Via the ABC:
In the end bloodshed was avoided.
The Federal Government put its large calibre export control weapon back in the holster.
The gas producers agreed to hand over sufficient supplies to cover a 54-petajoule shortfall regulators identified in the eastern state gas market next year and there were huge sighs of relief all around.
The Prime Minister had a big win without turning Australia into a command economy and back to the dim, dark days of state-controlled industry.
The gas producers can deliver on the deal without too much pain.
The regulators at the ACCC and AEMO can point to their number crunching as being pivotal to forcing the deal.
And the consumers, well they will enjoy gas prices tumbling back to where they came from and that flowing through to cheaper electricity — err, probably not.
Forecasting prices is fraught at the best of time, but the best guess from analysts after the supply deal is that wholesale gas prices will bump along in a band of $7-to-$10 per gigajoule (GJ).
In other words, still around a 100 per cent mark-up on two years ago.
“[There is] no change in our view for medium-term gas prices, the days of cheap gas are over,” UBS energy analyst Nik Burns wrote in a note to clients after the deal was brokered.
The positive angle for consumers was the guarantee of supply was likely to at least curtail the more savage price spikes, in the short term at least.
“Heightened scrutiny and increased transparency in gas markets will result in less gas being offered for materially above $10/GJ in our view,” Mr Burns said.
The view across the road at Credit Suisse was similar.
“We remain comfortable that wholesale prices will remain in the A$7-10/GJ range,” Credit Suisse analysts wrote.
Undoubtedly, the big industrial consumers played a shrewd game in boycotting deals with the gas suppliers in the expectation the Government would bring in some sort of price control.
In the aftermath of the deal, they are unlikely to be offered anything like the $16/GJ contracts that were being hawked around six-to-twelve months ago.
The ACCC point of view is there is an “appropriate benchmark price” of $5.87/GJ in Queensland and $8.17/GJ in Melbourne based on current Asian LNG spot prices.
The relevance of this benchmarking is open to debate given all the big consumers crave the stability of fixed contract prices rather than the uncertainty of spot global markets.
As well, as the ACCC itself noted, the benchmark prices they came up with are well below recent well-head costs for the producers. Enforcing them, would be forcing the producers to lose money.
Macquarie’s energy team says the ACCC’s idea of benchmarking prices this way is counter-productive any way it is viewed.
“We see the comments of ‘benchmark pricing’ at the sub-economic price of A$5.90/GJ as both providing false hope to commercial and industrial users and deterring what is clearly needed to help domestic users, further investment in gas development.”
Macquarie argues around $8/GJ would be a better compromise. It could still cause some pain, and potentially closures, among industrial users but it is a price that would allow most businesses to remain profitable and has been sufficient to develop new resources in Cooper Basin.
“If commercial and industrial [C&I] users are genuinely concerned about volume, this level of pricing could allow for the long-term contracts that C&I users ostensibly crave, and give upstream developers certainty around the return for fields not planned on being developed in the near-term.”
While any short-term gap in the eastern states’ market appears to have been plugged, the big problem remains much faster than expected decline in gas supplies in southern Australia, particularly Victoria.
In fact, perhaps the most striking news in AEMO and ACCC reports was the sudden decline in Bass Strait production from 330PJ this year to 244PJ in 2018.
While some analysts doubt the degree of the fall given the joint venture partners BHP and Exxon have just spent a $6 billion on upgrading the Kipper project, it does come from the industry itself.
It also fits in with data released by Origin Energy in its sale of assets to Beach Energy this week which showed a faster expected decline in Otway Basin production.
The other part of the gap equation is higher demand, principally from industrial users, as well as from gas-powered-generation.
The increased demand data comes from AEMO’s survey of commercial users.
Oddly enough, the increased appetite for gas comes at a time of record prices. It also bucks the trend of five years of declining demand in the sector.
As Macquarie pointed out, it was in the commercial users interests to “game” the survey to make the issue appear even more severe to force tougher action from the Government.
Whatever the truth, AEMO has gone from reporting no domestic gas short fall in June to September’s reading of a 54PJ shortfall next year and 48PJ in 2019.
Given the steady phasing out of coal from the power generation and the increasing importance of gas in setting marginal power prices, will the supply deal pull power prices back down?
“Not likely,” ITK principal David Leitch said.
“The power price comes down to more generation capacity and this deal doesn’t impact that,” he said
But there is perhaps a bigger problem looming and that is the domestic gas price is still linked to global energy markets.
Oil prices have been edging up recently and are now back near two-year highs — not only because inventories are falling, but also demand for energy is picking up.
China is leading that demand. It is also desperately seeking to wean itself off the choking impact of burning coal for power.
Currently around 60 per cent of Chinese power comes from coal and 4 per cent from LNG.
Those figures only need to change a few points to see the Asian LNG price the ACCC used in its benchmarking exercise take off again.
And if that happens, the PM will probably have to leave his Australian Domestic Gas Security Mechanism in its holster.
It would only be shooting blanks.
That’s about right so long as you except the status quo. Well-head gas costs are not $5Gj and above once the sunk costs are taken out of the mix. If that was the case then why would the cartel be shipping it offshore at $5Gj spot prices when shipping and liquifaction is another $2Gj?
One could absolutely force the cartel to the ACCC benchmarks and much lower and the cartel would still make money today given the sunk costs of building the infrastructure are already written off.
As well, why are we simply accepting that Australian gas must now have oil-linked prices? It never did before. The US doesn’t have such. That’s bloody insane.
Basically it’s because the cartel continues to set the terms of this debate rather than the sovereign doing so.
The magnitude of this crisis remains far larger than any solution yet contemplated for it:
- we need gas reservation that forces cheap gas back into the local market with price controls if necessary;
- we need to expropriate gas resources, develop them ourselves with a national champion, and sell them cheaply into the local market to benchmark the cartel.
Either that, or nationalise one of them.
Otherwise every government from here to Kingdom Come is going to be fighting a losing battle on energy.
