

        It’s better to allow more efficient Asian enterprise to use the LNG and we just buy their products rather than suppress the price of LNG to protect inefficient local industries.

      • “It’s better to allow more efficient Asian enterprise to use the LNG”
        More efficient at what? Making plastic crap that lasts a week before becoming land fill that takes several centuries to bio-degrade? Why is it protectionist to use our natural endowments for competitive advantage?

      • Yes if they were more efficient they wouldn’t be complaining but with high labour regulation and compliance costs, Australian governments are to blame.

        So let’s get this.

        You complain about one input being ‘too high’, such as labour, but deride the claims of another possible input.. ‘energy’ being too hgh as selfishness on behalf of ‘inefficient industries’?

        The inverse would be ‘well our wages are global parity’, so then cheap energy can counter high wages.

        Do we wantAustralians to enjoy high wages?

        There’s no way of knowing what will happen in 2087 or the long-term. Energy could be cheaper due to advances in technology (Thorium etc.).

        Correct, and without knowing, there could be no advances, and our once bountiful energy is now scarce and expensive energy is costing future Australians a decent standard of living.

        So then we’re in an ‘insurance versus pissing it up the wall as soon as possible’ debate?

        It’s better to allow more efficient Asian enterprise to use the LNG and we just buy their products rather than suppress the price of LNG to protect inefficient local industries.

        Why is is better?

        It may be better in 2013, but could easily be disadvantageous in the future.

      • Why is it protectionist to use our natural endowments for competitive advantage?

        Competitive advantage doesn’t result from artificially lowering input costs for an industry. The Asian industries that can compete at a higher LNG price are obviously more efficient than Australian industry that are only viable at lower prices.

        You complain about one input being ‘too high’, such as labour, but deride the claims of another possible input.. ‘energy’ being too hgh as selfishness on behalf of ‘inefficient industries’?The inverse would be ‘well our wages are global parity’, so then cheap energy can counter high wages.Do we want Australians to enjoy high wages?

        The cost of labour is too high because of regulations that give unions too much power:

        “The maritime union wants workers on major energy projects to be handed a 26 per cent wage increase over the next four years as it logs claims for a series of perks and allowances, including an extra $245 a day for those building Chevron’s $52 billion Gorgon LNG project in Western Australia.” http://www.theaustralian.com.au/national-affairs/mua-ramps-up-energy-pay-battle/story-fn59niix-1226700156885

        See my point is the world LNG price is higher than Australia due to market forces. Labour costs are high due to regulations. I want everyone to have higher living standards which is achieved by having low priced goods from Asia. Australian industry is just not efficient.

        Correct, and without knowing, there could be no advances, and our once bountiful energy is now scarce and expensive energy is costing future Australians a decent standard of living.So then we’re in an ‘insurance versus pissing it up the wall as soon as possible’ debate?

        You can always say we should save our energy for the future. You could say that in 1913 and you can say it in 2113. By that logic we would not be able to take advantage of these higher prices which will not last.

        Your view that expensive energy will deny Australians a high standard of living is wrong. Have higher mineral prices hurt Australia? Higher energy prices will always benefit the energy producer. As supply comes online, prices will fall and energy will become cheap again. That’s why we have to make hay while the sun shines!

      • flyingfoxMEMBER

        @Captilist Competitive advantage doesn’t result from artificially lowering input costs for an industry.

        Errr that is exactly what many asian economies have been doing for teh past few decades. Suppressing the cost of labour as well as pegging their currencies.

      • @flyingfox

        Errr that is exactly what many asian economies have been doing for teh past few decades. Suppressing the cost of labour as well as pegging their currencies.

        Ultimately, that is unsustainable. Pegged currencies eventually lead to financial instability as seen in 1997 during the Asian Financial Crisis:

        “From 1985 to 1996, Thailand’s economy grew at an average of over 9% per year, the highest economic growth rate of any country at the time. Inflation was kept reasonably low within a range of 3.4–5.7%. The baht was pegged at 25 to the US dollar.

        Thailand’s booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers being sent back to their home countries. The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed.”
        http://en.wikipedia.org/wiki/1997_Asian_financial_crisis#Thailand

        Their people have also suffered because the government has suppressed their wages and thus they have lower standards of living.

        If they want to sell stuff to us below the true cost, then Australian consumers win.

      • flyingfoxMEMBER

        @Capitalist. Ultimately most of the systems of government and systems we have today are unsustainable too as we are finding out over the past few years.

        I am well aware of what happened during the Asian financial crisis.

        Little bit of history repeating yet we have built a country overtly reliant on digging up shipping stuff.

        If they want to sell stuff to us below the true cost, then Australian consumers win.

        This does come at its own cost as we are/ will be finding out soon enough.

        Given your screen name, you should know that nothing comes for free.

      • @flyingfox

        Little bit of history repeating yet we have built a country overtly reliant on digging up shipping stuff.

        That’s just efficient Australian miners responding to higher commodity prices. It’s not like the government has chosen to enlarge the mining sector.

