LNG imports must be stopped at all costs

The AFR offers a useful debate about gas today, though is draws all the wrong conclusions as usual. Its editorial sets the tone under the title “Solution to energy crisis should fall back on the market”:

Rather than heavy-handed resource intervention, the best response is to encourage more domestic supply. That means peeling back the irrational state government bans on gas development in NSW, Victoria and part of South Australia. The anti-science irrationality and hypocrisy is staggering, driven mostly by pandering to the Greens and, weirdly, to anti-fossil fuel conservatives such as Alan Jones.

I agree the gas should be developed. But that’s neither here nor there. As things stand it is not going to be owing to overwhelming community objection so wishing for it is either dumb or deliberating misleading. Given it won’t be developed, we need to recognise that the market has failed and, therefore, that heavy handed state-led solutions are needed.

Thus the real debate is about how else can we break the gas export cartel. Matthew Stevens sums up some options:

Dow reckoned its massive pipeline can get gas to the east at a cost of $6/GJ.

Mind you, that number relies on being able to acquire WA gas at $3.25/GJ. It also relies, ambitiously enough, on transportation costs of a spare $1.25/GJ and on the owners of the $5 billion pipeline being happy with a capital recovery of just $1.50/GJ.

The Dow proposal would arrive with a capacity of 600 petajoules. That is pretty much equivalent to the whole east coast gas demand. And that, we are assured, explains the modest transportation and capital cost numbers.

The other reason the transport costs look low is that Dow has modelled the journey to Moomba. Getting that gas to Sydney would add another $1.50 or so to the transport cost.

Baulderstone [LNG imports] will arrive at Thursday’s summit sessions forewarned and forearmed. He will suggest that Dow has been wildly bullish on the cost of WA gas and of moving it eastwards.

The next generation of Woodside gas in Western Australia will cost $6.77/GJ to extract and AIE has estimated it would cost $7/GJ to pipe gas all the way to Sydney.

…Baulderstone will also reveal, for the first time, just how competitive the transport costs of his “virtual pipeline” are. It will cost just 59¢/GJ to ship gas from WA to Port Kembla and just 66¢/GJ to source the stuff from Singapore. And accessing the pricing arbitrage made available by the US arrival into the seaborne LNG trade will cost just $1.32/GJ.

The way Baulderstone sees it, this transport advantage leaves AIE free to source gas from a broader base of supplier that sell their products on different pricing indicies. To appreciate what that means all you need to know is that US gas is presently changing hands at about $US3.50/BTU ($5.00) and through most of this year that price has been ranging much closer to $3/BTU.

OK, let’s unpack these numbers.  First, LNG imports. The US gas price is cheap, sure. But by the time it gets here through the US liquifaction businesses and ships via the Panama Canal we need to add another $8-9Gj. Then you need to add the cost of the import plant and its margin. Once added, the price ends up being about $15Gj. And that price only holds so long the AUD does not fall (and it very likely will) and the price of US gas does not rise (and it definitely will). Another downside is that given the ADGSM domestic reservation policy already has gas hovering at $9-10Gj it will have to be destroyed. This will unleash Banana Republic dynamics in which a weakening currency results in an energy shock for the world’s largest LNG supplier.

The WA pipeline proposal also has some problems. 600Pj is a lot of gas. It is going to drive up the WA price which is only low owing to its own domestic reservation. I don’t know how high it will go if these volumes are extracted. The other costings seem plausible with high volumes and public ownership.

Another problem for the pipeline is that the export cartel’s Curtis Island white elephant is operating well below nameplate capacity of roughly 1230Pj by 200-300Pj. So half the WA pipeline gas will immediately be sucked up and shipped offshore by the east coast export cartel. This is hardly efficient or fair to WA given its firms could be doing that themselves.

Moreover, the cartel’s own QLD shale gas is under-performing expectations so the it could just vacuum up the entire 600Pj of pipeline gas and leave its own equivalent gas in the ground. There is no way to stop it given reserving the pipeline gas can just displace existing cartel supplied domestic volumes.

Sadly, rather than confront this massive threat to Australian national security, the Coalition is still playing political games, also at the AFR:

Federal Resources Minister Matt Canavan claims success because prices have tempered from extreme levels of about $20 a gigajoule early last year.

…But Senator Canavan said “the reality is that we have a market now that’s linked to world oil prices” and also seemed to rule out the possibility of subsidies for manufacturers.

“I don’t think the solution to the crisis here is to subsidise in an ongoing and unsustainable way the use of energy in Australia relative to our export opportunities,” he said, while encouraging east coast gas producers to think of the future for their customers.

Why have the ADGSM at all then? In fact, in any sensible nation with a sensible Resources Minister this entire discussion would have taken place three years ago in emergency meetings between state and federal leaders. Gas market failure has been obvious for years. Thankfully Canavan’s apocalyptic performance will get him sacked next May.

Which leaves us with what the incoming Labor Government should do. Fixing gas must be its first and most urgent priority Why? Because if it does not, and LNG imports arrive, then it’s entire policy platform – which aims to deflate Australia externally, as well as to decarbonise energy –  will be held hostage by the LNG import cartel as the gas price skyrockets driving electricity prices mad with the opposition waiting in the wings to blame it on renewables.

Labor has only one choice. It must enforce stronger east coast domestic reservation. It can use the Coalition’s own ADGSM mechanism to do it. Just beef it up. If the cartel threatens to leave the gas in the ground in response then hit them with “use it or lose it” laws or fixed price quotas at $6Gj. Be prepared to fight.

Comments

  1. All of those solutions are complicated and messy and are so, simply because of a refusal to face up to the fact that national interest must trump the fetish for the myth of commodity markets free of regulation, quotas and national interest considerations.

    Just let the ideology fall away and the practicalities of the situation reveal the solution. A solution that would be seen as obvious by most of our trading partners who value outcomes in their national interest over ideological purity.

    Of course the old tankies (from the other end of the ideological spectrum) don’t like this proposal either because they would like all markets operated by GAZPROM with giant input and output matrices and fear any market component as vampires fear garlic. But providing you don’t share that kind of fanaticism a pragmatic solution like this should appeal.

    https://theglass-pyramid.com/2017/03/10/no-fracking-way-a-national-export-volume-auction-is-the-solution-to-the-australian-gas-crisis/

    “..Set the total volumes nationally of LNG that may be exported and then let industry bid for tradeable licences to part of that volume.

    If they dont have an export licence they will be limited to the domestic market.

    The only real difference between an Iron Ore NEVA and one for LNG is that the objective for the Iron Ore NEVA is to prevent international miners competing with each other with OUR ores rather simply competing against foreign competition.

    Of course we still need to compete with alternate foreign producers like Brazil but it is NOT in Australia’s interest to allow foreign mining companies operating in Australia to drive prices down by competing between themselves in international markets.img_1076

    With LNG the issue is even simpler – work out how much gas we want available for domestic purposes. Subtract that from a conservative estimate of production capacity – i.e. one that does not require every bit of farmland to be screwed with fracking – and the remainder can be the national export volume for which licenses will be available for purchase via public auction…”

  2. Having sold Australia’s one major international competitive advantage, cheap energy, to predominately international interests, why would we then throw ourselves further under the bus by exposing scarce, precious water resources to unconventional gas production.
    That would be MORONIC.

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