Gas disaster mushrooms into MSM

Yet it remains painfully limited and wrong. Leading us off, last week the Asian gas price collapsed again amid the ceaseless glut, now down to USD4.20Gj or AUD6Gj. According to the Australian Domestic Gas Security Mechanism (ADGSM) we should now have a local gas price near $4Gj, back within historical ranges. Yet the spot market is completely unmoved at $9,50Gj on Friday.

Moreover, according to The Australian, contract prices remain obscene:

Australia’s largest plastics producer Qenos has castigated Canberra for its part in exacerbating the nation’s gas crisis and called for government intervention to keep gas-reliant manufacturers afloat.

…Qenos — which relies on sourcing large supplies of competitively priced gas and ethane for its Altona plant in Victoria and Botany operation in NSW — said market offers were still priced between $10 and $15 a gigajoule, which was uneconomic for trade-exposed industries.

Belatedly (only six years behind), Ross Gittins has joined the fray, which is welcome, but he’s botched the story pretty badly:

Did you know Australia has now over taken Qatar to be the largest exporter of natural gas in the world? But, thanks to private profiteering and government bungling, this seeming triumph comes at the risk of further diminishing manufacturing industry in NSW and Victoria.

It’s yet another example of naive economic reformers stuffing things up because real-world markets don’t work the way they do in textbooks.

When expected world liquefied natural gas prices rose last year, Australian gas suppliers were quick to raise their prices to local manufacturers, which use much gas in their production processes.

But expected world prices have fallen significantly over the past six months. Have the three suppliers dominating our east coast market cut their prices with the same alacrity? No. Most commercial and industrial users will pay more than $9 a gigajoule for gas this year, with some paying more than $11.

…Why haven’t suppliers cut their prices? Because their pricing power means they don’t have to if they don’t want to. Why would they want to? Only because the government threatens them with something worse if they rip too much off their customers.

…The easiest and best solution would be for the Victorian government to lift its restrictions on development of – would you believe – conventional gas deposits.

Yes, we should absolutely open more offshore and onshore acreage for exploration. But this will not fix the problem. The new gas will very likely be developed by (or sold t0) the existing gas cartel which still doesn’t have enough reserves to fill its white elephant LNG export freeezers.

If we’re going this route as a solution then we’ll need a new government gas company to develop the reserves to ensure domestic supply and cheaper prices, though even that is questionable because there is no cheap gas left in the ground outside of the cartel (unless you’re lucky enough to strike it).

The other glaring omission by Gittins is that this is not just a manufacturer’s problem. It is problem for every business and household in the National Electricity Market (NEM) because gas sets the marginal cost of power as well. The combined utility price shock is some $15-20bn from Adelaide to Cairns, and more of this is power than it is gas. In truth, manufacturers are small beer.

Still, more local gas supply would certainly be better than imports, also via The Australian today:

Australia’s first LNG import terminal, financed by iron ore billionaire Andrew Forrest, could double its planned capacity to plug an expected shortfall of gas on the nation’s east coast.

…“The 100 petajoules is a good number but if the market grows for power generation — for industrial users either in NSW or Victoria — by increasing the frequency of deliveries of LNG into the vessel, you can see supplies growing,” Stuart Johnston, chief executive of Mr Forrest’s Squadron Energy unit, told The Australian.

…Critics of the LNG import terminal question the high price of gas delivered into Australia’s southern states compared with historic tariffs. AIE concedes prices will be between $10 and $11 a gigajoule but says the volumes will be available next year, compared with more uncertain timing for domestic gas production.

The one benefit of LNG imports is that they will cap the LNG exporter’s gouge. But imports won’t end it. Import prices are much higher than potential domestically reserved prices (if enforced). The gas importers will join the exporters in a cosy cartel that holds the local price FAR above fair or market value. And if the AUD falls then the price will automatically rise. It must also be noted that the partners of Squadron Energy are some of the very buyers of the QLD LNG exporter’s gas. All we are doing is allowing middle men to ship our own gas to ourselves with a 1000% mark-up.

The only rational solution is tougher domestic reservation imposed directly on the LNG export cartel. Benchmark the price at either export net back or $6Gj fixed, whichever is cheaper, and enforce it with law. This is failed market that requires direct and draconian intervention.

Either the LNG cartel takes the losses for its blundering over-investment, or everybody else does. There is nothing else.

David Llewellyn-Smith
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  1. What would the world say if Saudi Arabia started to import oil? They would be the laughing stock of the world! That is the situation we would be in if we, the largest exporters of LNG, started to import gas 🙁

  2. Am I correct to surmise that blinded by something that the political class chooses not to take administrative actions to limit the price gouge?

  3. Domestic gas reservation. Or nationalise the industry. Or get the RAAF to use Curtis (sp.?) Island LNG trains for target practice.

    Just get the gas cartel to pick one of the above. A gas reservation doesn’t look too bad compared to some alternatives.