The energy crisis is simply an issue of sovereignty

I’ve lost count of how many folks that have complained about various solutions to the east coast gas crisis triggering the dreaded “sovereign risk” for the companies involved. To them I say just one thing today, any nation that cannot rely upon the production of energy is not sovereign at all. Energy is essential to security, to health, to civil order, to industry and standards of living. Energy is not some random market. It is the lifeblood of every modern nation.

When a nation’s energy supply is threatened, it reacts decisively in the national interest. It doesn’t pussy-foot around worrying about who it might offend. “Sovereign risk” is complete bullshit when energy supply is threatened. Countries have invaded others for less.

We all know that Do-nothing Malcolm is doomed. Most folks blame his party’s loony Right. I am of the view that the fault lies with Do-nothing himself. He has repeatedly demonstrated an impeccable ability to present the perfect mask for any situation but is equally incapable of decisive action to follow through. Rather he dithers and divides, betrays and destroys, as he sits at the centre of the drama.

But there is a way out now for Do-nothing. The east coast gas crisis demands decisive action and, given he is going to lose the next election whatever he does, there is little point spending his last few cents of political capital on manipulating those around him to stay atop the greasy pole. He should spend it instead on fixing something for his legacy. He should crash or crash through on a bold fix for the energy crisis.

Yesterday’s move to summon gas CEOs was a good one. It was a beginning. But these CEOs will give him no joy. They will all say “it is the market” at work and that their hands are tied. They may offer a few tidbit half-solutions that are more rent-seeking dressed up as public interest policy. The bullshit solutions are already flowing at the AFR:

The paradox is that while Queensland’s LNG producers are sucking up vast quantities of east coast gas to ship offshore as LNG, the prices they are getting in Asia are soft and heading south while several of the buyers don’t want the gas they have contracted to buy and are reselling it on the spot market at a loss. Industrial users on the east coast are meanwhile going short.

EnergyQuest principal Graeme Bethune suggests a sort of arrangement that would see retailer AGL Energy, for example, cut a deal with a Queensland LNG customer – say Sinopec – that would result in a cargo’s worth of LNG redirected instead as gas to the Wallumbilla hub in Queensland.

…Nor would the gas be cheap, with industry sources estimating that based on current oil prices of around $US53 a barrel, the gas would have to be priced at about $9/GJ at Wallumbilla. Also, government is expected to have to facilitate any such deal.

…An equally interesting suggestion is a floating LNG import terminal, which Bethune says could be set up more swiftly than the 2021 start-up envisaged under AGL’s $300 million project proposal currently undergoing a feasibility study.

If Sinopec is currently reselling its Aussie gas on the Asian spot market – which is not oil-linked – then it’s getting USD6Gj. Why would Aussies pay the oil-linkage price which is currently $7.80Gj (switched back to AUD is above $10Gj?) Once delivered to NSW and Victoria the price would be $12Gj. This is not a solution, it is another gouge.

Likewise with AGL. It sold its gas reserves to GLNG 18 months ago, no doubt because the offer was too good to refuse. Now it’s back for a second bite at the cherry and wants to import from the US at $11-12Gj delivered. I mean, how many goddamn leaches are attached to the national arteries here?

So, when the CEOs arrive, Do-nothing Malcolm, by all means be polite and put on one of those great masks you have. Faithfully record their solutions and charm them in that way that you do best. Then, when they’re gone, take that piece of paper and wipe your arse with it as you turn your prolific ability to disappoint upon them instead of the public. Divide and conquer them.

What is needed is quite clear and easily communicated to the community. It will piss off your crazed rump and it will drive some of our idiot media mad. But it can be summarised in two short words: “market failure”. The government is justified in taking decisive and drastic action because the east coast gas market has failed and that is a national security crisis as power is jeopardised for all essential services.

This approach has one great advantage. It is the truth. And that makes it very difficult to defeat.

Once the declaration of market failure is made, act. Immediately bring new legislation that bans the export of third party gas from the east coast, as well domestic reservation for all future projects plus “use it or lose it” rules aimed squarely (though not directly) at Shell’s Arrow reserve.

That will crash the Santos share price. Too bad. Do not offer it compensation. Why would you when others don’t get it if:

  • buyers of an inflated house and land package on the fringe that finds its value reduced as more adjacent land is zoned residential by the government;
  • buyers of off-the-plan apartments whose value is reduced by newly approved developments nearby;
  • owners of businesses that go out of business due to international competition via a ‘free trade agreement’ signed by the government; or
  • owners of businesses that suddenly face increased competition from market deregulation (e.g. airlines, pharmacies, etc)

As Credit Suisse points out:

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.

Quite right. This will solve the immediate crisis in one swift stroke as it releases 160Pj of gas locally.

Make the deadlines on “use it or lose it” tight for Shell. It should have to shit or get off the pot within twelve months even as east coast prices slump. If it develops, terrific. If it sells make it abundantly clear to the buyer that it must be developed immediately. That solves the problem long term.

