Productivity Commission’s gas WTF

These test tube economists are a plague, via The Australian:

Forcing Australian gas exporters to increase their domestic output could “distort resource allocation” and drive up energy costs over time, the Productivity Commission has warned.

…The Productivity Commission said reductions in production could deliver lower gas supply volumes, shifting higher costs on to the gas industry and energy users.

“In the short term, the commission observed that (domestic gas) reservation would divert gas from liquefied natural gas (LNG) production (that would otherwise be exported), to domestic users,” it wrote in its submission.

“With a sufficiently large domestic supply requirement, this would place downward pressure on wholesale gas prices for domestic users, while imposing a cost on producers that supply gas to the eastern market.

“This in turn would distort resource allocation, with economic losses compounding over time. Domestic gas reservation would encourage investments in gas-­intensive (and related) industries on the basis of gas prices below levels that would have otherwise prevailed in the market.”

The Productivity Commission found domestic gas reservation may be “ineffective in preventing wholesale gas prices for domestic users in the eastern market from rising over time”.

“By reducing the return on new supply sources, reservation would decrease incentives to ­invest in gas exploration and ­development,” the commission said.

“The gap created between domestic prices in the eastern market and export prices likely under such a policy would weaken incentives to invest in projects that would produce solely for the eastern market, given that all of a domestic project’s production would be sold at prices below the market level.”

Yeh, they actually wrote that. As if, somehow, the existence of the world’s most toxic gas export cartel isn’t already distorting resource allocation, charging Australians $12Gj for gas when the world pays $4Gj.

As if the rest of the world, all of it, doesn’t enjoy cheap gas owing to domestic reservation.

As if WA domestic reservation hasn’t kept the price at $4Gj.

As if all new Australian supply isn’t prohibitively expensive.

As if, without reservation, it won’t also go offshore.

As if the ACCC didn’t make this exact same argument for years while the cartel formed, only to volte farce and back reservation as the only hope.

As if worrying about high gas prices in the far distant future owing to market distortions makes any sense when you’re paying astronomical prices today owing to complete market failure.

WTF.

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Comments

  1. I can’t believe I read that. That seems like it’s written by Santo’s CFO rather than the productivity commission.

  2. It’s like as if someone in the PC was paid to say that or otherwise taken out to the back of the shed…

  3. Distortion favouring International private interests = good
    Distortion favouring national interest = bad

    Besides, who is this massive cohort of producers queuing with projects to produce for the domestic eastern market? Getting the few big players to invest for international export has now been proven to be pretty fraught. What a load of crap. The actual structure of the market belies these statements as convenient fictions. Shame.

    The PC has been pickled.

  4. Natural Gas is only a transition fuel, everyone knows this, it’s not the end game.
    In some ways the mispricing of natural gas in Australia could actually enabling us, as a nation, to skip forward at least 10 (if not 20) years in the development of our renewables industry.
    This can be a fantastic outcome if we decided to let ourselves succeed.
    Renewables will need energy storage well into the next century yet natural gas will lose its importance within 15 years, so for me it’s a no-brainer. Begin today to build the energy systems of tomorrow. Build the dams, build the transmissions lines, build the battery banks, build ultra fast response compressed gas storage, build seawater energy storage systems. Start building all these elements of a modern energy system today and derive a benefit for the next 100 years. Start building these systems today and become tomorrows global experts on sea water energy storage, start building these systems and become tomorrows global experts on renewable powered grids.

    • “skip forward at least 10 (if not 20) years”
      Love the optimism but when has that ever happened?
      More likely the increasing cost will make coal more viable and we will skip backward 20 years.

      • Yep that’s the most likely outcome, but remember it is our collective choice
        The only impediment to our success is our satisfaction with failure, our acceptance of failure and indeed our love of failure. Where would most Aussie be if they didn’t believe that someone else was to blame for their inability to leverage the natural advantage that Australia creates, nope if you ask me most Aussies just love to fail…in the end it’s what they’re good at.

  5. GunnamattaMEMBER

    WtfF are these people smoking? Or is the Rupertarian fertilising their remaining readership with specially curated excerpts from the PC?

    Forcing Australian gas exporters to increase their domestic output could “distort resource allocation” and drive up energy costs over time, the Productivity Commission has warned.

    So here, in the nation which is currently the largest gas exporter in the world…….Forcing gas producers to increase domestic output (as opposed to export   output) will have gas producers scratching their heads and asking…….

    ‘Gee, we aren’t sure if we want to produce gas for the highest priced domestic gas market on the planet, which is currently paying more for gas we produce than our major export markets (Japan South Korea & China), in a global market which is in something of a glut situation………Could someone please point us in the direction of ‘Market Failure’ in the dictionary?’  

    …The Productivity Commission said reductions in production could deliver lower gas supply volumes, shifting higher costs on to the gas industry and energy users.

    ……..So here, in the nation which is currently the largest gas exporter in the world……. ‘reduction in production’ could result in lower supply volumes.  Can anyone ask the productivity what would happen if legislation forced companies to deliver higher volumes on the domestic market again – like, would that shift lower costs on the gas industry and energy users?

