Time to bully Santos not AGL

The MB line on the energy crisis is now official.  Via The Australian through gritted teeth:

The use of high-cost gas for electricity generation has almost doubled in two years, producing a perfect storm for household bills of record gas prices and a growing reliance on it to fill the energy gaps as coal plants come off line.

The Australian understands that modelling provided to the Turnbull government has warned that when gas is used, the wholesale price of electricity spikes from $70 a megawatt to upwards of $120 a megawatt, a cost that is ultimately passed on to consumers.

At the same time, the reliance on gas, according to the data, has jumped from 13 per cent in 2015 to 23 per cent this year, contributing in large part to the recent increase in retail power bills of 20 per cent.

The gas shock has effectively wiped any gains for consumers, after energy bills levelled off in 2014 and started to fall in 2015 when state-imposed network costs began to ease and the carbon tax was removed.

Updated Australian Bureau of Statistics figures supplied to The Australian show electricity prices per household rising on average by 10 per cent every year between 2009 and 2013. They then fell by 5 per cent from 2014 to 2015.

In a detailed briefing to the Coalition partyroom last week, Energy Minister Josh Frydenberg warned that the wholesale electricity pricing crisis of the past two years was being largely set by gas, which was relied on more often and at higher prices than coal.

Australian Energy Market Operator modelling shows that for every $1 rise in the price of a gigajoule of gas, there was a corresponding $10 a megawatt rise in the wholesale electricity price.

And Labor is onto it at the AFR:

Labor leader Bill Shorten will ramp up his campaign for the greater use of gas to generate baseload electricity as he counters the Turnbull government’s preference to prolong the life of old coal-fired power stations.

Mr Shorten, who has already demanded the government use its new powers to secure more gas for domestic use, will call on Wednesday for additional measures to increase the supply and lower the price of the fuel for industrial users.

He said while pulling the trigger to force exporters to free more gas for domestic use would increase supply and reduce price, more was needed to help manufacturers secure affordable long-term contracts.

Mr Shorten will suggest that gas market transparency measures as recommended by the Australian Energy Market Operator be urgently fast-tracked.

…Just over a year ago, the Turnbull government said gas would be the prime source of baseload power as the nation transitioned towards renewable energy. But earlier this year it switched, and re-embraced coal.

“This is a crisis happening right now. Australian manufacturers need action on it right now, not in five years’ time,” [Shorten] said.

“The energy crisis we’re facing right now is bigger than one power plant, it’s a national problem that demands a national solution.

“We are in the midst of an energy crisis and it’s mind-boggling the Turnbull Government is refusing to pull the gas export control trigger. His own regulations say this should’ve been done by 1 September.”

The ADGSM gas reservation mechanism is not tough enough. It has to force Santos (and potentially other Curtis Island producers) to push more gas into the local “market”. As well, for the long term it must be supplemented with something else also loosen the grip that the cartel has upon reserves. New “use it or lose it” laws would help.

But even that is not enough. There are reserves that are not being developed owing to the gouge and public resistance. Also from the AFR today:

After nine months living in Santos asset Siberia, the $3.6 billion Narrabri coal seam gas project is set to recover its place on the frontline of the South Australian driller’s core project list.

Santos chief executive Kevin Gallagher has told The Australian Financial Review that he wants to add Narrabri to his core five projects “before Christmas” as his driller works to sate government concerns over the short and medium-term outlook for domestic gas supply.

Santos spent $1 billion acquiring the subsequently controversial Narrabri project in 2011. It was to be the third corner of new gas production that would make long-term financial and strategic sense of the $US18.5 billion investment in liquid natural gas that Santos undertook with Petronas, Total and Kogas.

…Necessarily, Gallagher is looking beyond the short term and working at transparently generating medium to long-term solutions to the supply problem. And, as has been the case from the moment Santos acquired it, the Narrabri project looms large as the first best solution.

“Demand for the project [Narrabri] has never been as great as it is right now,” Gallagher told me, with little or no obvious hint of irony.

