Electricity and the carbon price have dominated our national policy debate in the past three years, but in the first 100 days of the next government’s life, there’ll be a new energy problem to tackle: natural gas.
Between 20 and 25 per cent of energy use in Australia is gas consumption and the predicted tripling of its price over the next few years will hurt our households and manufacturers.
Australia’s domestic market for gas had settled at around $3 per gigajoule (into Sydney or Melbourne), reflecting plentiful, easily-accessible reserves in Bass Strait and the Cooper and Bowen basins.
Our proven reserves – according to the Prime Minister’s Manufacturing Task Force – are 184 years.
This is the gas market that Australian industry operates in: cheap and plentiful gas, one of the underpinnings of Australia’s first world economy.
Unfortunately, the LNG export plants in Queensland are forward-buying as much gas as they can for export, which has removed around 80 per cent of the eastern market’s natural gas from the domestic supply. Remaining domestic gas is then re-priced as if it was being sold in the Asian market – a strategy called export parity pricing.
Manufacturers have expressed their opposition to export parity pricing, pointing out that countries in Asia pay up to $12 per gigajoule for Australian LNG because they are gas-poor countries who must import. Australian industry operates in a gas-rich environment – the previous $3 per gigajoule gas supply reflected the reality of this abundance of natural gas.
Furthermore, because of the size of the LNG export terminals at Gladstone, their forward-buying of gas has taken in the easily-accessed gas from Bass, Cooper and Bowen, which is also the ‘cheap’ gas. Whether by design or accident, local manufacturers’ new gas tariffs are paying for new exploration.
Gas producers have mounted an argument that the market will sort out what’s best for the nation, and some have labeled the manufacturing sector ‘interventionist’ and ‘protectionist’.
However, taking an economic laissez-faire approach to gas doesn’t account for ‘the market’ failing to operate as a market should.
According to the Bureau of Resources & Energy Economics’ Australian Energy Projections report from 2011, Australian gas production will increase fourfold to 2035. But prices won’t come down. The Prime Minister’s Manufacturing Taskforce in 2012 identified that natural gas prices had already risen by 70 per cent and were likely to go higher because of the export LNG market.
Moreover, the Australian gas market has none of the competitive tension we associate with a market. There is no spot price for gas, there are no gas-on-gas competitors, entire basins (wells, pipelines, interconnectors) are controlled by single entities, and export parity pricing is based on 20-year supply contracts to north Asia.
This is not a market where Australian business can shop for the best price.
The scramble to send LNG north to Asia has not only distorted gas pricing, it has made supply uncertain.
Already, a number of large chemical enterprises in this country cannot secure supply contracts past 2016 – this is critical because industries such as fertiliser and plastics use gas as a transformational agent in production.
Uncertainty over gas means investment into the chemicals industry is not coming to our shores because one of our strategic, competitive and available advantages – low and stable gas prices – has ceased to exist.
We have already lost a one billion-dollar investment – from Newcastle to the southern United States – primarily because the company could buy $4 per gigajoule gas in the US compared to the almost $9 gas on offer in Australia.
The looming gas crisis also means we lose our ability to develop clever graduates, to keep smart projects onshore and to see ideas through from concept to production.
Without a robust chemicals and plastics industry we would never have invented and produced the Australian polymer banknote – the local inventors would have developed it in Singapore, Texas or the Netherlands.
Value-added industry is crucial for a nation’s long term prosperity. According to the National Institute of Economic and Industry Research (NIEIR), for every $1 gained via LNG export, $21 to $24 is foregone in domestic industrial production. Clearly, an export-weighted gas policy is not sustainable.
The solution is for government to design a domestic gas policy that creates stability and certainty in the homeland, while allowing a profitable LNG export business.
This is possible without invoking the negatives of ‘regulation’. In the United States and Canada, gas regulation protects domestic users – it doesn’t stop producers making a return on investment.
In the US this means there are virtually no LNG exporters because domestic consumption soaks up supply, while Canada reduces gas exports as production reduces. It’s hardly ‘interventionist’.
In Australia we have no domestic gas policy and we need one badly. The federal Minister for Resources and Energy, Gary Gray, is investigating the domestic gas market but the issue is one needs resolution.
Natural gas is a ‘first 100 days’ issue for whoever occupies the Prime Minister’s office after September 7. We all look forward to discussing a framework that allows all parties to thrive off what is, after all, a national resource.
Margaret Donnan is the CEO of the Plastics and Chemicals Industries Association (PACIA).