These three rule changes, which are already in operation in WA, will resolve the problem for long enough that decarbonisation can continue and the market be reformed to fit rising power sources. Labor and the senate will have to back it.

Do it Do-nothing. You have nothing to lose. And who knows, if you actually lead, instead of spending your energy retaining your lead, the public may warm to you a little.

More to the point, if you do not do it then…well…what’s the point of “Australia” at all?

Comments

  1. Great article. Santos who cares? But I’m a “reusa property guy I need to be protected” & I know I will be in next budget. So why shouldn’t santos? As others have alluded to everything is a ppp now…public private piss up! I want my money & I want yours?. Turnbots the biggest soggy lettuce we’ve ever had, but given BS is likely our next PM what’s the difference? How is anything going to be better? They play in the same back pockets, one right one left, still up the arse!

  2. Yeah do nothing will do what he does best.. nothing.

    At least a broken clock is correct twice per day. ?

  3. “I’ve lost count of how many folks that have complained about various solutions to the east coast gas crisis triggering the dreaded “sovereign risk” for the companies involved. To them I say just one thing today, any nation that cannot rely upon the production of energy is not sovereign at all. Energy is essential to security, to health, to civil order, to industry and standards of living. Energy is not some random market. It is the lifeblood of every modern nation.”

    Best opening paragraph I’ve read for a while.

    Such blindingly obvious common sense that the policy elite can’t see it.

    • Add to that it is the Nations resource. Extraction is our privilage to grant or withdraw.

      • Constitutional considerations! Under the Australian Constitution mineral rights are vested to the States. Hence up and down the Eastern Seaboard you have States a diverse politicised approach to energy security – three States currently refusing access to new supply ain’t gonna help matters.

  4. The solution is simple and no different to the one required for iron ore.

    https://pfh007.com/2015/05/29/iron-ore-a-national-iron-ore-export-volume-auction-is-the-best-solution/#comment-211

    A National Export Volume Auction – NEVA.

    Set the total volumes nationally of LPG that may be exported and then let industry bid for tradeable licences to part of that volume.

    If they dont have an export licence they will be limited to the domestic market.

    The only real difference between an Iron Ore NEVA and one for LPG is that the objective for the Iron Ore NEVA is to prevent international miners competing with each other with OUR ores rather simply competing against foreign competition.

    Of course we still need to compete with alternate foreign producers like Brazil but it is NOT in Australia’s interest to allow foreign mining companies operating in Australia to drive prices down by competing between themselves in international markets.

    With LPG the issue is even simpler – work out how much gas we want available for domestic purposes. Subtract that from a conservative estimate of production capacity – i.e. one that does not require every bit of farmland to be screwed with fracking – and the remainder can be the national export volume for which licenses will be available for purchase via public auction.

    No sovereign risk involved at all.

    A wonderful free market solution! What better selling point can there be for our ideologically obsessed political class!

    If someone tries to suggest that setting a national export volume and auctioning off rights to it is beyond the competence of the national government they are barking mad.

    Sovereign risk is just a cloud of bull dust spun by international companies who fear the ‘natives’ are on to their scams.

  5. tripsterMEMBER

    There will never be a reservation policy under the current governments. It is desperately needed now but the QLD, NSW and Federal governments (QLD really being the critical player for any East Coast reservation policy) are too beholden to special interests to do anything meaningful.

    The WA reservation policy, as brilliant as it is, hails back to an era when politicians governed in the best interests of the nation as a whole. Those days are long behind us.

    • WA DomGas does work. Wheatstone Project is completing its DomGas facility as we speak. Horse has bolted for existing projects on the East Coast but remains open for new projects should States decide in the interests of energy security to lift moratoria on access to new supply.

  6. Tomorrow Bill Shorten declares “market failure” Malcolm rejects the call, another day of politics

  7. This “crisis” is about 80% fluff. Just a reason to play out another politician ideological debate.

    Whatever “solution” that comes up here is going to be very expensive relative to the benefits it brings.

  8. Erwin Schrödinger

    Most folks blame his party’s loony Right. I am of the view that the fault lies with Do-nothing himself.

    Glad you could finally join us. Now, can we also discuss China, Fast Trains, CBD employment, NBN, scrapping $100 notes and currency and all the other intellectual disasters still to be addressed.

  9. Effectively States have regulatory control over onshore gas reserves. Currently NSW Victoria and Tasmania have moratoria that blocks development of new supply.

    There exists challenges to the development of unconventional and tight gas: forward thinkers like Peter Thiel on same “What’s very striking is that on some level I think fracking represents a bigger economic form of progress for our society as a whole than the innovation in Silicon Valley.”

    Green tape, red tape, State regulations, Commonwealth regulations, over commitment to provision of renewables led by outfits like Beyond Zero Emissions lobbying hard persuading State bureaucrats who were lured by paleo banana and pear muffins that Australia could and would be “zero emissions” by 2020 leading to head in the sand appreciation of energy realities.

