Morrison’s gas unplan a joke of truly spectacular proportions

I have absolutely no idea why manufacturing is on board with the new Morrison gas policy. All it wants is cheaper gas and power. Morrison will give it neither. Here it is:

Gas will help re‑establish a strong economy as part of the Government’s JobMaker plan, making energy affordable for families and businesses and supporting jobs as part of Australia’s recovery from the COVID-19 recession.

Prime Minister Scott Morrison said the Government would reset the east coast gas market and create a more competitive and transparent Australian Gas Hub by unlocking gas supply, delivering an efficient pipeline and transportation market, and empowering gas customers.

The Government will get more gas into the market by:

  • Setting new gas supply targets with states and territories and enforce potential “use-it or lose-it” requirements on gas licenses
  • Unlocking five key gas basins starting with the Beetaloo Basin in the NT and the North Bowen and Galilee Basin in Queensland, at a cost of $28.3 million for the plans
  • Avoiding any supply shortfall in the gas market with new agreements with the three east coast LNG exporters that will also strengthen price commitments
  • Supporting CSIRO’s Gas Industry Social and Environmental Research Alliance with $13.7 million.
  • Exploring options for a prospective gas reservation scheme to ensure Australian gas users get the energy they need at a reasonable price

We will boost the gas transport network by:

  • Identifying priority pipelines and critical infrastructure as part of an inaugural National Gas Infrastructure Plan (NGIP) worth $10.9 million that will also highlight where the government will step in if the private sector doesn’t invest
  • Reforming the regulations on pipeline infrastructure to promote competition and transparency
  • Improving pipeline access and competition by kick-starting work on a dynamic secondary pipeline capacity market

To better empower gas consumers, the Government will:

  • Establish an Australian Gas Hub at our most strategically located and connected gas trading hub at Wallumbilla in Queensland to deliver an open, transparent and liquid gas trading system
  • Level the negotiating playing field for gas producers and consumers through a voluntary industry-led code of conduct, to be delivered by February 2021.
  • Ensure Australians are paying the right price for their gas by working with the ACCC to review the calculation of the LNG netback price which provides a guide on the export parity prices
  • Use the NGIP to develop customer hubs or a book-build program that will give gas customers a more transparent and competitive process for meeting their needs

None of these policy initiatives address the core problem which is a gas export cartel that dominates reserves:

  • the same gas export cartel dominates all new reserves in the “five basins”;
  • these reserves are ALL expensive to produce and will not reach key markets in NSW or VIC for under roughly $10Gj;
  • the cartel operates five LNG terminals in NT and QLD that are all in need of more gas and without blanket domestic reservation they will simply send more of the old, cheap stuff offshore as they sell the new, expensive stuff locally.

That’s all there is to it. You can build pipelines. You can subsidise development. You can trash the environment. None of it will lower prices if you haven’t broken the market power of the gas export cartel. This is why they also support the Morrison plan.

The same applies to power costs. By building more gas power, Morrison is increasing the National Electricity Market reliance upon it without making it cheaper, thus locking in higher prices. If he instead lowered gas prices then the private sector would build the power turbines anyway and electricity prices would fall.

Thus, the only two policy statements by Morrison that make any sense, indeed that is needed at all, are:

  • Avoiding any supply shortfall in the gas market with new agreements with the three east coast LNG exporters that will also strengthen price commitments
  • Exploring options for a prospective gas reservation scheme to ensure Australian gas users get the energy they need at a reasonable price

The hilarity of it is this. If Morrison does those two things properly and applies a regulated price cap anywhere from $4-8Gj on east coast gas supplies, then the rest of his plan is redundant because the various gas basins are longer viable. Local prices are too low and so are offshore prices. Thus, Morrison literally cannot deliver on his only two sensible pledges or his fantastically complicated overall plan collapses.

If Morrison cannot and will not deliver on regulated lower prices, then local manufacturing is much better off doing something else entirely. Forget local production and go all-in on LNG imports because they do break the gas cartel. Asian gas contract prices are cratering as the global glut wreaks havoc, via AFR:

Qatar, the world’s biggest LNG exporter until last year, has advised it is pushing ahead with a huge expansion of capacity, taking it from 77 million tonnes a year to 110 million tonnes a year by 2025, then potentially to 126 million tonnes two years later.

…Dr Fesharaki noted that for many years Qatar had stuck to its guns on pricing and showed little flexibility in long-term contracts, except to favoured buyers.

That changed only very recently, with a deal struck with Sinopec at a “slope” or index against crude oil of just 10.19 per cent. A second deal with Pavilion in Singapore has confirmed the change of heart in Qatar’s policy, he said.