…Needless to say, working out how to generate an acceptable rate of return from Narrabri is one very big thing. But it is nothing like the challenge that is securing the approvals needed to make the $3 billion-plus investment in the first place.

If Gallagher had any doubts about the quality of the approval task ahead then it was made nakedly plain in the response to the environmental impact study that Santos lodged this year. Santos earned 23,000 responses to the submission, some 22,500 of them being authored by organisations or individuals who reside outside of the Gunnedah-Narrabri catchment area.

“Never in my life have I seen such a body of submission,” Gallagher said. “This is an activist-led process that wants to slow down and stop these processes. But, look at the gas and power bills that people are getting now. People need this gas. We don’t need to frack. We do not plan to frack. We need to get on and develop this thing.”

The answer here is obvious. Force acquire the Narrabri assets and develop them via an accountable public entity that assuages environmental angst about the extraction process. It will also then bring guaranteed cheap competition to the cartel from a publicly-owned gas producer that operates on mandated margins.

It’s no good letting the cartel develop the assets. It’ll do whatever it can to gouge along the way.

STO has already written down the value of Narrabri to zero. Force acquire it or, if you’re squeamish, toss ’em a few bob.

Remember that Santos lied to the Australian people when it developed Curtis Island:

As Santos worked toward approving its company-transforming Gladstone LNG project at the start of this decade, managing ­director David Knox made the sensible statement that he would approve one LNG train, capable of exporting the equivalent of half the east coast’s gas demand, rather than two because the venture did not yet have enough gas for the second.

“You’ve got to be absolutely confident when you sanction trains that you’ve got the full gas supply to meet your contractual obligations that you’ve signed out with the buyers,” Mr Knox told ­investors in August 2010 when asked why the plan was to sanction just one train first up.

“In order to do it (approve the second train) we need to have ­absolute confidence ourselves that we’ve got all the molecules in order to fill that second train.”

But in the months ahead, things changed. In January, 2011, the Peter Coates-chaired Santos board approved a $US16 billion plan to go ahead with two LNG trains from the beginning….as a result of the decision and a series of other factors, GLNG last quarter had to buy more than half the gas it exported from other parties.

…In hindsight, assumptions that gave Santos confidence it could find the gas to support two LNG trains, and which were gradually revealed to investors as the project progressed, look more like leaps of faith.

…When GLNG was approved as a two-train project, Mr Knox assuredly answered questions about gas reserves.

“We have plenty of gas,” he told investors. “We have the ­reserves we require, which is why we’ve not been participating in acquisitions in Queensland of late — we have the reserves, we’re very confident of that.”

But even then, and unbeknown to investors, Santos was planning more domestic gas purchases, from a domestic market where it had wrongly expected prices to stay low. This was revealed in August 2012, after the GLNG budget rose by $US2.5bn to $US18.5bn because, Santos said, of extra drilling and compression requirements.

“At the time of FID (final investment decision), there was a reasonable expectation during the early years that gas would be available in the market at the right price,” Mr Knox said. “However, large volume, long-term east coast gas supply and prices have tightened over the last 18 months, making third-party gas a relatively less attractive gas ­supply. This is what led to our ­announcement (that capital spending would increase).” For commercial reasons, Santos had not revealed the volumes of third-party gas needed to feed the ­second train.

Presentation slides reveal that by then, even with the $US2.5bn of extra spending, third-party purchases had grown from 140 terajoules a day, at FID, to 240 terajoules a day, or 20 per cent of east coast domestic demand.

Santos figured the gas it was taking out of east coast markets would be filled by accelerated production from the Cooper Basin (fuelled by the GLNG ­supply contract revenue), gas from the Narrabri coal-seam gas project in NSW and helped by the production of shale gas.

Unfortunately, shale drilling did not return hoped-for results, an oil price slump in late 2014 heavily restricted more Cooper Basin drilling and a community backlash, along with regulatory hurdles, stymied Narrabri.

