The war between Big Gas and Australia is heating up fast but it’s not at all clear which side the Do-nothing Government is on. Manufacturers are desperate, via the AFR:
Faced with a doubling in natural gas prices this year and a power bill that is also spiralling higher, David Karney is worried not just for the future of his metals treatment business but that entire parts of the manufacturing sector face wipe-out.
Mr Karney, general manager of Ace Metal Treatment Services south-east of Melbourne, said gas and electricity price increases for the energy-intensive sector had to be passed on to customers, who could instead turn to imported products.
The latest prices being offered by Ace’s gas supplier, AGL Energy, of around $20 a gigajoule, three times higher than it was paying last year, would cause Ace to “shut the doors”, he said. Power costs have meanwhile surged 20-30 per cent after Ace was slugged by a “summer demand incentive charge” by its network provider.
…Ace’s larger rival, Heat Treatment Australia, has seen its energy costs nearly double over three years and is fearing a further hike in gas when it renews its gas contract in 12 months’ time, said Norm Tucker at Heat’s Brisbane site.
“That’s going to be bad,” he said. “We did have some notice that this was coming, a year out my guys said, energy is skyrocketing because they are selling it all offshore rather than keeping it for us.”
It’s going to get worse:
Eastern Australian manufacturers will be left short of gas this winter unless the new $80 billion Queensland LNG industry diverts gas away from export to sell it to local users, AGL Energy has declared.
The shock advice from one of the country’s biggest gas retailers shows that the shortages that some have long feared in east coast supplies are much more imminent than are being assumed by government and some regulators.
It also explains why some industrial customers are getting demands for gas prices around triple last year’s levels after they were too slow to reserve some of the limited contract supplies available.
“I don’t believe there is adequate supply of gas to the market unless those LNG trains can push gas south rather than export,” AGL head of wholesale markets Richard Wrightson told The Australian Financial Review.
“If there’s an exceptionally mild winter then we could scrape through, but if it’s a cold winter, no. We are actually out of contracted gas, we don’t have any left in our portfolio.”
It’s derailing decarbonisation and skyrocketing electricity prices:
Senior executives from AGL Energy have given evidence that the main issue causing problems with reliable energy supply in South Australia is “dysfunction” in the gas market – not too many windfarms making the grid unreliable.
Executives from AGL told a Senate inquiry in Melbourne on Tuesday they would like to build a new gas-fired power station in South Australia to increase base load capacity in the state, but gas supply was chronically unreliable in the eastern states.
Richard Wrightson, AGL’s general manager of wholesale markets, told Tuesday’s hearing the problem was so dire the company was contemplating building its own LNG hub in Queensland to help secure reliable supply downstream.
“Dysfunction in the gas market is causing most of the systemic problems we are seeing in South Australia,” Wrightson told the Senate select committee into resilience of electricity infrastructure in a warming world. “We would love to be able to contract more in that marketplace but the main restriction on being able to do that is access to flexible gas contracts that we are able to trade in an out of.”
The Turnbull government has argued that ambitious state-based renewable energy targets are driving too large a share of low-emissions technologies, such as wind power, into the grid, and that is a significant factor behind the unreliable conditions in South Australia.
But a number of witnesses appearing before the Senate committee on Tuesday said the main problem afflicting Australia’s energy grid was not proliferating renewables, but a lack of a clear policy direction from Canberra. The policy vacuum had created a damaging investment strike in new assets at a time when old coal-fired power generators had reached their natural age of retirement.
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But the Do-nothing Government is focused entirely elsewhere, via The Australian:
An explosive budget row is brewing between the oil and gas industry and the Turnbull government as a Treasury-sponsored review considers radical proposals, including imposing a “minimum resource tax” to capture revenue from the emerging $200 billion LNG and shale gas industries.
The gas industry has taken a stance against any changes to the Petroleum Resource Rent Tax, warning that altering the rules, after companies have poured billions of dollars into building what will soon become the world’s largest LNG export industry, would jeopardise future investment.
Scott Morrison commissioned the former head of Treasury’s revenue group, Mike Callaghan, to review the PRRT late last year, expressing concern that revenue raised by the tax had halved since 2012 and seeking options in time to be incorporated in this year’s budget. The review does not report to the Treasurer until April 20, however industry sources say the idea of a minimum rate of resource tax is being canvassed, as are cuts to the indexation of tax deductions for investment and exploration.
