Pushing back the gas con

ScreenHunter_43 Jan. 24 08.38

By Leith van Onselen
Ross Gittins has written a solid piece today arguing that the Australia’s government’s are misleading the people on the true reasons behind gas price rises in a bid to force through controversial coal seam gas (CSG) projects:

For an example of state politicians willing to blatantly mislead their electorates, look no further than the Victorian and NSW governments’ dishonest explanation for the looming jump of about 25 per cent in the price of household gas.

The true reason for the rise is that the building of natural gas liquefaction plants in Gladstone will soon allow gas producers on Australia’s east coast to export their gas and obtain the much higher prices paid on the world market. The east coast will go from being outside the world market to inside it.

The price rise is thus inevitable unless governments were to prohibit the companies from exporting their gas.

…state politicians have taken up the dishonest claim of the gas companies that permitting them to build new and controversial coal seam gas plants would somehow prevent gas prices from rising or force them back down. But as any student of economics could tell you, there’s no way NSW and Victoria could ever produce enough natural gas to significantly affect the world price of gas.

The price of gas in NSW and Victoria would stay below the world price only if the new producers were compelled to sell their gas to local users at below the world price. Again, there’s been no suggestion of this.

Crikey’s Paddy Manning has today raised similar concerns, arguing that former federal politicians with ties to the energy industry are using the threat of gas shortages to force through CSG projects:

Former John Howard industrial relations minister Peter Reith — whose recommendation to lift fracking bans was ignored by the Victorian government last year — used his column in Fairfax papers yesterday to accuse the O’Farrell government of abandoning the CSG debate, warning “there is a real prospect Sydney could suffer gas shortages”. Reith failed to disclose his consultancy with construction giant Bechtel, a major contractor to the CSG industry.

Former federal energy minister Martin Ferguson was appointed chair of new advisory group APPEA (“the voice of Australia’s oil and gas industry”) in October, barely six months after he stepped down from his cabinet post and only weeks after retiring from Parliament — flouting the 18-month cooling-off period required of ex-ministers under the lobbying code of conduct. Ferguson had a dig at his erstwhile NSW Labor colleagues for “parroting the lines of the Greens and showing itself to be completely irrelevant to the debate”, urging Premier Barry O’Farrell to break “the impasse preventing the development of the state’s abundant gas resources to put downward pressure on rising prices”…

Both commentators are spot on.

Energy companies, and the politicians that serve them, are exploiting the problems they’ve created by using the threat of gas shortages to insist that Australia needs widespread development of CSG in order to ensure domestic supply and lower prices. In doing so, they are placing the natural environment at risk through the potential poisoning of ground water via fracking, which could also adversely impact the agricultural industry. Moreover, the cost of fracking, along with its relatively small scale, means that CSG is unlikely to have a material impact on gas prices anyway.

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Comments

  1. This sentence from Gittins sums up my thoughts:

    “But as any student of economics could tell you, there’s no way NSW and Victoria could ever produce enough natural gas to significantly affect the world price of gas.”

    Can anyone explain why that’s not true and why these CSG projects are allegedly so critical for our country?

    (Edit: I’m the first to admit I don’t know a lot about energy markets so please be gentle…)

    • I’m no expert on the gas industry either, but I’ll make the following observation; it is a false premise that local unconventional gas supply will always be priced at the international price of natural gas (less liquification and transport costs).
      As we export gas as LNG, demand in Australia for gas for export is from the owners of the LNG trains. Once these trains reach maximum capacity, demand falls to zero.
      H&H has made a convincing case that no further trains will be built in Australia in the foreseeable future due to ample supplies of natural gas from unconventional sources at low prices available for export from the USA and Canada, and lower construction costs for LNG trains there.
      So it seems to me that once sufficient gas is available to meet the requirements of the LNG trains currently under construction in Australia, the price will then fall to a level that meets domestic demand requirements.

      • Yes, and to the extent that CSG devt is held up by environmental concerns and this causes a shortfall is gas supplies for export, it is reasonable that domestic gas users should expect to pay the netted back export price.

      • Spot on, this is exactly what actual experts in the industry keep saying. These LNG terminals are so expensive that they locked in almost all their gas export contracts long ago, otherwise no one would have committed any funding. Even if they wanted to export more, they have no remaining capacity to do so.

