It’s only been coming for six years but today the gas crisis finally arrived and every man and his dog is on the hustings, via The Australian:
Energy Minister Josh Frydenberg has urged the states to consider Queensland’s “creative” solution to provide more gas amid looming power shortages, suggesting new discoveries and exploration should be quarantined for domestic use only.
He has also pleaded with the state governments to “lift their moratoriums” on gas and get more “out of the ground” as the nation’s energy market operator delivers its annual gas market statement, which has dramatically cut its domestic production forecasts.
…Veterans’ Affairs Minister Dan Tehan said Australia needed a national approach to correct rising electricity prices and boost energy supply.
Veterans Affairs? Reservation is the first right step but only that. At the AFR, Labor is also offering half solutions:
Federal Labor has accused the Turnbull government of being asleep at the wheel while the gas supply crisis developed and has again urged the adoption of its policy to impose a domestic gas quota on large LNG projects.
…Shadow treasurer Chris Bowen said the government was coming late to the issue and should not have mocked Labor’s proposal which was announced in May last year and taken to the federal election.
…”Every time a company wanted to create a new gas project an independent board, appointed by the Treasurer, would assess what impact it might have on the national interest,” he said.
That’s a start but it will not solve the problem. It must be accompanied by a “use it or lose it” rule to force Shell to develop or sell Arrow for long term relief.
And, shorter term, as Credit Suisse says, ban third party exports:
■ 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%
■ 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
The words these idiot pollies must mutter and can’t seem to is “market failure”. Only heavy-handed government intervention will fix it.
Worrying about sovereign risk at this point is like a drowning man being choosy about which boat rescues him.
