Andrew Forrest’s new east coast gas play is just another disastrous chapter in Australia’s gas monstrosity. Via AFR today:
AIE is the sponsor of not one of but three separate plans to import LNG for sale into domestic gas markets. Forrest has involved himself though his privately owned energy play, Squadron Energy. He was introduced to the idea by Squadron boss Stuart Johnson, who was, in turn, delivered the plan by James Baulderstone, a former Santos executive who subsequently worked with Johnson at power network and pipeline operator Duet.
Forrest has committed to fund half the equity component of any deal. And news that AIE has signed memorandums of understanding with 12 industrial and commercial customers in NSW and selected which of the state’s two biggest industrial ports will host its facilities would seem to announce Forrest’s venture as the most likely pioneer of this thoroughly paradoxical business model.
The paradox here, of course, is that a domestic supply shortage created by the construction of three export gas projects at Gladstone could be solved by buying LNG sourced anywhere but Queensland and shipped to proposed import terminals in NSW, Victoria and South Australia.
…While we are on markets, Forrest estimates that domestic reservation is not the answer to east coast shortage.
“I have always wondered why energy prices are so high,” he said reflecting on the WA market, where exporters are forced to sell into domestic markets. “A forced domestic gas policy has been, at best, partially successful. But you get a market driven domestic gas policy, you know it is going to be successful over the long term.”
…That means getting first gas into the market by 2019, a schedule that Forrest acknowledges will require more rapid than usual approval processing by governments and their agencies.
Why is this a disaster? The following:
- imported LNG will become the marginal price setter of gas on the east coast given it will be much more expensive that the locally produced stuff;
- thus the global market will be the marginal price setter of east coast gas which includes the cost of liquifaction, shipping and regasification;
- in effect, this will embed the Japanese price for gas in Australia. This is far worse even than the current target price of the government’s under-used domestic reservation mechanism which aims for the export net-back price (that excludes the cost of liquifaction, shipping and regasification, roughly $2-4Gj);
- today Twiggy would deliver gas at $13Gj plus whatever he charges for the privilege versus a local spot prices at roughly $8.50Gj or $8-10GJ on contract;
As well, as you can see from the Forrest commentary, his new business will undermine and destroy domestic gas reservation. It will have to because if it persists he has no business model. Let me just remind you that WA’s gas reservation has delivered a drop in the WA gas price from a spike to $16Gj in 2008 to $3-4Gj in recent years. How is that a failure compared to the east coast price range that recently spiked to $20Gj and was only brought down to $10Gj via reservation?
Forrest is offering extreme levels of commodity economics balderdash. That any manufacturer has signed up to it shows how desperate and abused is the demand side of the market. Electricity generators will love it because it will embed much higher prices for gas, and therefore a much higher price for electricity, ensuring that all non-gas power producing assets can cream rents until the breaking of the world. This is not a market solution, it is Twiggy Forrest joining hands with east coast energy cartel and delivering it a phenomenal windfall.
If, instead, we apply stronger domestic reservation like WA, we can have stable gas price in the $4-5Gj range for as far as the eye can see. That will crash electricity prices and restore our decarbonisation program.
Or, we can let Twiggy Forrest complete our transformation into Japan, with a cartel so in control of energy production that we have effectively become a zero resource endowment nation, wiping out any competitive advantage.
That, in turn, raises the specter of one last disaster from this proposal; the prospect of a doom loop for the eastern economy. As we hollow out gas-dependent manufacturing, the economy will weaken, driving down the Australian dollar. In turn that will lift the price of imported gas, and therefore energy more widely, triggering further hollowing out. So on and so forth into the pit of the Banana Republic.
Can we, as a nation, really be this calamitously stupid?
