Well done Credit Suisse:
Our research, if nothing else, always provides us with diverse feedback. Whilst the feedback from gas companies to our recent East Coast Gas note has been in agreement (despite the damning indictment on the industry implicit within it), it has been somewhat less effusive from some unlikely sources. Alan Jones, host of the most-listened-to AM radio show in Sydney, “doesn’t know what planet we are on”, labelling us “doomsayers” and “ignorant financiers who can’t seem to grasp simple facts”. Then Mick McCormick, APA’s CEO, said “all Credit Suisse have done is to continue their view of the world but shift it out four or five years”. These reactions are a microcosm of the challenges faced in both acknowledging and fixing the problem. The Counting Crows provide a bit of musical inspiration for us.
■ Mr Jones and me, we tell each other fairytales. We are left a touch confused by Mr Jones’ comments which at first suggests we are ignorant for saying there is an issue, but then says a reservation policy is needed to fix the crisis. Indeed, we agree that a form of reservation policy, known as common sense, was needed five years ago to not build six trains on Curtis Island. In our note, we suggested Cooper Basin gas could be reserved to help a little. The reality is you cannot reserve what does not exist though and there is almost no uncontracted 2P gas reserves in Australia (beside potentially Arrow, but let’s not go down the rabbit warren of both the cost and farming land issues there).
■ Believe in me, help me believe in anything. Whilst Mr Jones may be right on our inability to “grasp simple facts” more broadly, we’ll add a few facts of our own to the debate. The average gas consumer in Australia pays ~40% less than in Japan, not 65% more. That said, gas prices are going up and supply is not there. It is a fact that much of the “184 years of identifiable gas” in Australia is both uneconomic at a price domestic users can tolerate and sits onshore in the Northern Territory or Victoria, with moratoriums, or NSW with its large political challenges. Marginal-cost economics means even reserved gas would need a $6-7/GJ price.
■ We all want to be big big stars, but we’ve got different reasons for that. The domestic gas market is an emotive debate, where numerous agendas are at play. We thankfully only need assess the market from an operational and financial perspective. The facts are that new gas takes 3-4 years from sanction to production and there simply is not enough gas to meet demand. Indeed, Fairview could stay running at ~440TJ/d, adding another~40PJa shortfall vs our base numbers (that is ~25% of residential demand).
■ No, we aren’t taking the Mick….The APA CEO said in the AFR that CS said five years ago the shortage of gas was coming in 2016. Ironically, five years ago we all erroneously thought that 2016 was the year of excess ramp gas flooding the market. Whilst we think the greater pinch comes in 2018-20 if the LNG projects do all ramp up, we believe there is already evidence in 2016 that disputes the view that sees enough gas to meet LNG and domestic demand. Queensland spot spiked to >A$20/GJ when AGL was short a few, measly PJs, Santos has announced it is unable to ramp GLNG as quickly fundamentally due to equity and third-party gas issues and the gas market even had a small part to play in the SA energy crisis, with higher gas prices one of the reasons for Pelican Point’s closure. The problem exists and it will undoubtedly get worse. We are always happy to wave the white flag when we are wrong, but we have not seen anyone present numbers to suggest that supply can fix the problem, not demand. Markets will balance, that we can all agree on.
The important part about being a populist plutocrat is that you simultaneously represent yourself as one of ‘the people’ as you reach into their back pockets.
