AFR continues gas propaganda war on Australia

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This is pure gas propaganda headlining the AFR today:

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For some earthy, cut-through clarity on the state of Australia’s gas markets, who better to turn to that Mick McCormack.

McCormack runs APA Group, the nation’s biggest gas piper. And it is his firm view that, right now, we do not have a gas supply crisis. What we have is a bitter division between suppliers and customers over what it is costing to get the gas they need.

“We have heard some big customers saying they can’t get gas,” McCormack told The Australian Financial Review last week. “I have been told that is not true. There is gas available on two and three-year terms at a price. But the customers don’t like the tenor and they don’t like the price. What they are really saying is they want it like the good old days, the days when contracts were 10 to 15 years and pricing was $3 a gigajoule.

“But that is not going to happen. The conventional gas that they have been getting cheap for 20 years, that was the low hanging fruit. The $3 days are gone. It is now the higher cost conventional from the Cooper and the higher cost stuff from Bass Strait and the price has to increase. Then the coal seam stuff costs that little bit more. It needs export pricing and volumes to justify the investment needed to get it. And then Santos built one train too many.

“The answer is short and sweet,” McCormack said last week. “We have got to get access to more gas. Everywhere you go in Australia there is gas underneath you. To solve the issue in the medium and longer term, it is dead simple, it is just not easy.”

…Why promote gas reservation in states that have either banned onshore drilling (Victoria) or actively contained its potential (NSW)? And why talk about use-it or lose-it provisions when drillers are being constrained by government from doing the drilling they want to do?

McCormack is right. The answer is new gas supply. The domestic price is offering every incentive for explorers to get on with it. What we need is a national consensus that demands they be allowed to as rapidly as possible.

Supply will only help if it is forced to remain in Australia by reservation. Victoria has no onshore gas. NSW does but the community is against removing it owing to the risk to aquifers. The biggest reserves in the country are held hostage by the gas cartel in QLD.

APA is one of the monopolists that is doing the gouging. The ACCC has already told the government that it is should regulate it hard to force it to lower prices.

Cooper, Surat and Bass gas is all being sold in Asia for $7-9mmBtu. That means its profitable after extraction, transport, liquifaction and shipping at cash costs. The net back is therefore $2-3mmBtu below that. That’s the price it would be sold at here if there was no gas cartel driving the shortage. We’re currently paying $9-12mmBtu.

Three weeks ago, Matthew Stevens endorsed domestic gas reservation after years of resistance. Now, after a friendly chat with one of the monopolists he’s been straightened out with the argument that there’s somehow no connection between prices and market balance.

How did this article even get published? It is factually wrong, relies entirely on biased sources, has no counterpoints and its framing of the economics is transparently perverse.

Even Gotti is better today:

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The looming crisis is much worse than I expected. Three state governments, Victoria NSW and South Australia, have vandalised our total energy system. The Premiers of each state clearly had no idea what they were doing and did not sit down with top engineers outside the government advisers to work out the best way to achieve their objectives — whether that be an increase in renewables or gas restrictions.

Not until Josh Frydenberg came to be energy minister did the Commonwealth start to understand the extent of the disaster. Prime Minister Turnbull and Frydenberg have taken the first step in overcoming the problem with the Snowy pump hydro scheme, but it is only a small step and will take two or three years to be effective.

…Santos and Origin consortiums in Gladstone “shorted” gas by signing contracts to export gas they did not have. Shell has enough gas but it was expected to have Bowen Basin gas available to cover the Origin and Santos “shorts”. The Santos and Origins consortiums covered their shorts by draining gas from Bass Strait and the Cooper, offering much higher prices. There is available gas in Victoria and NSW but NSW former Premier Mike Baird and Victorian Premier Daniel Andrews have stopped development.

Solution: People who short shares or commodities usually are aware of the dangers of such practices. Malcolm Turnbull and Josh Frydenberg need to teach the Origin and Santos consortiums the danger of such practices. While Shell had gas it must have been aware of the shorting.

As I understand it some 5 per cent of the Gladstone exports needs to be diverted to the local market. That can be organised in a voluntary basis, or more likely the Commonwealth needs to use emergency powers to divert 5 per cent of Gladstone to local use. Normally I would oppose such an action but we face an emergency, albeit partly brought on by Messrs Baird and Andrews.

Frydenberg? A week before Utopia gave the PM his Snowy hydro idea, Frydenberg was promoting coal. He had no idea the crisis was coming. However, other than being a political hack, Gotti has not been too bad on this question. In 2012 he followed my lead quicker than most:

I start my blame for the project price escalation not with the unions or the government – where most blame is usually targeted – but rather with the chief executive officers of the companies involved in the gas, iron ore and coal expansions….I believe our CEOs made three fundamental errors, and as each CEO announces a cost over run they should be held accountable. The CEO mistakes vary from project to project but they fall into three or four baskets:

– Mistake one was to try to bring their resources into production at a time when there were too many projects being developed and there was no where near enough labour. Inevitably that would cause chaos and vastly escalate the costs so making the projects very vulnerable to any price down turn. How the unions responded was totally predictable given the CEO error.

– CEO mistake two was to enter too many projects in haste and not plan them properly. This particularly applies to some of the Queensland gas projects and possibly Gorgon.

– CEO mistake three was to either agree to or allow subcontractors to agree to hopeless labour agreements that gave unions power over the projects. That not only hit the projects but the desire for union management control spread around the country and the unions now want this to be a permanent part of the Australian construction industry fabric. If successful, this means the nation will suffer inflated construction costs for decades as a result of the mining CEOs’ foolishness.

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And he’s right about the solution. Ban third party exports and there’s your lousy 5% of volumes to ease local prices, which will fall to 3.6% by 2018.

3.6% of export volumes FFS!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.