The rising price of gas

One of the Santos GLNG  gas compressor plants under construction near Roma.
One of the Santos GLNG gas compressor plants under construction  in the Surat Basin near Roma.

More indications arrived this week the price of Australian domestic gas is likely to double or triple after 2014 – though not for the reasons people in the industry are spruiking. Research from the Australia Institute says the current wholesale price of $3 a gigajoule would likely go to $9 in three years. Increases of this magnitude will put pressure on manufacturing businesses, mostly in Victoria dependent on gas. But that is the likely outcome once the eastern seaboard gas market becomes connected with the world.

This is not the only recent research that predicts this. Geologists always knew about gas in the coal seams of Queensland and NSW but it was too expensive to drill for in comparison to natural gas trapped in conventional chambers. Higher prices in Asia, suddenly made that CSG more valuable. The three big companies and their backers are spending $60b to extract the gas, and to build pipelines and the LNG plants for export to Asia.

Those export plants are on Curtis Island off Gladstone where US-construction giant Bechtel is building three massive facilities for Santos GLNG, Origin APLNG and BG Group’s QCLNG  next to each other. Rolling out in 2014, the plants will have a combined capacity of 20 million tonnes of LNG a year. They will take methane gas from the coal seams of the Surat (west of Toowoomba) and Bowen (west of Mackay) Basins and supercool it below minus 160 °C so it condenses into liquefied natural gas compressed for shipping.

In Japan customers will pay $15 a gigajoule for LNG. When you take away the $6 a gigilitre cost of liquefaction and transportation, what’s left is the netback price. Australian producers could charge a netback price of $9 a gigajoule and still find a Japanese buyer. With Gladstone available, why would local producers continue sell to local customers at $3 a gigajoule?  The domestic price is bound to find equilibrium with the export netback price as domestic supply drops. Given the size of the world market, the equilibrium will be mostly in the direction of the current world price.

Gas availability is not the issue. The Government’s BREE (Bureau of Resources and Energy Economics) says adjustment would depend on “consumers sensitivity to changes in gas prices.” Origin recently agreed to supply Santos with 365 petajoules of gas from 2015. This will make it hard for domestic gas buyers on the east coast to secure supplies beyond 2014. Queensland will be worst hit. Santos and Origin did not reveal the price but said it was linked to the oil market. At $100 a barrel of oil, that already pushes the gas price up to $7 a gigajoule, twice as expensive as the domestic market.

The gas companies admit price rises are coming but try to turn the argument. They say domestic supply problem could be solved by more drilling and blames the campaign waged by the anti-coal seam gas protesters for driving up prices. It ignores the huge facilities at Gladstone changing the rules of the game. These facilities would not have been built if Queensland didn’t identify CSG as a power source. Huge new infrastructure will link us to the world market regardless of how much we produce.

There is only way to keep the price down – set a reserve price. That’s what they do in Perth for Western Australia’s offshore industry. WA is behind Queensland in the production of CSG but has huge conventional sources. These produce 60% of Australia’s gas (twice as much as the eastern seaboard). WA’s gas network is not linked to the east but is linked by LNG plants to the world market – with more to come. Yet WA has a gas reserve which insists a quota of 15% is kept for domestic use. It creates a guaranteed market that cushions it from the higher world gas price though it is more expensive than the eastern seaboard.

The eastern jury is out on the reserve issue. Analysis by law firm Minter Ellison shows different parliaments have different ideas. The Commonwealth is against but federal Liberal have not revealed their position. Also against are South Australia, Tasmania and the territories. The NSW Government has recommended one but not actioned on it yet. Queensland is different again. It has a loose reservation clause in law. They could require every tenement holder to set aside 15% for domestic use but no contract has this proviso. Energy Minister Mark McArdle calls it a last resort.

Though not explicitly endorsing it, the Australia Institute sees no reason a reservation price should not happen. It said a reserve would create two markets, one for domestic and one for international. Since producers extract sufficient gas to supply Australia at a low price, they could still earn healthy profits by selling additional gas at the world netback price. The gas reserve policy would not act as a disincentive to further investment in new gas production. With four states and one territory involved, getting an eastern seaboard reservation price would be more complicated than the one in WA, the Institute said.

The gas industry is against a reserve, saying the cheaper local price would prevent investment in new supply.  Industry peak body APPEA denounces “the folly of providing industry-specific assistance and using subsidies to resist structural economic shifts”. APPEA’s eastern region chief operating officer Rick Wilkinson (not Williams as The Australian and other media called him) said rising gas prices were something NSW may have to get used to unless the industry could “get on with developing NSW gas resources”.

The Grattan Institute agrees, calling a reserve domestic price protectionism that “inequitably shifts economic benefit from producers to some consumers”.  It quotes BREE which says a reserve would lower gas prices. However it would also increase lobbying costs, reduce investments and decrease supply as it lowers the incentive to drill.

Reserve price or not, the introduction of CSG has made gas more profitable. The companies want to drill for more, particularly in NSW where the gas lies in more populated regions. But rather than attack the NSW Government for imposing restrictions, industry advocates like Wilkinson prefer to influence public opinion by blaming the protesters. “For this (rising prices), they have local anti-CSG activists to thank,” Wilkinson told The Australian.

Blaming protesters is designed to turn public support against restrictions and increase pressure on the State Government to remove them. The Gladstone LNG plants will set the price not production flow and only reserve price intervention will change that.

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