NSW gas debate doesn’t add up

From the AFR:

Any hopes that the new consensus on the urgency of New South Wales’ natural gas problem would lead to softer rules for coal seam gas have been dashed. Much to the frustration of CSG companies, in particular AGL Energy, the NSW government has cemented the 2-kilometre buffer zone around residential areas. Indeed, the number of areas affected will increase as new growth housing regions are included. Hundreds of vineyards and horse stud properties will also be off limits to CSG. Arguments from AGL that the rule exempts hugely more land from CSG than warranted have been ignored.

Meanwhile, from the The Australian:

Australian Industry Group chief executive Innes Willox warned there was a “real risk” of industrial closures sparked by steeply rising gas prices within a couple of years as he criticised the NSW government for proceeding with “the most restrictive elements of its revamp of coal-seam gas regulation, regardless of the looming and intense gas-supply issues facing NSW”.

Let’s get a few points straight. Coal seam gas is causing the price spikes not fixing them. By opening the eastern seaboard gas market to North Asian prices via the Gladstone LNG hub, the local $4-5 mmbtu price can’t compete with $15mmbtu available in North Asia. Gasification and shipping costs are equivalent to $5 so the net back gas price is around $10 local:

ScreenHunter_40-Aug.-08-14.26

Will mining more CSG in NSW solve the problem? First you would need absolute gas reservation policies to prevent more LNG plants immediately being built to ship it out. And to prevent a pipeline being built from Newcastle into the Surat Basin and thence onto Gladstone, for shipping out.

But even if you go this way, you still need to make the CSG profitable here. And it’s not cheap. Santos reckons break even is somewhere around $6mmbtu. Add some profit and you’re at $7-8. This is demonstrable in the break even costs associated with the Gladstone LNG projects, which are all around $12mmbtu:

Picture 5

So, your best case scenario with expanded NSW CSG production is a gas price of $7-8 versus $10 at current North Asian prices.

But, in my view, North Asian prices are going to fall. The steady breaking of the Pacific oil-price price link for LNG by Japan and the US is going bring prices down. I reckon into the $12-$13mmbtu range for spot. That brings the Australian net back price down to $7-$8, the same as if you start mining CSG hand over fist locally.

And there is another risk. One of the reasons the gas extraction costs are so high is mining boom inflation. Adding a new wave of NSW CSG projects is potentially going to feed this even more meaning both our LNG exports an manufacturing are under simultaneous competitive pressure. We should really be looking at how we accelerate cost-out deflation in these projects to ensure we can compete with North American LNG.

Nobody could accuse me of not supporting Australian manufacturing but the numbers behind the NSW GSG panic don’t add up. Correct me if I’m wrong!

 

 

Comments

  1. There are two sides to every story.

    http://www.theaustralian.com.au/business/looming-gas-shortage-a-myth-says-bg-group/story-e6frg8zx-1226732175131

    GAS giant BG Group Australia says there is no looming shortage of gas in New South Wales or any other east coast state, and accused gas consumers of waging a scare campaign.

    There is gas there if people are willing to pay for it, says BG Group chair Catherine Tanna.

    As well as sources like Bass Strait and the Cooper Basin in South Australia, reduced electricity demand in NSW, where the state government has moved to extend a ban on coal-seam gas exploration and production, is expected to free up some gas.

    In a speech to a conference in Canberra today, Ms Tanna pointed to last month’s $3 billion NSW-bound Bass Strait gas supply deal between Origin Energy and suppliers Exxon Mobil and BHP Billiton as an example of available gas.

    “When gas users say gas is unavailable, they are often really saying they cannot contract gas at a price they want to pay,” Ms Tanna said.

  2. I just read this article about how cheap renewables are helping iceland’s economy by industry setting up in the country…then at the end of the article it talks about how iceland is planning to export power to europe…um, why can’t you just continue using a natural advantage to maximise your own benefit?

    http://www.worldcrunch.com/rss/culture-society/how-renewable-energy-has-fueled-iceland-039-s-miraculous-comeback/island-energy-revolution-keflavik/c3s13581/

    • The Icelanders have transformed almost every disadvantage — their geographical situation, the climate, the lack of natural resources — into an advantage.

      This is the worst part of the article for me. Australia has so much more in terms of a resource and energy endowment, and yet it is all exported to other countries while everyone dives into the property market and financial innovation with a fervor that would make an archbishop blush..

  3. HnH, a very good assessment. ‘The steady breaking of the Pacific oil-price price link’, nice to see your terminology change to steady.

    Relying on cheap energy to remain competitive is only a short term solution anyway and delays industry adjustment. Japanese and German firms are very competitive without cheap energy, in fact most people realise that Australia will never compete on a ‘low cost basis’ more on technology and quality basis.

    A final note, now that the abolishment of the carbon price will potentially make coal very cost competitive and which is a commodity we have in abundance will Australia actually make the transition to burning gas at all?

    • Yeh, forgot about that. A very good question. The threat of punative international action against coal has to be taken pretty seriously in the time frame for any new power plant…

    • Last week I was talking with some ex-work-colleagues based Japan, they were telling me that there is a real street level uprising against the whole climate change “global warming” concept. Young japanese feel like they have been conned, carbon pricing is a tax that the Japanese people pay so that Chinese businesses can steal their jobs. WHY is the Japanese gov’t shooting their own businessmen in the foot, while China just burns more and more and MORE coal?

      I wouldn’t be at all surprised to see the Japanese LNG market just collapse Nuclear and good old fashioned coal will come back into vogue.