It is easy to draw analogies this week between Australia today and Eastern European countries during the 1970s and 1980s when they exported anything and everything to earn foreign income while their citizens starved at home.
The consequences of market failure in our natural gas market have again made headlines with leading advanced manufacturers, Dow Chemical and Qenos, pressing the case for urgent interventions.
Market failure is evident in the suppression of natural gas supply for domestic and industrial use – despite Australia being home to one of the world’s most abundant gas reserves.
Advanced manufacturers have been sounding the alarm for many years. They have pointed to: the “vacuum cleaner” effect of the large LNG export projects in Queensland, which control Queensland’s gas reserves and will continue to suck gas supplies from Victoria and elsewhere. They pointed to the fact that extreme market failure, lack of transparency and the consequent lack of competition means there is no “market price” for gas. There are only ways you agree on a price with your customer; that large export contracts will cause – have now caused – a domestic shortage.
In fact, a COAG energy market review in 2002 observed “strong fears that this current lack of upstream competition will lead to much higher gas prices once current contracts expire over the next few years.”
Damage to Australia’s manufacturing sector and across the entire economy is ongoing. A study commissioned by the Australian Industry Group and PACIA in 2012 found that suppression of domestic industrial gas use would cost $21 in lost valued-added product for every $1 gained in gas exports.
Major manufacturers such as Incitec Pivot warned in 2012 that they could not even buy gas. The company’s planned expansion in Australia was subsequently shifted to the U.S. where they could secure long-term gas prices they could depend on.
The link between energy prices and manufacturing has been ignored for too long.
The U.S. shale boom has been a major contributor to a steady growth in manufacturing employment there. The US Bureau of Labor Statistics reports that manufacturing added 646,000 jobs to the economy from February 2010 to May 2014, and manufacturers are actively recruiting to fill another 243,000 positions.
Solutions to the gas market failure were evident to the COAG panel back in 2002 and they remain valid in 2016:
- facilitate the move to a mature gas market with many players and an active short term market
- promote upstream competition – for example, exploration licences should be assessed on the criterion that they promote competition
- joint marketing by producers should be voided
- remove regulatory uncertainty in pipeline investments
- ensure that significant pipelines are competitive through ring fencing and ensuring tradeable capacity
- enforce transparency in supply and pricing, to enable industry to negotiate.
The Australian Advanced Manufacturing Council strongly encourages the Federal Government to review long-standing exploration licences that have not been exercised, in the context of promoting increased competition.
And on the hot topic of increasing supply, we suggest that development of coal seam gas be facilitated by community-driven arrangements such as trusts and foundations that have economic rights to participate in the development of the resource on behalf of a local community.