Energy companies have agreed to the PM’s request to increase the supply of gas to the domestic market.
AUSTRALIA is “swimming in gas” but ordinary citizens are not benefiting from this precious resource.
Recent warnings of a coming gas shortage has exposed what a raw deal Australia has when it comes to its own resources.
As energy analyst Bruce Robertson told news.com.au last week, Australia has been “uniquely stupid” in allowing companies to dig up resources that belong to the Australian people and sell it overseas, without even ensuring there would be enough gas to cover our own use.
Instead big gas companies are selling the resource overseas for a profit, and even other countries are making more money than Australia is from its own gas.
Here’s why the system is broken:
AUSTRALIA HAS PLENTY OF GAS
The Australian Energy Market Operator has warned that Australia is about to run out of gas but that’s not actually true.
BHP Petroleum chief Mike Yeager told journalists in 2014 that there was plenty of gas available in the Bass Strait, and it could supply people in Victoria and NSW, and possibly even Queensland, “indefinitely”.
Australia has plenty of gas to supply its own needs, but gas companies on the east coast have been sending this overseas ever since they were allowed to build three liquefied natural gas (LNG) plants at Gladstone in Queensland.
The plants allow coal seam gas to be chilled and turned into liquefied natural (LNG), which takes up less space and is cheaper to ship overseas.
But when the initial developments were approved, the Queensland Government, under the leadership of Labor’s Anna Bligh, rejected an option to require a percentage of the gas produced to go towards domestic supply.
This was despite the government being warned in 2009 that there could be problems with supplying its own citizens.
“Australia is unique in its sheer stupidity in allowing companies to exploit our resources and not insist they provide for our domestic market,” Mr Robertson told news.com.au.
“We are swimming in gas, the idea that we cannot provide for our own population is just a total failure of our energy policy.”
Nowadays about two-thirds of the gas produced on the east coast is sent to Asia.
At the moment Australia is the world’s second-largest LNG exporter, providing about 12 per cent of the world’s gas, and it is expected to become the world’s largest exporter by 2020.
Yet the Australian Energy Market Operator warned last week that Australians may soon be left to swelter or freeze because they can’t get enough gas for their own use.
It predicted that NSW, Victoria and South Australia could feel the impact of gas shortages by the summer of 2018-19.
GAS PRICES IN AUSTRALIA HAVE SHOT UP
The development of LNG plants to ship gas overseas means Australians are now competing with overseas markets for supply of their own gas.
Part of the reason there is a shortage is because Queensland coal seam fields are not delivering as much gas as companies originally thought they would. It has also cost more to get out of the ground than expected.
On top of this, an unexpected global glut of gas means companies are not making as much money as they thought they would.
This puts pressure on them to sell more gas and the Australian Competition and Consumer Commission has noted that companies are choosing to sell gas on the overseas “spot market”, on top of fulfilling their contracts.
In order to get more gas to send overseas, LNG operators have turned to conventional gas supplies, mainly from South Australia and Victoria.
This means that cheap gas extracted from the Bass Strait, which was mainly used by Victorians for their heating and cooking, is now being pumped all the way up to Queensland to be sold overseas.
ACCC chairman Rod Sims told a conference this week that demand for gas on the east coast had “tripled virtually overnight”.
This has pushed prices up and it doesn’t help that there is little competition in Australia so companies can charge higher prices locally.
Mr Sims said there were now reports of Victorian manufacturers being offered one and two-year contracts for gas at a wholesale price of $20 per gigajoule or more, much higher than the historical average of $3-$4.
The problem has become so bad some manufacturers are warning they may have to close “purely as a result of the current gas crisis”, he said.
THE GAS CARTEL
Gas on the east coast of Australia is controlled by a handful of companies and the lack of competition means they can charge higher prices locally.
At the moment, supply is controlled by six companies: Santos, Exxon, BHP, Origin, Arrow Energy and Shell. Some of these companies also control pipelines used to transport gas around the country, also adding to inflated prices.
Mr Robertson said companies were sitting on gas reserves and not releasing enough of their product.
“Companies are sitting on permits, not developing them and restricting supply so they can make a lot of money,” he said.
He said the global glut of gas, which is predicted to continue until 2030, has also put more pressure on companies to make money domestically.
The more they restrict supply locally, the more money they make.
It’s created the bizarre situation that sees Australian gas being sold in Japan for a wholesale price that is cheaper than the price it’s available for in Australia.
Santos, Shell and Origin Energy have to stick to long-term contracts they signed with Japan amid a global glut, but the lack of competition in Australia means they can restrict supply locally and drive up prices.
Australians are now paying a price higher than the international price for gas.
There’s even talk about Australia importing its own gas back because this would be cheaper.
OTHERS MAKE MORE MONEY FROM AUSSIE GAS
Australia is also not profiting as much as we could from selling our gas overseas.
Japan reportedly puts a tax on the gas it imports from Australia, which will deliver it $2.9 billion over the next four years.
In comparison, Australia will not receive any money from its petroleum resource rent tax from gas projects over the same period. We get $0 in tax from selling our gas overseas.
Most of the $800 million we do get from the tax every year comes from established oil operations in the Bass Strait, rather than from LNG producers.
Qatar, which is the world’s biggest exporter with 32 per cent of the market, also reportedly raises three times as much in royalties as Australia for selling the same amount of gas.
BUT MALCOLM’S FIXED IT RIGHT?
The even sadder reality is the government has little power to force gas companies to give us more gas to keep the country’s power supply stable.
The government can’t even find out how much gas the companies have got in their reserves.
After talking tough about forcing companies to provide us with more gas, Prime Minister Malcolm Turnbull emerged from a meeting on Wednesday, saying he had a guarantee Australians would get more gas.
He said gas producers committed to ensuring there was enough gas to meet peaks in demand and bring more supply into the market as quickly as possible.
There’s no way for Mr Turnbull to force companies to do this, except by threatening to block their exports.
Whether this threat is enough to get the gas companies to play ball remains to be seen, but the Australian Financial Review noted on Friday gas producers were only giving “vague assurances”.
Citigroup analyst Dale Koenders told the AFR local prices would still need to be high enough to make it pay.
But the Prime Minister also agreed to speed up reforms to provide greater transparency about how much companies are charging for the use of pipelines that carry the gas across Australia.
The ACCC found pipeline operators were able to charge higher prices because of the lack of competition, and this has also added to the cost of gas. It hopes to bring down prices by exposing details about costs so that companies can tell whether the prices are really reflective of the costs of delivering the service, or if they are being over-charged.
THEY WANT MORE
The gas companies are complaining they do not have access to enough gas and blame state governments for banning things like coal seam gas exploration.
The Victorian government has banned all onshore gas exploration and production, and there has also been delays over projects in NSW and the NT.
Shell Australia chairman Andrew Smith said developing additional local supply, particularly in Victoria, was a key component of ensuring competitive prices.
The Prime Minister has agreed to continue pressuring these governments to reconsider the bans.
But it might be worth remembering that current arrangements do not guarantee any of this extra gas will be pumped into the domestic market. Based on recent experience, it’s likely to go overseas.
And that’s worked out so well for us so far.
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