        This has been mentioned over and over again but MB disregards it. In the words of H&H, “watch me get ignored”.

  2. “The plebs cannot be trusted with the truth – they couldnt possibly comprehend it…”
    Or:
    If we told them the real reasons why prices are going up the plebs would want us to limit exports, forcing down local prices…. That’s bad for Coalition party donations – real bad… cant have that now, can we?

    I’m not a fan of limiting exports for the sake of it, but to actively withhold information is tantamount to outright betrayal.. Unfortunately, could we expect anything more from such a deviant government – hellbent on doing whatever it likes, regardless of the national costs

  3. The Liberals are hostage to all forms of neo-liberal dogma and to all interest groups except the electorate. It deploys policy as a form of deception to further the interests of its clients. This is not a government, it’s a right wing kleptocracy.

  4. Energy is a funny thing. When asked why the New Zealand Government gave tens of millions of dollars to Rio Tinto/Sumitomo keep its aluminium smelter going in Southland one answer was, “Well if we don’t, the massive increased supply of surplus electricity to the retail market would make prices fall and that would be bad for the market”. Hang on! What’s bad about electricity prices falling for households and businesses, and keeping the $30 million sweetener you gave to Rio as well? “Well that would be bad for the market……”

  5. I will get in with some sensible counter arguments while the free-market information taskforce is dispatched to this thread

    – gas consumers have become accustomed to unsustainably low gas prices

    – government imposed market interventions designed to reign in domestic gas prices will simply discourage investment in gas development in Australia

    – business creates jobs, not government

    – it would be irresponsible for government to impose such policies that distort markets and discourage investment

    – government is in the business of encouraging investment

    (…. notwithstanding the government’s other stated objective to reduce cost of living pressures and improve Australia’s competitiveness, via reducing the impost of higher energy costs created by the carbon tax. Lower wages, anyone ?)

    We can only hope government maintains a consistent approach of avoiding knee-jerk responses to the disquiet of its poorly informed electorate. The market will reward us, brothers and sisters (well, some of us anyway). Have faith !

    • GunnamattaMEMBER

      You forgot Unionists…..

      If Australia got off its backside to get rid of Unionists and sundry tree hugging public service loving socialists and lowered its expectations about return from the industries on its soil Australia would be able to free the gas extraction business from the unreasonable impost of politics, society, the environment, and numerous persons at an individual level who all seem to think that business should be in any way a service to any other portion of the human race other than controlling shareholders, and close to that point where market outcomes are closer to perfection.

  6. Martin Ferguson was a sector favourite and I am sure he will continue good work toward the marrying of industry interests and community benefits.

    Surely his argument that fast tracking CSG to augment gas supply resulting in some moderation of price has merit. It is not dissimilar to HnHs IO deluge thesis.

    • GunnamattaMEMBER

      …..for those who dont understand 3d1k

      if you dont support fracking the living bejeesus out of whatever environment you are thinking about, then the globalisation of your gas market, and associated cost increases, in an industry which charges under the pound of flesh or through the nose school, may occur at the time when the economy, having had its head up its cloaca for some time, may find that the urge to defecate is no longer deniable and that head extraction may not be fast enough to avoid some unpleasantness for those being purged from the job market or some other functioning part of the economy.

      One of the advantages of having the mining industry 3/4 owned by foreign interests is that it frees their decisionmaking processes from unreasonable sentiment, even if we see traces of sentiment when we wipe.

    • Martin Ferguson was a sector favourite and I am sure he will continue good work toward the marrying of industry interests and community benefits.

      Thanks for that 3d, now I have to clean the coffee off my keyboard.

      I do assume that comment was supposed to be a joke?

  7. State and Federal govts literally give away resources in exchange for royalities (although in certain situations there are 5 year ‘royalty holidays’ on offer).
    A few decades ago, national energy security/affordable domestic supply at reasonably stable prices was a consideration. Those days are gone, now it is ‘liberalisation’ and poor policy advice leading the way.
    Main driver of increase in average regulated retail gas prices was cost of developing distribution network (48% of cost rise – see Chart 23 in following paper). Growth of the network is a function of accelerating population growth as noted in 2011 Ross Garnaut Report.