    Legal contractual agreements between States and Commonwealth with Australian and global energy players, legal contractual agreements for LNG supply to global customers, legal contractual agreements for supply to domestic customers. Investment in all underpinned by stable regulatory environment which respects legal obligations.

    Again: The States have primary responsibility for how their onshore/unconventional gas resources are regulated and developed. Paramount in this complex maze of responsibilities is the need for States to stop playing politics, retreat from excess green agenda and start facilitating supply.

    • The Commonwealth Government has the power over exports and if it chooses to introduce export licenses by volume it has every right to do so.

      How those licenses are allocated is a matter for the government but an auction would seem to be the fairest approach.

      No license No Export

      Very easy for all to comprehend and highly effective.

      Cuts through your thickets of red tape like a hot knife through butter. 🙂

    • Whats the price of Surat CSG before it hits the LNG plants? No amount of unconventional development is going to bring us back to $4.

      I also think you’re smarter than your “greens are to blame for all of this” argument.

      And nobody listens to BZE.

    • Like that fool Macfarlane on the Project last night, you are misreading public opinion on a massive scale.

      The public are strongly opposed to fracking. Last time I looked the public employed the politicians not the other way around. If Australia did not have access to huge offshore gas reserves, there might be a decision that needed to be made.

      So the clear course of action is to reclaim some of the sovereign property of Australia on behalf of its people.

    • http://www.abc.net.au/news/2014-03-18/grudnoff-the-case-for-fracking-regulation/5328678

      Using terms like “removing green tape”, with its obvious comparisons with red tape, is designed to make it as popular as kittens and Christmas. Who could possibly be against getting rid of pointless bureaucracy? The problem with ‘green tape’ and CSG, however, is that the public wants more regulation in this area, not less.

      For my new paper Fracking The Future, The Australia Institute conducted two surveys that looked at public opinion on regulation and CSG. The survey found that one in two respondents wanted more regulation of CSG, with only 7 per cent wanting less.

      Further results showed that people still have serious concerns about the health and environmental impacts of CSG, and the idea that the government should step back and allow the industry free rein does not make sense to most people.

      Coal seam gas companies have a troubling dichotomy. On the one hand it’s about as popular as root canal, but on the other hand it’s extremely profitable right now. How do you convince a highly sceptical public to embrace a form of energy that is potentially hazardous? You can’t tell them it’s because you want to make bigger profits and you can’t tell them it’s because you’ve signed contracts to deliver huge amounts of gas overseas – gas you don’t yet have.

      Part of the solution seems to be to convince us that government needs to be less involved. The Federal Government has been very receptive to this idea and has recently announced that it is stepping back from the approval process and handing it over to state governments. This, they claim, will cut down on duplication and speed up the process. It will of course mean that there are also fewer checks and balances in the approval process.

      How much traction has this idea got when it comes to CSG? The same Australia Institute survey also asked people which level of government they thought should regulate CSG. An overwhelming 71 per cent thought it should be the Federal Government. This is another strong statement from the public that when it comes to CSG and ‘green tape’, they want more and they want it overseen by the Federal Government.

      Concern about the environmental effects of CSG can only have been heightened by the recent revelation that the EPA had found Santos guilty of leaking toxic water into an aquifer. The water was found to contain uranium levels 20 times the safe drinking limit. While the leak does not appear to have affected humans or livestock, it will have an effect on the local environment. Such a spill highlights the need for a strong regulatory environment and shows the potential hazards that could arise from an expansion in CSG.

  10. Triggering ‘sovereign risk’ is a good thing imo. It will cause lenders to raise rates which is exactly what the world needs.

  11. The house on the fringe is not a like for like comparison, given the government would be tearing up contracts. Like for like would be more like the government taking your house off you and offering well under market value in compensation.

    Then once the supply from existing wells declines and more capital is required, prices rise to the development cost anyway. How is any of this a proper solution? I’d love to see a proper strategy from you Hnh instead of a thought bubble which goes nowhere near fixing the situation.

  12. If anyone was worried about ‘sovereign risk’ they would not have sold our nation to foreigners in order to fund Sydney and Melbourne excess. The economy would have been straightened up 60 years ago and we would now be a VERY VERY prosperous country with vast wealth and no debt.

  13. Classic Australian “She’ll be right, the market will sort it out” approach. Strategy (geo-political or otherwise) just isn’t what we seem to be capable of!

  14. Awesome article. Absolutely spot on.
    I mean who owns the gas? The people which is the commonwealth of people not the government and not the LNG exporters. If the government asked the people what should we do with our gas? Nationalise it and risk upsetting some oil and gas companies? The payoff might be a return to cheaper gas and more manufacturing jobs, what would the punters vote to do? Dump these pricks.
    I just love what’s going on right now. It is the perfect example of the corrupt intersection of Australian business and politics. None of it is working for Australians.
    The rate ant which the political and business classes try and spin this story some other way is a lesson in subterfuge