Where the PRRT is intended to tax profits once a minimum rate of return has been achieved, a minimum rate of tax would be based on output and would resemble a royalty.
There is no doubt that the uplift rate in the PRRT is absurd and should be cut. But, right now, if taxes are hiked on the sector what do you think is going to happen to prices? There is no competitive pressure in the market at all so they’ll pass the price hike on to customers. And because there’s no pricing power in export markets it will all be local inflation.
The Do-nothing Government has, as usual, got itself entirely in the wrong position addressing the wrong issue at the wrong time. The PRRT should be fixed but not until the gas market is fixed. Indeed by not addressing the market failure first, all the Do-nothing Government is doing is muscling in on the gouge of its own economy for short term Budget gain. Hiking taxes at this point would only make economic sense if it were a Piguvian strategy to rebate large scale gas users.
The incoherence is obvious, again from the AFR:
Last week Credit Suisse analysts suggested that restricting exports of third-party gas by the LNG ventures could be the best way to tackle the worsening crisis.
But Federal Resources Minister Matt Canavan has rejected the suggestion, saying that changing the rules “mid-game” would put future investment at risk.
What, and changing the PRRT isn’t? As Credit Suisse said last week, the gas cartel never told us they’d need third party gas. It is they that have changed the rules not us:
■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5% thirdparty gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other thirdparty gas would get extremely close to balancing the market. Clearly these things are far better done by mutual agreement from all parties, rather than a political mandate.
■ GLNG loses but can all be compensated? We estimate that, at a US$65/bbl oil price, GLNG as an entity would lose US$447m p.a. of FCF if they could no longer toll thirdparty volumes. Interestingly, if Kogas and Petronas could recontract their offtake on a slope of 12x (doable in the current LNG market) then their losses as an equity partner are all offset (not equally between the two albeit). Santos would see ~50% of its US$134mn net GLNG loss offset if the Horizon contract could move up to a slope of 8x from 6x. The clear loser would be Total. We wonder whether cheap government debt, a la NAIF, could be provided at the (new, lower volume) project level or even to take/fund an equity stake in it? In reality all parties (domestic buyers included) have some culpability in the situation, so a sharing of pain does not seem unreasonable 02 March 2017 Australia and NZ Market daily 31
■ If these contracts were then all diverted domestically, at US$65/bbl oil, they should deliver gas at Wallumbilla at $7.50 gj. This is highly competitive gas in the current environment we think and should certainly not be considered unreasonable by domestic buyers
■ Importing LNG: AGL has now very publically disclosed its plans to look at using floating regas to import LNG into Australia. Whilst many believe this is just a negotiating tactic with buyers, we are less convinced. That said, with AGL rightly unlikely to want to take price risk, this might be more about targeting seasonal markets than providing 10-year supply agreements with industrial buyers. Even if one contracted off Henry Hub and used a long-run price of US$3/mmbtu, it would be landing in Australia at >A$10/GJ. Post transportation costs this could again be unmanageable for many domestic buyers of flat, term contracts. Importing LNG could be key in targeting seasonal (winter) spikes though
■ Reducing red tape, lifting moratoriums and stricter use it or lose it policies: Policy has an enormous role to play, partially short term, but in particular long term. Projects need to be made cheaper and quicker to bring to market and companies need to be forced not to sit on assets
■ The ultimate aim, from a national perspective, has to be to get the domestic market in surplus again. As witnessed in the US, the multiplier effect of having cheaper, relatively stable and plentiful gas supply has a material multiplier effect on the economy. Clearly producers would rather a tight, even undersupplied market, but with the right frame work in place (which it clearly isn’t at the moment) a more equitable and profitable industry could exist for all parties. Even with a sledge hammer, breaking the camel’s back appears the hardest thing at this stage
More here. The Credit Suisse approach is excellent. The longer term solution is to force Shell to divest Arrow and get it developed for domestic use only.
If not, the future is obvious. Carbon policy will be butchered as we build implicitly stranded coal-powered assets with tax-payer’s money while private renewable energy that is desperate to invest won’t; manufacturing will exit the country; households will see big further increases in utility costs and, eventually, balance will return to the gas and power market via huge demand destruction.
For any economy this would self-destructive. For one trying to rebalance away from resources it’s madness.