        Yes we have significant exposure to mining, but if there is a sudden drop in commodity prices then the economy will adjust. Exchange rate depreciates and wages will adjust to the new regime. We will never avoid a recession, we can only delay it via government spending and cheap money.

      • flyingfoxMEMBER

        @Capitalist. You do realise that Gina is not giving out the 50K right?

        We will never avoid a recession, we can only delay it via government spending and cheap money.

        Exactly! So shouldn’t we try to build competitive industries instead of just relying on debt?

      • Even the Arabic countries have realised that the oil they have wont last forever and are now using the monies for other enterprises.

      • @flyingfox

        You do realise that Gina is not giving out the 50K right? I don’t hate the mining industry like some people. It’s any industry that has generated enormous wealth for Australia.

        Exactly! So shouldn’t we try to build competitive industries instead of just relying on debt?

        We have competitive industries: agriculture, mining and energy, education, healthcare, financial services.

        @Mik

        Even the Arabic countries have realised that the oil they have wont last forever and are now using the monies for other enterprises.

        This will happen naturally as the oil revenue declines and the industry sheds jobs. There’s no need for government industry planning or policy redirecting resources from one industry to another. We don’t want political parties picking winners and losers.

    • It’s our gas, and we can decide if, when, and for how much we want to sell it.

      Just the same as if I say to you that you should sell me something of yours for to me at the going rate, you have the right to decide whether or not to sell or not. Just because I want someone else’s property doesn’t mean I get it.

      Or are you a communist? 😉

      • Yes the government ultimately has control.

        I’m just explaining that the greatest benefit is achieved if we get the most for our LNG exports. Higher LNG prices will just encourage more supply which will eventually bring prices down. Like we have seen with iron ore.

        A domestic quota will reduce income received from LNG exports. The price of products that domestic industries produce will be more expensive simply because each cubic metre of LNG sent to Asia will result in more output than a cubic metre of LNG used by Australian industry. Less overall supply means higher prices and consumers then lose.

      • @ capitalist

        Hear hear. Unfortunately Capitalist I think you are wasting your breath, The majority of these Chardonnay socialists, are a product of our left leaning education system and delight in receiving their opinions wholesale from the subjective opinion pieces that pass for journalism in our mainstream press. They are sowing the seeds of their own demise.

      • @shemwatson

        Yes which is why it’s important to discuss the consequences of any government intervention. The common mistake is focussing on the good intentions of regulations while failing to analyse the unintended consequences.

        I simply employ logical arguments because regardless of political bias, logic is difficult to refute!

      • desmodromicMEMBER

        @ shamwatson

        Where do I find these influential left-leaning opinion pieces in our mainstream press? They are certainly not in The Australian, nor I suspect anywhere else in the Murdoch empire that dominates our press.

  3. Would a gas reservation policy benefit the Australian economy and its people?
    Off course we should have a gas reservation policy.
    We however are governed by self interested short contract actors that are dictated to by a controlled media and big business.

    • And Australia wants to bomb Syria ????????? WTF
      We are no Sovereign Nation! Fully owned and operated!
      Vote Wikileaks party and independents

  4. Ronin8317MEMBER

    It can be a problem if all the gas is locked up for long term supply contracts, and it’s inefficient for Australian manufacturers to import their LNP from the US. One solution is to get the gas companies to pay some of their royalty as gas future contract. The government can then resell the gas to the local manufacturers at market price.

  5. Sell the gas and buy solar panels or better still a solar industry.

    Australia is the most energy abundant continent. Get rid of the stored solar now and use the income to convert to current solar energy that is 8 minutes old rather than eons old.

    That will set Australia up to benefit from solar energy exports right up to the time the planet is fried from releasing all those captive gases from the fossils they are now locked in.

  6. A recent MB post concerned the Japanese gambit that perhaps due to the imminent cheapness of shale gas, they should get a cheaper price for our gas.

    Seems to me that we have an opportunity for them to go chase the shale, and reserve some of our gas for ourselves. Win Win.

    Alternatively, this gambit by the AIG might merely be a tit for tat response to the Japanese trying to scare us about shale gas.

  7. AIG might have an agenda but there is sense reserving some gas instead of selling most of it off.
    Looming gas shortage gun aimed at one foot & oil shortage gun aimed at other foot of economy.
    Following excerpt from Parliamentary Library Budget Review 2013-14:
    “When Australia originally joined the IEA in 1979, Australia was a net exporter of oil and was exempt from the requirement to stockpile 90 days’ worth of imports. Since 2000, Australia has become heavily dependent on oil imports, but has not moved to implement the IEA requirement. Australia is the only member country of the IEA that relies entirely on private industry to comply with its stockpiling requirement.
    As at January 2013, Australia had only 63 days of oil stock on hand, in contravention of the IEA’s requirement. [International Energy Agency (IEA), ‘Closing oil stock levels in days of net imports’, IEA website, January 2013, viewed 8 May 2013.]”
    http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201314/MiningResources
    Has anyone running this show got a clue?