The amusing life cycle of a Victorian gas molecule


The Australian energy crisis is the circus that just keeps on giving, via The Age:

“It’s an inevitability that Australia will import gas, there needs to be at least one gas import terminal in Australia, if not potentially two,” Macquarie Bank analyst Andrew Hodge told Fairfax Media.

…However, he said the terminals were unlikely to help drive down gas prices, which are forecast to average $12.60 per gigajoule next year.

Mr Hodge said any import terminal would set a new price floor, instead of actually driving prices down, however, he said they might act as “magnet pricing, where the price gravitates around them”.

Exactly. LNG imports will set the new marginal cost of gas on the east coast which will be the Asian price for the gas plus the cost of the import plant and a margin. Today that will deliver a spot gas price of…wait for it…$18.60Gj. The spot gas price today under the ADGSM domestic reservation policy is $9-10Gj so we are talking doubling the price which will also cause, of course, a massive surge in electricity prices because gas generation sets the marginal cost of power. Obviously to make this staggering gouge viable, the ADGSM will have to be destroyed.

But that’s only where the fun starts. It will be both unnecessarily costly and bothersome for the import/export cartel to actually bring in foreign gas. It will make much more sense to import Australian gas.


Victoria especially will then enjoy its own gas after it has done a rather amusing round trip. It will be extracted from Bass Strait, piped north to QLD export terminals, frozen for transport, sailed out to the reef for a bit, then motor south to the Victorian LNG import terminal. There it will be unfrozen and distributed into the same pipeline network that carried it north and sold to Victorians. Along the way it will have added costs of:

  • massive overcharging for the original gas via the BHP/Exxon Gippsland cartel;
  • $2Gj to pipe it north;
  • $2Gj to freeze it and ship it south;
  • $3Gj to unfreeze it and release into the “market”.

That’ll give you your $18Gj gas which came out of Bass Straight down the road at $1Gj or similar. At this point the molecule of gas might be used to make, cook or heat something. Or, it might be bought again by the gas cartel and make the same round trip a second time for some more ticket clipping.


Exactly why this amusing form of national suicide is “inevitable” is not obvious to me.

Stiffen domestic reservation now.

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.