The Australian
For millions of east coast gas consumers, it may even be a case of cold showers and camp ovens.
AUSTRALIA is about to become an extreme case of the paradox of plenty — a gas-rich country that cannot supply its domestic needs. And the response so far from state and federal government is policy paralysis.
When the three industrial behemoths now under construction on Queensland’s Curtis Island start exporting liquefied natural gas over the next two years, Australia’s earnings from gas exports will more than double. But the prices paid by domestic consumers are forecast to either match this – or triple – as the plants hoover up all the available supply.
For millions of east coast gas consumers, it may even be a case of cold showers and camp ovens because there will be no gas available at any price. The $60 billion investment in these plants and their related infrastructure has created thousands of new jobs, but for businesses and households on the eastern seaboard they also mean heightened energy insecurity, with gas supply contracts expiring just as the new exports begin.
AGL chief executive Michael Fraser warned last April that these plants would operate “like a giant vacuum cleaner for the east coast gas market”, but since then state and federal governments have stood by and watched the train wreck unfold.
Major industrial users report they are unable to secure new contracts with major producers because all available gas is contracted for export markets.
Brickworks managing director Lindsay Partridge, who runs 40 plants across the nation, told Inquirer the company did not have gas supplies for its east coast operations from 2015, and he called on governments to
intervene.
“If there’s no gas available for domestic consumption the governments – state and federal – will have to step in and make it available, otherwise it will be political suicide not to. It is the same as if they failed to supply electricity. In two years time they will have no choice,” Partridge says.
Another major industrial user, who asked not to be named, has been unable to secure new contracts with domestic producers Santos and Origin for the past two years.
The effects of Australia’s looming gas crisis will intensify the wrenching structural changes Australia is already experiencing as a result of the mining boom. The latest round of job shedding announced this week by Boral and Bluescope Steel reflects the reality of life in the slow lane of the two-speed economy, where a combination of the high dollar and an investment
drought in non-mining sectors is the main cause of woe.
But the prospect of rapidly rising energy prices adds a whole new dimension to Australia’s manufacturing economy. The likely price impact would be far greater than the carbon tax and it would skew local energy supply towards cheaper, but carbon-intensive, coal. Completely at odds with federal government policy.
To address this vexed problem, Labor has adopted a strictly hands-off policy, believing market forces will come to the rescue. Ironically, the Coalition supports a domestic reservation policy as practised in Western Australia, the US and several other gas-rich countries. This means requiring industry to supply a set share of available gas resources to the local market.
Coalition governments in NSW and Queensland are yet to develop policies on these issues, which are a source of considerable disquiet among some of their federal colleagues.
Labor also has its dissidents, including Australian Workers Union national secretary Paul Howes and several federal MPs who called for a reservation policy in a caucus committee report on the mining boom.
After being pressurised and frozen at minus 160C, the methane gas extracted from a vast network of pipelines stretching across 20,000 sq km of southeast Queensland will be shipped from Curtis Island, near Gladstone, through the Great Barrier Reef Marine Park to export markets in Asia.
Australia’s annual exports of LNG, mainly from Woodside’s North West Shelf fields, amount to about 20 million tonnes or 50 per cent of total gas production. But within the next two years production from the Queensland plants will more than double. When new LNG plants in Western Australia are added in, annual export volumes are on track to increase fourfold over the course of this decade to more than 80 million tonnes. Cost blowouts for LNG developments in Queensland and Western Australia will intensify the supply pressures and may make resource companies reluctant to develop the nation’s gas reserves in the future.
And a further setback for the industry is the move by a coalition of green groups in the US to mount a legal challenge against funding for Australian projects by the government-owned EXIM Bank. The Centre for Biological Diversity says EXIM failed to take into account the effect of the plants on threatened species such as dugongs and turtles, contrary to US environmental laws.
However, Resources Minister Martin Ferguson is confident market forces will prevail. He says Australia’s abundant reserves of shale gas can be brought to the market at a far lower cost than building a new LNG plant, but the question is one of timing.
“Shale gas adds a new dimension,” says Ferguson. Small reserves of shale can be brought on at far smaller cost than an LNG plant. That can change the nature of the supply debate.
“The current glut in the US goes back to the fact that the investment stream occurred when prices were $11 a gigajoule. With prices now at $2-$3, gas is being flared.”
Asked whether these new supplies might also be shipped offshore, he said: “You are going to get a combination of export LNG plus domestic.”
The opposition’s resources spokesman, Ian Macfarlane, resources minister in the Howard government, has advocated a limited reservation policy, although industry says in reality there is little difference in the policies of Labor and the Coalition. Macfarlane told The Australian last year that in government he would “promote the idea of acreage reservation for domestic production, whereby certain areas are set aside, wholly or in part, for the extraction of gas for the domestic market”.
The policy would be developed in conjunction with the states, through a ministerial council or the Council of Australian Governments. His office confirmed yesterday that the position still stands.
While Macfarlane was unavailable to expand on these comments, industry spokeswoman Sophie Mirabella said the policy was still in development and the Coalition was “looking at a variety of measures”. She said the policy would “balance the interests of local users and international markets”, and rejected the notion that the Coalition would be interventionist.
Industry groups say the Coalition isn’t serious about intervening and that any reservation policy would come too late to avert critical shortages in gas supply.
DomGas Alliance, a West Australian coalition of industrial gas users, says the federal government should look to WA’s reservation policy, which has guaranteed 15 per cent of new fields to the local market, even though a
supply cartel has kept prices higher than in other states. DomGas executive director Gavin Goh says the government needs to address a serious market failure.
“Most of the resources are controlled by a very small number of companies. We don’t have a market anymore, the market has failed,” he says. “If you look at Gladstone, it’s under-resourced for meeting contracts. Any gas discovered will be sucked into Gladstone.”
DomGas argues evidence around the world supports the case for reservation policies. In WA, gas companies have invested about $100bn in new fields following the introduction of its reservation policy. Other states could introduce similar policies, but are reluctant to do so.
When asked if he supported a reservation policy, the office of NSW Resources Minister Chris Hartcher provided a general answer. “The NSW government is working to ensure our gas resources are appropriately developed to maximise benefits to NSW. Pricing depends on supply and demand, key to which is the development of our reserves to ensure our own energy security,” Hartcher said via a spokeswoman. Asked to comment on claims the state would run out of gas from 2015, she declined to spell out any policy action other than renewing some coal-seam gas licences.
“The NSW government has been advised that we are to begin facing a gas supply issue from as early as 2014-15 as contracts begin to expire,” she said.
“A responsible government must take the necessary action to maintain and increase our state’s energy security, which includes the responsible development of a domestic gas industry.”
While this issue will play out in this federal election year, both NSW and Queensland will face elections at the very peak of the projected spike in prices in 2015 and 2016, which may well focus their attention on the need for serious policy action. For industry leaders such as Lindsay Partridge, the extent of the policy failure is breathtaking. As he sees it, Australia is a gas-abundant nation that is “effectively shutting down manufacturing to export
gas”.
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