The slope was as high as 15 in Australia’s legacy premium-price contracts with LNG buyers in Japan but by last year had slid to 11-12 per cent, already a level that analysts said would put pressure on high-cost Australian projects. A slope of 16.7 represents parity with oil.

Herein is the spectacular joke of the Morrison gas unplan. Local bulk gas buyers typically pay a 14% slope to Brent, enforced by the blood-sucking gas export cartel on contract prices since they collapsed the local market in 2014. Making a few basic assumptions about a rising Brent price and AUD, we can draw the following chart:

Yes, it is far cheaper to import Qatari LNG than it is to develop the gas in the Morrison unplan.

And it must be remembered that these are bulk contracts, the most expensive volumes available in the global market. Asian spot prices will be consistently $1-2Gj cheaper than this and often, such as now, $4-5Gj cheaper.

If manufacturers use their purchasing power to push the LNG importers to the lowest possible commitments on contract volumes to make them viable, then load up on spot volumes as much as possible, then they will be able to substantially lower their overall gas bill from the $10Gj that Morrison’s unplan will deliver.

Most importantly, at that point, imported gas displaces the export cartel as the Australian marginal price setter and local cartel gas prices are forced lower to compete. Meaning the average price of manufacturing’s portfolio of gas supplies falls again.

The ultimate joke of truly spectacular proportions in this scenario is that the volumes NSW and VIC import from the glutted Asian markets will often be the very Aussie gas that the export cartel refused to sell them here at twice the price.

David Llewellyn-Smith
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Comments

  1. What if this is all just a cunning plan?

    Open up the gas fields, wait until they are producing and then introduce the reservation scheme…. Much cheap energy….

    Nah… Morrison doesnt think that far ahead

  2. What I read is lots of Plans, whereby only the plans appear to be funded.
    I wonder if those companies that are gifted the contracts to flesh out the Plan are LNP contributors, (I also wonder if they will know a damn thing about Natural gas exploration and development)
    It’s sad that the actions of our elected officials (PM in this case) are so transparent, maybe they promised him a real job when he is done with his current gig.

  3. Comrades, it is your duty to watch the pathos and lunacy of the Speers “interview” with Morrison. Could have been selling floor sanders or ladies’ underwear. Changing steeds five times in a single paragraph, never pausing for breath.

    How much extra energy, to replace Liddell? Could be 1000mW, could be 250mW. Could be anything really. You spin the wheel. Anyway, “gas has chosen itself”. It came to him in a tumescent dream, speaking in tongues of flame. Would he “commit” to “net zero”? Sure thing, David, that will happen, directly after the collapse of human civilisation.

    How to cope, through 2022 and 2025? I bet $250 to $400 on him with TAB, just for cynical fun.

    • happy valleyMEMBER

      Unfortunately, that’s 2 winning bets you have – go bigger than $400 each. But remember SFM keeps telling us he is a doer, but he’s looking more like a wrecker as with Abbottolypse?

      • Happy, I’d bet the house. But it’s in the Socialist Republic of Inner Canberra. True believers would run me out of town.

        I had always assumed Net Zero was invented by “market economists” like Garnaut. Turns out it was a bunch of well-meaning ladies at Tessa Tennant’s place in Scotland. I’m not even making that up.

  4. happy valleyMEMBER

    “I have absolutely no idea why manufacturing is on board with the new Morrison gas policy.”

    Because they know that the LNP will look after them or at least the favoured few?

  5. PaperRooDogMEMBER

    Why aren’t Labor opposing this? It’s yet another golden opportunity to out ScoMo ScoMo with rabid attacks (since this is the only thing that seems to work these days) & they might even win back a few of their core voters. #LaborUnelectable

    • Joel Fitzgibbon the putative leader of the ALP , s in favour of Morrison’s Gas policy,
      he said “They stole our policy”.”It is very close to the Policy we took to the last election.
      Until this traitorouscretin is dealt wiyh Labor will continue to be seen as LNPlight.

  6. The ultimate joke of truly spectacular proportions in this scenario is that the volumes NSW and VIC import from the glutted Asian markets will often be the very Aussie gas that the export cartel refused to sell them here at twice the price.

    The really, really tragic joke is that unless we stop using ALL fossil fuels immediately we will be toast by 2050..

  7. This is the interview that David Speers should have done, not the ScottyFromMarketing Great Gas Gish Gallop.

  8. Many of the points in the policy are just rewarming existing policy. The gas hub is already there. The ACCC already monitors netback. Unless they are going to consider shifting the liquefaction stranding risk back from domestic consumers to the cartel, there is nothing to see.