Morrison’s Keynesian gas pork abomination

Yesterday we saw the “gas-led recovery” plan”, via ABC:

The potential for a taxpayer-backed, gas-fired power plant comes as the Federal Government turns its eye to the troubled gas market.

The east coast gas market has boomed under the development of Queensland’s coal seam gas fields over the last decade.

But while that has made for a profitable liquefied natural gas export market, Australian commercial and industrial gas users have continued to pay high prices.

The Federal Government will announce a sweep of measures aimed at addressing that imbalance, including:

  • Setting up a National Gas Infrastructure Plan to identify the priorities for investment in the gas transport network
  • Establishing an “Australian Gas Hub” at Wallumbilla in central Queensland for domestic trade
  • Supporting an industry-led, voluntary code of conduct for gas producers and consumers (with the threat of a mandatory code if agreement is not reached by February 2021)
  • Re-negotiating agreements with east coast gas exporters to ensure enough domestic supply at reasonable prices
  • Supporting the development of five key gas basins, particularly Beetaloo Basin in the Northern Territory

The Federal Government is promoting the initiatives as moves that will both lower gas prices and create jobs.

Via the AFR comes the rentier backlash:

…Sarah McNamara, chief executive the Australian Energy Council, said the threat to build gas-fired power may be counterproductive because it “risks deterring the very investments the government is attempting to encourage”.

Grattan Institute’s energy program director Tony Wood described the government’s plan as unnecessary intervention and overkill.

…EnergyAustralia managing director Catherine Tanna noted the recent Statement of Opportunities report by the Australia Energy Market Operator (AEMO), which said the NSW market needed about 150MW “to reduce the risk of load shedding and meet standards of reliability once Liddell closes”.

…Santos chief executive Kevin Gallagher, whose company wants to develop the Narrabri coal seam gas field, one of five basins the government wants to feed the hub, welcomed the commitment to unlock more gas, including a commitment to underwrite pipeline infrastructure to help establish the hub.

…Atlassian co-founder and keen energy market commentator Mike Cannon-Brookes also questioned the need for the government to build a 1000Mw gas-fired generator in the Hunter Valley. He, too, noted the AEMO assessment and said the Prime Minister should let the market fill the capacity gap.

…”Australia is in the deepest recession in a century and it is hard to see where you get a single job from this announcement in the time frame that we need,” said opposition energy spokesman Mark Butler.

OK, so we can dispense with pretty much all of this whinging. There is no gas “market”, it collapsed around 2014. Increasingly, there is no power “market” either, because the high gas price sets the marginal cost of electricity in the National Electricity Market and margins are so fat for every form of generation that, really, competition has been pushed to one side and the big gentailers only think about how to keep it that way. They time their asset retirements based upon this calculus.

So, the Morrison Government is absolutely right to hit the east coast energy market with a public policy sledgehammer. The question is, is this the right one?

Given the following:

  • No new NSW or VIC gas resources are cheap enough to bring the price down below $10Gj, including Narrabri.
  • NT gas might do it so Beetaloo is a worthy goal but its reserves are dominated by the same gas cartel that trashed the market in the first place (Santos and Origin, plus a few charming foreign marauders like Falcon). This will mean that the patchwork of domestic reservation agreements will leave the cartel able to juggle whatever assets it likes to ship the cheap gas offshore and leave the expensive stuff here. This will include back-filling Curtis Island volumes and LNG operators in Darwin.
  • So, very likely, the gas price will not fall despite there being more gas. In fact, it will need to double from where it is today in the spot market to make the projects viable at all. Contract prices will need to go higher as well.
  • Then ScoMo will try to buy this structurally expensive gas on the cheap using taxpayer’s money for manufacturers. It is not clear to me how this can even work.
  • Having secured permanently high gas prices, ScoMo will build out our gas-fired power generation capacity to ensure that the NEM remains dependent upon high-priced gas, keeping power prices high as well.
  • In the meantime, there will be jobs as we build pipelines and stuff. But no new jobs in manufacturing because there’s still no cheap energy.
  • Greenhouse gas emissions will skyrocket from unconventional the gas sector. But that will be offset in some measure by the other clear implication of this plan: equally skyrocketing household and business solar installation as all forms of centralised energy remain preposterously expensive.
  • Which will, of course, leave those that can’t afford to leave the grid paying ever-higher prices for staying on it.

This plan represents the third great wave of capital destruction in Australian energy in fifteen years. First, we wasted $80bn on gold-plating the centralised power grid at the threshold of the greatest energy decentralisation boom in history. Next, we blew $80bn on building white elephant gas plants that are worthless and recoup costs only by depleting us of the vital transitional fuel at the threshold of the greatest energy transition in history. Now, we will add a layer of government investment over both to preserve the entire disaster in aspic.

Morrison’s plan is some kind of whack Keynesian super pork for the gas sector. An abomination of agglomerated gas and power cartels and lobbies, climate skepticism, trickle-down economics and politics.