    “In the short term, the commission observed that (domestic gas) reservation would divert gas from liquefied natural gas (LNG) production (that would otherwise be exported), to domestic users,” it wrote in its submission.

    So here, in the nation which is currently the largest gas exporter in the world we have a Productivity Commission which has a logical grasp of what is implied by ‘reservation’ – so that’s a positive. But that Productivity Commission is concerned that domestic users in a nation paying amongst the highest prices for gas on the planet would be concerned about a global gas market experiencing oversupply issues?  Which particular location in Australia are these people again?………

    “With a sufficiently large domestic supply requirement, this would place downward pressure on wholesale gas prices for domestic users, while imposing a cost on producers that supply gas to the eastern market.

    So here, in the nation which is currently the largest gas exporter in the world we have a Productivity Commission which has a logical grasp the ‘market’ mechanics vis prices and volumes (ie more = down) but is concerned about the multinational owners of gas production facilities, currently being run as a loss leader to amortize the outlay on some of the worlds most spectacular white elephants no longer being able to write off those outlays and having to run their investments as a real economic enterprise?

    “This in turn would distort resource allocation, with economic losses compounding over time. Domestic gas reservation would encourage investments in gas-­intensive (and related) industries on the basis of gas prices below levels that would have otherwise prevailed in the market.”

    So here, in the nation which is currently the largest gas exporter in the world we have a Productivity Commission which is concerned about economic losses for multinational producers running operations at a loss to amortize the outlay on a spectacular array of white elephants – to the extent that the domestic market is looking at reimporting gas from nations we export to, to meet domestic demand , and the potential impacts for a nation which relies on coal for electricity generation, and has experienced shortages because that nation is concerned about turning on the gas generation capacity to meet surge capacity due to domestic market price considerations, when that domestic price is more than that in major export markets……….and it is concerned about gas prices below levels (of anything) ‘that would otherwise have prevailed on the market’? FFS – they seem concerned that domestic consumers might cease to be about the only gas consumers on the planet having the living bejesus gouged out of them……(and this is our Productivity Commission?)

    The Productivity Commission found domestic gas reservation may be “ineffective in preventing wholesale gas prices for domestic users in the eastern market from rising over time”.

    But would it be as ineffective as the white hot gas production facility outlay amortization or the gas pipeline monopoly scams currently being shoved into the rectum of Australian gas consumers currently?

    “By reducing the return on new supply sources, reservation would decrease incentives to ­invest in gas exploration and ­development,” the commission said.

    Well yeah, But would that be all that negative for Australians?

    “The gap created between domestic prices in the eastern market and export prices likely under such a policy would weaken incentives to invest in projects that would produce solely for the eastern market, given that all of a domestic project’s production would be sold at prices below the market level.”

    What ‘market level’ (or planet) are these people talking about? (or on?)

    That is all so bad I find myself wondering if one of the Rupertarian’s gargoyles has whipped that one up in a drinking binge with someone from Chevron, Shell, or Mitsui, as a sort of prelude to an article next week highlighting a national ‘compact’ to promote the right of Australians to pay the worlds highest gas prices.  I am at work and don’t ever open Rupertarian, but did Simon Benson write that piece?…….

    • GunnamattaMEMBER

      So basically the Australian has run a beat up from a PC submission to a Senate committee (last November) which expressly told that committee to read its 2009 and 2015 reports on gas and summarised these for the committee

      https://www.pc.gov.au/research/supporting/oil-gas-reserves

       It should also be noted that the Commission is undertaking a commissioned research study into regulation of the resources sector (including oil and gas), with a draft report due in March 2020. This study will examine the effectiveness and efficiency of current regulatory regimes across jurisdictions and recent developments in the sector.

      That March report should make interesting reading.

      This is a classic example (yet again) of just how the Rupertarian creates their beat ups…….

  6. There is no difference in domestic or export output, the output is from the well through the network. Whether it goes to Wallumbilla or Gladstone for liquification is irrelevant, it’s all output. And the wells’ output is declining. The viability of the projects, and the basis on which they were sanctioned by their respective parent companies, is based on resource exploitation predicated on rounds of future investment (or phases) that go well beyond what has been drilled to date. One way or the other it is getting produced. Their financial viability and survival is their incentive and why they keep drilling wells.

    Theoretically they have a minor point, but ultimately it must be played against the alternative which is essentially perpetuating the current arrangement (or perhaps worse via an import terminal to regasify our own gas after its sailed around the world). So which scenario would be most beneficial for the most stakeholders from a social and economic perspective. Hint: it’s not the current one.

  7. Why is any of this controversial? If it costs $X/GJ to extract the gas and the gas is sold for less than that then on a look forward basis no one would invest. At first it will be fine as the investments are sunk but over time supply would naturally reduce as wells decline and no new ones are drilled. This might be acceptable (I’m not sure the report makes any assertions about whether this outcome is better than the ‘do nothing’ outcome)