Manufacturing shuts as gas rises “$2-3 every couple of months”

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From the AFR:

Victoria’s Ace Metal Treatment Services has found a just-bearable fix to its gas supply problems – but it’s come at a hefty price.

The metals processor has had to accept an offer of around $15 a gigajoule from Origin Energy for gas starting in the peak demand season, on July 1, or close its doors. Last year it was paying $6.80, but its only other offer – from its existing supplier AGL Energy – was at a completely unaffordable level of around $20.

…”Even securing some sort of commitment from the primary producers to ensure gas is available for emergency needs is not going to curtail the pricing,” said David Karney, general manager of Ace.

“All we’ve heard are vague assurances that gas will be available for electricity shortages,” said Garbis Simonian, managing director of NSW aluminium scrap processor Weston Aluminium.

“There is no commitment to get prices down to something that’s reasonable even to the level of global prices that our competitors are paying overseas.”

Mr Simonian puts much of the blame on Santos’s $US18.5 billion GLNG venture which is sucking up gas from the southern states to help fill its export plant, rather than relying on gas from its own coal seam gas acreage in Queensland.

He points to the environmental impact statement for the GLNG venture in which it said it “is not diverting gas from local markets to export markets” and “has no direct implications for domestic gas prices”.

…In the meantime, Mr Karney is extremely worried that prices are still rising. He has heard that Origin’s latest offers for new supplies through this winter have climbed to the $17-$18 a gigajoule range just in the last weeks, beyond what Ace can afford.

“The pricing continues to escalate two or three dollars a gigajoule every couple of months,” he said.

Meanwhile, the Kingslayer is barking up the wrong tree:

Federal Labor is backing industry calls for a gas swap to help address Australia’s domestic energy crisis, ahead of industry leaders attending their latest meeting with Malcolm Turnbull and key ministers tomorrow.

Bill Shorten says it is “literally crazy” that businesses in Japan and Korea can buy Australian gas more cheaply than Australian companies can.

…“We call upon the Turnbull government to bring these companies together, but not leave it to them to fix,” the Opposition Leader said.

“Malcolm Turnbull’s got one job tomorrow: It’s to bang heads and get all the businesses who are producing the gas to prioritise Australian jobs and Australian business before they export gas we need here overseas.”

Mr Shorten said companies like polyethylene manufacturer Qenos, which he visited today, were struggling in the face of rising gas prices.

“The company who I stand in front of today, they employ the best part of 1,000 people, direct and permanent contractors, and the multiplier effect beyond that of the jobs they generate in Sydney and Melbourne is broader than the thousand-plus direct job,” he said.

“The issue here is that their own gas prices, realistically, have gone up 50%.

“The reason why gas prices are rising in Australia is because gas which should be diverted to Australian use is going overseas.”

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Forget gas swaps. They’re a terrible idea, exposing manufacturing to huge forex risk given local contracts will then be linked to the oil price.

GLNG must take responsibility for stuffing up its investment and trashing the eastern gas market in the process. As Credit Suisse argues:

■ 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.

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Ban third party exports plus install “use it or lose it laws” and domestic reservation.

If not, the market will adjust via demand destruction and then gas loses anyway. It’s an insane short term arbitrage by gas cartel management over their shareholders and the nation.

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.