Indeed, whatever public interest economic spirit exists in Canberra generally, it is so debased and toxic that it has created and energy abortion the likes of which no third world country has ever seen.

I won’t bother repeating the insanely more simple public policy sledgehammer that would give us cheap gas and power, ongoing decarbonisation and booming manufacturing at the stroke of a pen. I will leave that to Ian Verrender:

If you need to solve a problem, the first thing to do is figure out its root cause.

When it comes to Australian energy, our big problem is that despite being the world’s biggest supplier of cheap gas, we are paying twice the price of our Asian customers, at least on the east coast.

While you’ll hear all manner of complex and obscure explanations from Canberra and within the industry, there’s a pretty simple explanation. It’s called price gouging. And it is being conducted by the three big consortia that export our gas from Curtis Island, a few kilometres north of Gladstone on the central Queensland coast.

Don’t take my word for it. Here’s what Rod Sims, the competition regulator, said about the situation a month or so back when he ripped into the industry:

“When we have lower gas prices around the world, and the Australian market is linked to world gas markets, it is vital Australian gas users get the benefit.”

The exorbitant cost of Australian gas on the Australian market has had two big effects. It has applied a direct financial hit to energy-intensive industries like smelters. More broadly, it was a major reason for the massive lift in electricity prices a few years ago.

Somehow, the entire debate over how to fix what ultimately is an epic market failure has been lost in a fog of politics and conflicting ideology over climate change that has fuelled a revolving door of political leaders from Kevin Rudd and Malcolm Turnbull to Tony Abbott and Malcolm Turnbull (again).

And, as the problem has festered, what should be a relatively straight-forward solution — forcing the exporters to adhere to free market principles and competition law — has resulted in ever more complex plans that primarily aim to appease the various vested interests in the debate.

We’ve had the Finkel Inquiry. We’ve had the National Energy Guarantee that lived up to its acronym, NEG.

And now we have this; a plan for gas-fired power stations that many believe could end up being surplus to requirements and a continental criss-cross of pipelines.

Overhanging all of it is a threat to the industry. Come up with a plan by next April or the Federal Government will build it.

It’s a plan born out of the pandemic and the National COVID-19 Coordination Commission, led by businessman Nev Power, to fire up Australian manufacturing with cheap gas to pull us out of recession.

How much will all this cost?

That’s the $6 billion question. At least, that was the most recent guess for the transnational pipeline alone, which has been a pipedream of politicians dating back to Rex Connor, the Whitlam government energy minister whose demise triggered the dismissal by governor-general Sir John Kerr.

Like all guestimates, particularly for major infrastructure projects, the cost is likely to blow out. And, ironically, cost blowouts on gas infrastructure are a major factor behind our current predicament.

Back in the mid-noughties, when global demand for gas was accelerating and Australia had an abundance of cheap supply, three big consortia raced to gain control of Queensland’s coal seam gas deposits, paying over the top for reserves.

Rather than build one massive export terminal, the three built separate facilities right next door to each other on Curtis Island. The total cost of this came in well north of $80 billion. And ever since, they’ve been writing down the value of them.

A few months ago, Santos lopped another $1.3 billion from its stake in its plant — the fourth writedown — while Origin sliced $1.2 billion from its Curtis Island interests. Shell, which controls the third plant, took a $9 billion hit to its Australian gas interests, accounting for about 40 per cent of its $22 billion global gas devaluation.

Woodside joined the party with a $4 billion writedown, part of a global rush to devalue assets as energy prices collapsed in the wake of the pandemic-inspired recession.

Investors routinely take a hit when companies make poor investment decisions. It’s taxpayers who foot the bill on government projects when they turn sour.

Is gas the fuel of the future?

While it’s possible energy prices will recover in the coming years as economic growth picks up, not everyone is convinced.

Energy giant BP this week warned we may have hit peak oil demand and, among its more likely scenarios, increased carbon emission restrictions and higher carbon prices will accelerate the trend towards renewables.

The graph below shows the mix of energy sources as of 2018 on the left.

Only under a business-as-usual scenario does demand for gas grow meaningfully.
Only under a business-as-usual scenario does demand for gas grow meaningfully.(Supplied: BP)

By 2050, the only meaningful lift in gas demand is if there is no shift in global climate policy (the bar on the right).

If you look at the two bars in the middle, where emissions rules are tightened — quickly or extremely quickly — oil, gas and coal demand shrinks.

The latest energy plan unveiled by Prime Minister Scott Morrison is based around two concepts.

One is that we need more gas in the system. The other is the idea that we don’t have enough electricity generation, or rather that the shift towards renewables leaves us exposed when not enough wind or solar power enters the grid.

There’s a good argument in favour of the first but few experts agree with him on the second.

The rapid advancements in electricity storage, via battery, are likely to tip the scales in favour of renewables as dispatchable energy in the future.

Even the Prime Minister refers to gas as a “transition fuel”. That’s a lot of money to be spending on a temporary fix.

Get out the ‘big stick’ and use it

When it comes to gas, given we produce vast amounts of the stuff, there shouldn’t be any shortages.

