Manufacturers go after gas cartel

Via the AFR comes Australian manufacturing:

The federal government should create a public gas company to drive investment in new supply, say major energy users who warn urgent intervention is needed to avert plant shutdowns and mass job losses.

…A “Commonwealth Gas Co” could support the development of new gas pipelines and a gas import terminal, and reduce the monopoly power of existing suppliers, the Energy Users Association of Australia says, calling for the gas crisis to be elevated by the next federal government to the same level of importance as electricity.

…In a report released on Wednesday, the association, whose members also include Glencore and Brickworks, warns a second shockwave is looming for gas users on the east coast. It says the market faces a tipping point within 12 to 18 months as supply contracts are renewed at higher prices and manufacturers already struggling with prices lose the battle to stay afloat.

Here’s the summary of policy suggestions:

Immediate Actions

Given the gravity of the current gas crisis, two immediate actions should be considered being a revised LNG netback methodology that excludes the capital and financing costs associated with the gas trains themselves and the establishment of a short-term domestic gas support fund. Combined, these two initiatives have the objective of reducing domestic gas costs to between $7Gj and $7.50Gj.

Status Quo

ADGSM and some pipeline reforms aside, governments have a largely hands-off approach. The market is largely left to develop over time meaning that concentration of market power, finely balanced supply/demand, low levels of liquidity, poor transparency and a domestic price that is largely aligned with an international price will continue.

Accelerated Regulatory and Market Development

Primarily look to electricity market reform over the last 20 years and seek to replicate the most successful elements in the gas market. This needs to be a deliberative process, supported by the COAG Energy Council. We suggest a continuation of efforts to deal with the issue of information asymmetry and look to replicate successful technology development and deployment programs and institutions. Finally, industry development policies and funding sources that have already proven highly successful in the electricity market should be seriously considered.

Establish a Commonwealth Gas Company

The establishment of a Commonwealth Gas Company to not only manage new funding and support programs identified previously but to act as a wholesale participant who can provide longer term contracting for new gas developments. This could be developed in two stages. Stage one would see the Commonwealth Gas Company act as the coordinator of the various initiatives and broad reform agenda. This would provide some assistance for junior developers to get new supply to market, to support the development of new gas pipelines, to increase liquidity and reduce monopoly power of incumbents. Stage two, would be for the Commonwealth Gas Company to take a position as a gas wholesaler in addition to the coordinator role described in stage one. We note the Commonwealth already owns Snowy Hydro which is set to become the most influential player in the wholesale electricity market so there is a clear precedent for government involvement in this way.

Domestic Gas Reservation

Initially reserve a quantity of both existing and new gas development for domestic use similar to the current Queensland Government policy of tendering leases for domestic supply only. We would place a particular focus on delivering gas at a newly defined “domestic net-back price”. After a period of time (yet to be determined), reservation would only apply to new gas development as more supply enters the market, which would be supported by other measures such as accelerated regulatory and market development and the Commonwealth Gas Company.

There is some useful stuff here, many ideas shopped at MB previously:

  • A domestic net-back price will drop the ADGSM benchmark. Domestic users shouldn’t have to pay for the capitals costs of the gas cartel, after all. But the ADGSM is being ignored by both government and cartel at the moment so it must be used and enforced. The fund is just a grab for handout. Bugger that.
  • A Commonwealth Gas Co is a good idea. It can help assuage community angst about coal seam gas extraction while negotiating through state government blockades. But it will not produce gas much lower than $8Gj anywhere so how useful will depend upon the wider array of policy choices.
  • Forget building more pipelines. Just regulate the ones we’ve got more effectively.
  • Forget LNG imports. They’re a recipe for disaster, benchmarking the marginal cost to Asian prices plus costs.
  • Forget about putting a sunset clause on domestic reservation. Just apply it harshly and let the cards fall where they may with losses to the gas cartel instead of everybody else.

Much of this is wasted breath. If you just stiffen the ADGSM and put a price cap on it at domestic net-back or $6Gj then let the gas cartel wear the losses for its capital misallocation. It will go through a period of write downs to lower its costs then make money anyway as it keeps low costs volumes in Australia and ships higher cost oversees, developing the latter as needed as prices rise.

There is plenty of cheap gas is you force those that have stolen it to put it back. After all, as EUAA says:

How did we get to this point? We assert that the acute problems in today’s gas market:

• Are contrary to the many assurances from the gas producers at the time the LNG projects were being developed that there will be enough gas for all.

• Are contributed to by explicit Government policies that restrict onshore exploration and development.

• Are exacerbated by the immaturity of the domestic gas market including the presence of monopoly power, high barriers to entry and information asymmetry that puts industrial gas buyers and shippers at a disadvantage.

Break the cartel with a stroke of a pen. Stop being so nice about it. The gas cartel has Australia by the throat. Are we going to fight it off or choke?

Comments

  1. Its still going to take years to fix electricity even if the cartel is broken. There is an investment strike on new build gas turbine power plants and many of the project proposals that were halted when Curtis Island got the green light have seen their “major project” government regulatory approvals lapse. These proposals would have to start afresh and the process will take years. The only way you’ll be able to fast track the procurement is to for the government to hire or buy a couple of those Turkish gas turbine power ships, go to Korea to have couple of floating gas turbine power plants built in around 18mths or buy reconditioned floating units from the USA and have them delivered and commissioned in around 12 months.

  2. No gas importation whilst we still produce heaps of gas for export – ever.

    That is just a breathtakingly crazy idea…

    Can people just get some sense!?!?!?!?!?!?

    • I dunno.
      Perhaps we should just import all the electricity we need for our cars and pay for it with MMT.

  3. Here’s a ADGSM benchmark which the Australian Government can learn from the PNG govt:
    Ref OSH announcement to ASX: Papua LNG Project Gas Agreement signed, 9apr19
    and Goldies analysis 16 April 2019 8:13PM AEST:
    “Reported details of the recently signed PLNG gas agreement, but not confirmed:
    Local news in PNG has highlighted key details of the recently signed PLNG gas agreement. The Domestic Market Obligation (DMO) is expected at 5% (vs. GSe Base case 7%), and reportedly priced well below expectations at a fixed US$4.50/mmbtu (vs. GSe US$6/mmbtu). State equity carry agreements and details of new levies and taxes require further clarification from the JV, while further in-country approvals remain outstanding.”