    ‘Gas Policy in Australia’
    http://www.parliament.nsw.gov.au/prod/parlment/publications.nsf/0/BEA3EE2904867594CA257C3F00136087/$File/Gas%20-%20resources,%20industry%20structure%20and%20domestic%20reservation%20policies.pdf

    “. . with regards to energy security, nationalism advocates adoption of domestic gas reservation, while liberalism argues that a robust gas market will produce the desired goal.
    The 1970s were marked primarily by a nationalistic approach to gas policy.
    In 1973, the Whitlam Government established the National Pipeline Authority. It had a twofold purpose:
    (1) To provide an integrated system of pipelines from gas sources to population centres and export points in Australia; and
    (2) To ensure that adequate oil and gas reserves remained in the country to meet long-term requirements and to ensure uniform gas prices.”
    Rex Connor (Commonwealth Minister for Energy) in 1973:
    “imposed an embargo on gas exports from the North West Shelf. . .
    In 1977, the Fraser Government lifted the embargo on granting export licences for gas from the North West Shelf (NWS), after bipartisan agreement was reached.
    During the 1980s, Australian energy policy began the transition from a nationalistic approach to a liberal one in line with the liberalisation and deregulation of the Australian economy as a whole.
    Most foreign ownership limitations were removed and energy infrastructure began to be privatised.
    By 1999, all Australian jurisdictions had completed the following reforms:
    • publicly owned transmission and distribution entities had been corporatised and vertically separated; and
    • privately owned transmission and distribution activities were isolated through ring-fencing.
    Until 1997, Commonwealth approval of exports was required to ensure the adequacy of gas reserves and that prices received were satisfactory, including ensuring that transfer pricing did not occur. Federal controls on LNG exports were removed in 1997, when the Howard Government adopted the policy of allowing gas developers to sell their products into the markets of their choice.
    At present, Western Australia and Queensland are the only States which implement any form of domestic gas reservation policy.
    In its November 2012 . . Public Accounts Committee stated that it also does not support a domestic gas reservation policy.”

    Our resources have been given away by the Laberal Party, with effectively no consideration given to ensuring domestic supply. Their duplicit and short-sighted behaviour caused the current situation.
    Full sell-out of Commonwealth assets is inevitable – avoid dissapointment, remember this is firesale-land.

    As usual, insightful spleenbatt, you have a career as a Laberal party speechwriters any day.

  8. From a national security perspective it would appear essential to preserve a certain amount of gas for domestic use & emergencies.
    We have a similar problem with liquid fuels, diminishing refinery capacity & no 90 day reserve.The only developed nation not to have 3months of fuel on hand.

    On the social & environment front I went to listen, on Monday night, to USA rancher from Wyoming John Fenton speak about his family’s & his communities involvement with the unconventional gas mining industry.It is a tale of destroyed health , polluted under ground water & invasive practice, severely curtailing his ability to operate his beef ranch.

  9. So if CSG is developed and more than enough gas is produced for the LNG liquefaction plants to run at full capacity, what happens to the excess? It’s sold domestically, potentially at less than world market prices. We would once again have gas that’s “outside the world market”.

    • Or our friends at the gas companies will just slow down development of new wells until international demand picks up?

      • Yes, the discount from world prices would be limited by the time-cost of leaving it in the ground until it can be sold on the world market. It could be sold at the NPV of some future international sale, minus a risk factor.

        Edit: note that international demand picking up is not going to increase the capacity of the liquefaction plants, so they would be waiting for raw gas supply from other companies’ wells to dry up before they can sell their gas to the liquefaction plants. In general companies want their money now, not in 25 years.

  10. A “Smart” Government would make sure that “Local Consumers” ENJOYED low cost Gas energy when we have such a surplus to export.

    A “Smart” Government would make it mandatory for exporters to provide for Local Markets FIRST with surplus for Export. After all the GAS/OIL wealth belongs to the Country.

    It would help Joe Blog, Local Industry and even Fuel our Vehicles in the vent of Oil spikes.

    It is Total Bull$hit to evade this obvious truth.

    All Oil Rich nations supply their own Domestic Market at Cost + SFA . You don’t have to be 3rd World to follow that lead!

  11. With a lawyer last week for lunch talking about his experience with fracking in the us.
    He was saying the sht they get away with via political influence was unbelievable.
    He’s dead against it here and works for some of the big guys.