The AFR ran some more interesting stuff over weekend, this time from former Credit Suisse analyst Mark Samter:
“I think Bill Shorten should be held to account for his comments and to explain to the gas market, and to gas buyers because he has left it, I would argue deliberately opaque so that unions and manufacturers think they will get cheap regulated gas and I don’t think many producers would operate on the basis of a regulated price.
If you take it to its extreme, regulated prices would be cataclysmic for the (gas) industry.
Bill Shorten is going to have to march up to Korea and China and Malaysia and say we are requisitioning your gas because some of our other export-exposed industries are whingeing and I want to give them cheap gas.
It is just fanciful to think the oil industry should be the one that subsidises it. If we want cheaper gas, then the government should subsidise imports, or firms should subsidise a trans-continent pipeline.”
Let’s clear up a bit of confusion here:
- first, ideally Labor would be more clear on its policy objectives, though it is understandable that it is not given the resources industry’s history of rolling prime ministers;
- second, the need to lower the gas price is not just to placate a few rentier manufacturers. It is to prevent a gas cartel from plundering every business and household on the east coast. And, because gas sets the marginal cost of electricity in the NEM, to prevent power companies from then doing so as well;
- third, gas is the primary driver behind the same energy price shocks that are destroying the Australian decarbonisation plan. Gas-fired power was supposed to fulfill the role of base load substitute to coal but is now uneconomic. This, in turn, has allowed demagogues to blame renewables for higher prices and injected permanent disruption into the Australian political landscape that has played a major role in killing four PMs.
- fourth, the recent re-appearance of the gas crisis has coincided with the falling Australian dollar. It is a new dynamic for Australian business and households to be confronted with a comprehensive energy price shock when the currency falls. It will severely exacerbate future economic downturns and hold back recoveries.
In short, if we fix the gas price then we also fix Australia’s entire east coast energy shock, Australia’s entire climate change response, restore the AUD to its economic shock aborber role and we go along way towards re-establishing order in Australian politics.
Mark Samter does not claim to be a political or economic analyst and it’s just as well. But what is a little mysterious is why Mr Samter has turned so violently opposed to reservation and so equally enthusiastic in favour of LNG imports. My own apprenticeship in the details of the local gas market was helped along considerably by Mr Samter’s fabulous work at Credit Suisse where he was arguing for precisely the opposite under two years ago:
■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5% third party gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other third party gas would get extremely close to balancing the market. Clearly these things are far better done by mutual agreement from all parties, rather than a political mandate.
■ GLNG loses but can all be compensated? We estimate that, at a US$65/bbl oil price, GLNG as an entity would lose US$447m p.a. of FCF if they could no longer toll third party volumes. Interestingly, if Kogas and Petronas could recontract their offtake on a slope of 12x (doable in the current LNG market) then their losses as an equity partner are all offset (not equally between the two albeit). Santos would see ~50% of its US$134mn net GLNG loss offset if the Horizon contract could move up to a slope of 8x from 6x. The clear loser would be Total. We wonder whether cheap government debt, a la NAIF, could be provided at the (new, lower volume) project level or even to take/fund an equity stake in it? In reality all parties (domestic buyers included) have some culpability in the situation, so a sharing of pain does not seem unreasonable 02 March 2017 Australia and NZ Market daily 31
■ If these contracts were then all diverted domestically, at US$65/bbl oil, they should deliver gas at Wallumbilla at $7.50 gj. This is highly competitive gas in the current environment we think and should certainly not be considered unreasonable by domestic buyers
■ Importing LNG: AGL has now very publically disclosed its plans to look at using floating regas to import LNG into Australia. Whilst many believe this is just a negotiating tactic with buyers, we are less convinced. That said, with AGL rightly unlikely to want to take price risk, this might be more about targeting seasonal markets than providing 10-year supply agreements with industrial buyers. Even if one contracted off Henry Hub and used a long-run price of US$3/mmbtu, it would be landing in Australia at >A$10/GJ. Post transportation costs this could again be unmanageable for many domestic buyers of flat, term contracts. Importing LNG could be key in targeting seasonal (winter) spikes though
■ Reducing red tape, lifting moratoriums and stricter use it or lose it policies: Policy has an enormous role to play, partially short term, but in particular long term. Projects need to be made cheaper and quicker to bring to market and companies need to be forced not to sit on assets
■ The ultimate aim, from a national perspective, has to be to get the domestic market in surplus again. As witnessed in the US, the multiplier effect of having cheaper, relatively stable and plentiful gas supply has a material multiplier effect on the economy. Clearly producers would rather a tight, even undersupplied market, but with the right frame work in place (which it clearly isn’t at the moment) a more equitable and profitable industry could exist for all parties. Even with a sledge hammer, breaking the camel’s back appears the hardest thing at this stage.
All that has changed since is that the tumbling AUD and spiking regional LNG price has made the the case for imports very much worse. The LNG import price is now up to about $15Gj (when we add the importer’s cut). Yet here is Mr Samter arguing for that over his previous reservation policy position that could deliver gas at $7.50Gj by his own reckoning, a similar price objective of Labor’s mooted policy, which he now describes as “cataclysmic” for the gas industry. Go figure.
If Mr Samter doesn’t want the job then I’ll gleefully volunteer to “march up to Korea and China and Malaysia and say we are requisitioning your gas”. I’ll add that I’m doing it because their national oil and gas firms lied about having enough of it (that is, in Mr Samter’s words, they are guilty of a “scope failure”) and the subsequent shortage is tearing up their social licence to operate.
And you know what they will think? This: ‘jeez, took them long enough to figure it out’. Then there’ll be some argy bargy over compensation, they’ll write-off a few more billion in the value of the Curtis Island white elephant, and the whole episode will be forgotten in short order with zero long term implications for Australian foreign investment.
The alternative is we let the LNG export cartel attach our energy prices to the Asian gas price which is set by countries that have no energy resource endowment. We let manufacturing die, businesses and households be plundered by electricity monopolists, face an energy shock every time the AUD tumbles wrecking the nation’s most important economic shock absorber, and embrace decades of climate change political instability culminating in social if not outright civil war as that struggle is militarised by angry future Australians.
You tell me which of these is “cataclysmic”.