The problem is that the exporters — Santos, Origin and Shell — are so far under water on their gas investments, they have decided to maximise profits where they can.

They’ve been exporting all our low-cost supplies to their markets in Asia and funnelling higher-cost supplies to the domestic market. Even then, the pricing arrangements are so opaque, it’s difficult to exactly determine the costs.

One of the Prime Minister’s solutions to this is to create a national gas hub, just like in the US, with gas from Western Australia feeding into a national network. This would create a far more efficient market and transparent pricing.

As a concept, that’s not a bad idea. But, again, at what cost?

What if perennially weaker prices mean those thousands of kilometres of pipelines are worth far less than the cost of building them?

A study for the Federal Government two years ago rejected the idea on the grounds it was uneconomic.

Sims has a simpler solution. Last month, he argued the Federal Government should extend the agreement it signed three years ago with the east coast exporters when it first threatened the “big stick” and ordered excess export gas to be redirected into the domestic market.

But he has argued the pricing commitments should be tightened.

In other words, use that big stick.

He also hinted more gas suppliers would result in more competition and the Government should look to grant gas tenements to other producers. That’s code for unwind the oligopoly.

Will cheap gas reboot manufacturing?

It wouldn’t hurt. And it certainly would be a boost for those industries that have been hobbled by the surge in energy prices over the past decade, ever since the east coast began exporting gas.

But, as Tony Wood from the Grattan Institute points out, there’s more to manufacturing than gas.

He argues that if that’s all that was required, Western Australia would have been transformed into a manufacturing powerhouse.

It’s had cheap gas since 2008, when it forced the hand of global gas giants to reserve a portion of their gas production for the domestic market, something the eastern state premiers overlooked when they ticked off on the Curtis Island debacle.

It’s a mistake they are still paying for.

David Llewellyn-Smith
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Comments

  1. The irony is that the government funded snowy hydro 2 has brought down the wholesale cost of electricity, which is making any investment in gas power plants financially not profitable.
    Dont forget that SA was planning to build a solar thermal power plant, but could not get funding because it was financially unviable.
    It appears that other countries carbon taxes are causing the price of gas to fall on the global market, so therefore we dont need a carbon tax. Other countries are doing it for us.
    All it is going to take is further breakthroughs in battery technology and the price of electricity will collapse.

  2. At this stage of the game it simply begs the question of whether it is the policy of the current Australian LNP government, headed by PM Scott Morrison, to completely trash the competitive basis of the Australian economy and to inflict lasting economic pain on all Australians.

    Further to that, if we think it was an ALP government (Gillard’s) which OK’d the Gladstone white elephant, and governments of both flavours which have looked the other way while Australian gas which once meant amongst the cheapest gas prices in the world for Sydney and Melbourne, and therefore cheap electricity, has become about the world’s most expensive – while both sides of politics try to nudge coal seam gas and fracking on a population all too aware of the environmental and health costs this entails – then the following question simply arise.

    Does Australia’s body politic – both mainstream sides including the Lberal Party, the National Party and the Australian Labor Party – have at its core an economic policy of completely trashing the competitive basis of the Australian economy and to inflict lasting economic pain on all Australians.

    Have Australian public sector data gathering, regulatory, and policy formulation organisations and departments been so corrupted that they do not identify the above? Have they been so neutered that they cannot report the above to Australian politicians?

    And at that point

    Are Australian political and public sector elites acting in the best interests of Australians? Are they accountable for acting in the interests and explaining their actions to Australians to a sufficient degree enabling Australians to feel that their politicians and senior policy makers are accountable to them? ….and if they are not, How can they be made more so?

    It is time for open revolt.

    I think it is time for a new political party which I would call putatively Bullshit Australia – the party to identify and deal with Australian Bullshit and to promote informed and data backed decisionmaking throughout the political and administrative bodies of Australia, and to hold politicians, public officials and corporate interests to account for past decisions made, starting with a permanent standing Australian Corruption Commission.

    • Arthur Schopenhauer

      The term Hollow State is used to describe a set of governmental practices in which states contract with third parties (private companies) in order to distribute government services. In a hollow state there are many degrees of separation between the source of taxpayer funds and the final distribution of taxpayer-funded products or services. Services paid for by the state are produced by a vast network of providers and the task of the government is not to manage provision, but to negotiate contracts with providers. There is no “command and control” relationship between government and contractors. Contracts are managed by countless agencies and even more providers, there is no means of central record keeping or data management.[1][2] A Hollow State has all the standard edifices of governance although most are under the influence of third-party organizations, either for-profit or non-profit entities.

      https://en.wikipedia.org/wiki/Hollow_state

  3. The lobbies and Govt get away with this terrible (for most Australians) policy because the public doesn’t understand what makes electricity, or even gas, expensive.

  4. “Morrison’s Keynesian gas pork abomination” lol! who’s that for?
    Sorta like Gillespie’s Birdland special from 1956: “For musicians only!”… great album.

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