Even before oil prices slumped, Santos revealed its call on domestic gas would be greater than flagged. In a June 2014 presentation slides to an analysts tour of the GLNG facility were told that third party gas would provide between 410 to 570 terajoules of gas per day, or the equivalent of up to half of total east coast domestic demand, even though it was planning to drill 200 to 300 domestic wells a year.

As a result, GLNG, had drilled 769 coal-seam gas wells as of November last year (and presumably connected fewer). This is about a quarter less than the 1000 it had planned to drill by the end of 2015.

Santos and GLNG stuffed up. They got caught up in the LNG bubble and lied to themselves as well as the nation. Time for them and not everyone else to wear it via a national gas champion that smashes the cartel.


  1. In what seems like a lifetime ago now, I worked in financial markets. I can remember when these gas export plans were getting laid out and the gas majors openly saying that the cheap gas would be exported to make the price rise and the higher cost wells like Shale become economic. I also asked the BHP Investor rep if they would export Bass Straight Gas he flatly denied it..though I am almost certain that is what they doing these days.. I dont remember any public debate in Vic about that either.
    If anyone digs up a broker report from 2011-2012 I am sure you will see it all laid out there in black and white.

  2. “Force acquire the Narrabri assets and develop them via an accountable public entity that assuages environmental angst about the extraction process. It will also then bring guarantee cheap competition to the cartel from a publicly-owned gas producer that operates on mandated margins.”

    THIS! Nationalize the gas industry. Spare capacity (volumes above gas reserved for domestic energy needs) can be sold at profit for the Australian people.

  3. “Force acquire the Narrabri assets and develop them via an accountable public entity that assuages environmental angst about the extraction process.”


    Why not write: “F*k it. Even thought we rant on about rentier classes, the gas industry is special. Let’s just privatise the profits and socialise the (enviro risks and) losses”

    This statement is hypocritical to the broad economic narrative on MB and I think it was poorly thought through.

    Whether it’s government or industry extracting the gas, the water table and the technology used to extract the gas don’t change. Therefore the measure of environmental risks don’t change.

    Bugger the water table and it stays buggered.

    It doesn’t matter if STO do it or the feds do it or you or I.

    If you ask a geo engineer about the risks, and I have, they’ll say: “The risks are very low”. Read: real but remote.

    Ask what they’ll do if the water table becomes contaminated with carcinogenic, toxic hydrocarbons which are not uncommon in un-conventional gas extraction, and I have, and they’ll say: “Well there’s really nothing we can do because we really don’t know what’s going on down there or how to fix or mitigate such an incident”.

    So riddle me this, why not simply restrict gas exports some more?

    The gas exporters have no SOCIAL claim over unconventional gas. As a country we should be fighting this. Lock the Gate are doing a good job but are WAAAAY too apolitical. They don’t want to upset their members. Many of which are vote-by-DNA-national-party types.

  4. Lack of knowledge shown here. If the gas in Narrabri costs $8-9/gj to develop it doesn’t matter if private or public do it. Unless you want the taxpayer to subsidise a public development so the gas can be sold cheap? Seems self defeating.

  5. ResearchtimeMEMBER

    There are some crazy ideas here… the assets are not being developed because they aren’t economic!!!

    So we have Bill Shorten proposing to land the tax payer for state run assets at a loss???

    Bloody hell, this whole argument is back to front. Get government utilities to build LNG import terminals, and lets us feast on the global gut! If local producers want to compete at price, let them.

    For heavens sake, the stupid mistakes that private companies made a decade ago, let them rot. Tax payers should not have to get involved…

    • You always talk about spending money to build import plants when policy can fix it. Do you work for BCG, Parsons, monos or which?

      • ResearchtimeMEMBER

        That is policy… import cheap gas!!!

        The policy you allude above is a socialist pipe-dream. And will never happen. Think about it – how do your force a company to develop something that is uneconomic??? Answer – you cannot! It makes great reading, but its so far of the mark, its…

        Building LNG terminals is cheap, then everyone can unload. Cheap gas for all, in under 18 months.

  6. How about a national gas royalty to paid in kind? Paid by all producers/exporters.
    Delivered to a national gas authority for public distribution.