Some preposterous gas cartel apologism

Yesterday saw energy boffin Graeme Bethune appear at the AFR to argue that there “is no market failure in Aussie gas”:

So, is it true that higher gas prices have failed to promote new east coast supply? No.

The Cooper Basin achieved the highest level of production in nearly a decade in the 2020 March quarter, ExxonMobil is developing the $400 million West Barracouta field in the offshore Gippsland Basin, Cooper Energy is bringing the Sole gas field into production in the same area, Beach Energy has developed a new Katnook gas plant in South Australia’s south-east, Jemena has linked the Northern Territory and Mount Isa by gas pipeline, Santos is waiting for approval of its important Narrabri project in NSW, Arrow Energy is developing its $10 billion Surat gas project in Queensland where Senex Energy has also developed new gas fields – and there are also five proposed LNG import projects.

Does the east coast have large gas reserves? Not in relation to production. At current production levels, the east coast has about 18 years cover of proved and probable reserves (which are only 50 per cent likely) and only 10 years of proved reserves (90 per cent likely). East coast reserves are only 55 per cent of those on the west coast and are actually inadequate to support the three LNG projects at Gladstone plus the domestic gas market without significant new finds and/or imports.

…The cheapest new long-term gas for manufacturers is likely to be onshore and close to markets, minimising transport costs. On the east coast, this is likely to be in Queensland, where the state government is releasing exploration acreage, with any gas found reserved for the domestic market.

There is the potential for manufacturers to effectively get this gas at cost by taking an equity interest in projects. The Arrow Energy Surat Basin project will develop a further 5000 petajoules of gas for both the domestic market and LNG. This gas is unlikely to be cheap but will help reduce the pressure on the east coast market generally.

Manufacturers can also take more advantage of low short-term prices. Short-term east coast gas prices are now the lowest since 2016, ranging from $3 per gigajoule in Sydney to $5.33/GJ in Adelaide as of June 17. This reflects the extraordinary developments in global energy prices.

Asian LNG spot prices have fallen to around US$2.20 per million British thermal units (MMBtu) – $3/GJ. While replacement costs for east coast gas are much higher than spot prices, the increasing size and liquidity of spot markets provides opportunities for Australian manufacturers.

I suspect if you put a squashed melon in front of Mr Bethune and he would see a perfect sphere.

Let’s list the market failures obvious in the article:

  1. Australia overbuilt LNG export capacity.
  2. These LNG terminals are still operating well below nameplate capacity so all of the new supply that high prices have stimulated goes out to them as well.
  3. QLD gas for local manufacturers will very likely be owned by the same export cartel. Arrow is a case in point. They will still charge local buyers like a wounded bull because their exports have created the local shortage. Meanwhile, they can still export more from other reserves to ensure the domestically reserved volumes are in short supply.
  4. Gas imports from anywhere will be benchmarked to Asian prices so that means implicitly that you have lost any energy price advantage.
  5. Spot markets are cheap right now and will probably stay that way owing to the global glut. But market power is so strong for the suppliers that volume buyers must use contracts for most of it and they are benchmarked at exorbitant rates linked to Brent oil, which obviously has nothing whatsoever to do with the production costs of Australian energy.

This is market failure at every level: company, micro, macro and global.

As I have said from the beginning of this debate, the only path to competitively cheaper gas prices is domestic reservation to force the export cartel to supply its cheapest reserves to Australia then export the rest. There are no more cheap reserves outside of this pool.

In short, the gas cartel cornered the Australian gas market and you either break them for it in the public interest or it loses big.

David Llewellyn-Smith
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Comments

  1. You still don’t get it. NSW is already reliant on more expensive to develop Queensland CSG in order to avoid a shortfall. Vic gas meets Vic, some SA and some NSW demand while Moomba meets the some of the remaining SA and NSW. Queensland does the balance. There isn’t enough $3/GJ (long run cost) conventional Vic and Moomba gas left to meet domestic demand.

    Prices rise to the cost of development of the marginal molecule needed to meet domestic demand. That isn’t $3/GJ.

    • DominicMEMBER

      Not in this country anyway. Everything costs twice as much to produce, which is why manufacturing barely exists anymore.

      • bolstroodMEMBER

        Everything you say about the gas market being a dud is true.
        Why do you continue to press for gas?
        Renewables are cheaper, more efficient and far, far less polluting and do not threaten our Water ,move the whole debate to 100% renewables immediatelyskip gas it’s day is done.

      • Would be great to see some evidence of that. Page 9 of this report even has a table for all CSG fields:

        https://www.accc.gov.au/system/files/Core%20Energy%20report%20for%20ACCC%20-%20November%202018.pdf

        Combabula/Ramyard is the best of the CSG bunch at $5.90/GJ (using lifecycle cost). Even the best low estimate (Undulla Nose) is $4.70/GJ.

        If you writedown all the infrastructure installed to date to 0 you get Undulla down to $3.65/GJ on a forward look. Of course you’d need to wipe out a few bank loans and shareholders to make that work. I’m sure you could get a bunch of economists to argue with each other whether the benefit (lower gas prices) of trying to do this would outweigh the cost (via banks changing the risk premium in their spreadsheet for new projects in Australia from 1 to 1.X).

        If you touched on this sort of data people would take you more seriously on this.

    • There is excessive demand for a limited resource. Gas supply is not and never was. Overbuilt gas demand is the problem.

      The gas industry wagered (by way of capital investment) that it could get Aussies to willingly part with their water security and future water quality. They’ve used their spurious, Trumpian CSG “science” to successfully argue their case.

      Looks like they are winning. At least until 2 of 3 LNG trains go broke. Only then will the market return to something vaguely resembling balance.

  2. Does Australia have any coal reserves? Is coal cheaper than gas? Strange idea. I know.

    Pandemic hysteria, global warming hysteria, race baiting hysteria. It really feels like our civilization is going over a cliff.

  3. So the AFR highlight the theorist (aka hired gun consultant) and delegate the actual gas user (Incitec Pivot) to page 31 as the user highlights reality.