Break the gas cartel or pay!

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Via the AFR:

…prices could be higher based on the spot Asian LNG price for the first quarter next year, translating to at least $11 a gigajoule for a large manufacturer in Victoria, and even more for a smaller one, said Mark Samter, energy analyst at Credit Suisse.

The analysts are among energy market watchers that are warning of the risks of benchmarking local east coast gas prices against volatile LNG spot prices, an idea referenced by the competition regulator in its inaugural east coast gas market report last week.

..The ACCC’s calculations assumed a spot price for Asian LNG of $US6 per million British thermal units for 2018, which translated back to a local gas price of $5.87 at the Wallumbilla gas hub in Queensland.

But Asian LNG prices for the March quarter of 2018 are currently at about $US8.50, suggesting a Wallumbilla price of about $9, Mr Samter noted. When pipeline costs to the south are included, even a major Victorian user would be paying more than $11.

Conversely, some analysts are not ruling out a slump in Asian spot prices towards $US4 next year, at which price the Queensland LNG ventures would be keeping gas not needed to meet long-term sales contracts in the ground and not making it available for sale at all.

“Too low and the LNG projects just shut in wells as it’s not economical to produce at that price,” Mr Samter said.

“It feels like we’ve put on a Band-aid [to the east coast gas market] but maybe it’s the Band-aid that is worsening the wound.”

OK, so the current price rises are seasonal as Asia restocks for winter and US hurricane effected:

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But that does not excuse the ACCC. Why are we even looking to benchmark Asian prices? We know they’re still much higher than we ought pay. US and other energy reservation regimes are sufficiently strong that its gas market operates well below export net back prices. We should be aiming at the same.

This crisis is still running far ahead of policy-makers. They need to be much more radical in their approach or it will be endless. An idiotic piece today by John Durie captures the problem:

Prime Minister Malcolm Turnbull’s grand strategy to force LNG exporters to divert supplies to the local market would in any other circumstance raise the issue of potential cartel conduct between suppliers.

Here is the Prime Minister meeting in a smoke-filled room with the top three LNG producers and effectively setting the price by which they must supply gas to the domestic market.

The ACCC is clearly not going to take any action because it is in on the plan but reports today showing that spot LNG prices are on the rise underline the dangers.

An international buyer could allege cartel behaviour which is forcing up the price he or she must pay.

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Government price fixing and private carteling are not the same thing, especially when the government is looking to destroy a discriminatory pricing racket by the latter. This is not just bad policy meeting dumb companies. It is also now an Enron-style gouge amid the wreckage. To prevent it, the cheap gas currently being vomited into Asia at huge losses simply has to be kept here at fixed prices:

  • gas reservation is not tough enough. It must be deeper and benchmark prices where we want them. Let the companies sort out who takes the losses;
  • install use or lose it laws so that reserves must be developed or sold;
  • launch a gas national champion to buy cheaply or expropriate said reserves to develop and sell cheaply, or
  • nationalise Santos and shut-in one LNG train permanently.

Let me remind you that the gas shortage causing all of this damage is just 5% of Australia’s total export volumes, a pathetic amount.

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The gas cartel must be broken or we will all pay the price.

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.