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Analysis: How to engineer a gas-led recovery and save $6 billion

It’s always a good time for a bit of nation-building. And there’s no better time than when the chips are down.

While argument rages as to how best to fight our way out of the worst economic downturn in more than a century, the corporate world last week delivered its very own verdict on what has been proposed as the preferred method. And it wasn’t good.

When the pandemic hit early this year, forcing households, communities, states and even nations into self-isolation, thoughts quickly turned to the future.

And why not? There’s nothing like a bold plan, or a roadmap as we like to call them these days. They generate positive headlines and lift the national spirit, not to mention the polls.

In the time-honoured tradition of these things, Prime Minister Scott Morrison did what all politicians do; he put together a committee, the National COVID-19 Co-ordination Commission, a team of business experts to advise the Government.

In the months that followed, as the usual calls to dismantle the industrial relations system and cut taxes for the well off dominated the discussion, the commission came up with something straight out of left field; a gas-led manufacturing industry renaissance.

Apart from the romantic notion of it all, superficially at least, it had some logic going for it.

Traditional manufacturing has been in steady decline in Australia for decades, leaving us exposed to the whims of global supply chains.

And the manufacturers we have remaining have been up in arms about the soaring price of domestic gas in recent years, ever since we became the world’s biggest exporter.

True, the committee was led by Nev Power, a fellow with a vested interest in the gas industry, so the key recommendation shouldn’t have come as any great shock.

What was a surprise, however, was that rather than a free market led philosophy, and greater powers to the regulator to stop gas exporters overcharging local users, the committee instead called for huge government expenditure in gas and, particularly, national pipelines.

Billions of dollars; $6 billion, in fact.

But perhaps the commission overlooked an easier and far cheaper solution.

Gas losses continue to mount

Areial shot of the Curtis Island LNG plant

Some of the world’s biggest gas companies created multiple LNG plants on Curtis Island, off Gladstone.(www.rcrtom.com.au)

It has become almost an annual event; writedowns and huge losses on our east coast LNG export facilities. But this year took the cake.

Ever since gas giants Santos, Origin and Shell decided more than a decade ago to build three competing processing facilities next door to one another on Curtis Island, a few kilometres north of tropical Gladstone on the Queensland coast, everything that could have gone wrong has.

The expected global boom in demand for gas occurred. But other countries ramped up production.

Then there were problems extracting gas from Queensland coal seams which made it more expensive. And for the past few years, the cost of oil has plummeted, taking gas prices with it.

Then COVID-19 hit just as OPEC and Russia went head to head in an oil price war.

It has been an economic catastrophe for the exporters who spent $80 billion on the export terminals and a national disaster for household and business consumers who are still paying for the mistake.

Last week, Origin announced a 93 per cent drop in earnings, hit by lower oil prices, a drop in electricity prices and the increased prospect of bad debts from retail consumers.

A few weeks earlier, it announced a $1.2 billion writedown of its gas interests, following a massive write-down in 2017.

Rival Santos delivered a $1.3 billion devaluation, its fourth mammoth writedown since the Curtis Island project was launched, a plant that has never reached full production.

But global giant Shell knocked the others out of the park with a $9 billion wipe of the slate on its Australian gas assets, amounting to around 40 per cent of its total $22 billion global writedown.

Woodside, the country’s biggest oil and gas producer, joined the party with a $3.9 billion write-off as collapsing oil prices slashed asset valuations across the globe.

Green lobby groups over the years repeatedly have warned of the dangers of investing vast amounts of cash into what could become “stranded assets”.

Those concerns now have become far more mainstream particularly as demands increase for a low carbon emission world.

And that leaves the Morrison Government in a bind. It’s one thing for private enterprise and investors to torch oodles of cash.

It is quite another for a Federal Government already looking at a massive blowout in its budget spending.

Why do we pay double for our own gas?

If there is one place where energy prices, particularly gas prices, are holding firm, it is on the east coast of Australia.

For five years, gas shortages have squeezed the market, pushing prices higher as the three big export terminals plundered domestic supplies as they desperately tried to fulfil their international contracts.

In a ludicrous twist, Australians found themselves short of gas just as the nation became the world’s biggest exporter.

To alleviate the east coast shortages, numerous ideas have been floated; from reimporting Australian gas that’s already been exported to Asia to building a pipeline from the west, an idea that was rejected just two years ago as uneconomic in a pre-feasibility study for the Federal Government.

Back then, as the escalating energy crisis engulfed Canberra, the Prime Minister threatened exporters with “a big stick” if they continued to drain local supplies.

But nothing has changed, the stick remains locked in the closet and the $6 billion pipeline is back for discussion.

And that has the gas exporters worried. If gas prices fall, they warn, there’ll be no further investment.

Last week, the competition regulator blew up, highlighting the widening gap between domestic gas prices and cheap global gas contracts.

Between late last year and early this year, the three big exporters out of Queensland sold massive amounts of Australian gas offshore at half the price they were charging at home.

An increasingly frustrated Rod Simms called out the majors for selling gas locally at between $8 and $11 a gigajoule when export prices had fallen as low as $5.

“The ACCC is very concerned with the widening gap between domestic and export parity prices, which will have an inevitable impact on Australia’s industrial sector during what is already a difficult economic period,” he said.

Tell ’em they’re scheming

When the gas giants launched Australia into the global gas markets, prices trebled and large-scale manufacturers accustomed to cheap energy were up in arms.

Given gas effectively sets electricity prices — as the peak hour power generation fuel — it also was a big factor behind soaring household energy bills.

A Santos-branded Danger sign along a road

Santos has been lobbying to open up new gas fields.(ABC News: John Gunn)

The argument from the exporters back then, however, was that given we were exporting gas, we were locked into the global pricing mechanism and there was precious little that could be done.

That rationale clearly has Mr Simms baffled now that the pricing tables have been turned.

“I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets,” he said last week.

“When we have lower gas prices around the world, and the Australian market linked to world gas markets, it is vital that Australian gas users get the benefit.”

For the past decade, Santos has been lobbying to open up new gas fields, particularly its Narrabri project in NSW.

The argument is that adding extra supply into the domestic market will alleviate the shortages and bring down prices.

Some analysts, however, argue Narrabri gas is more expensive to extract and that given Santos will price it on the domestic market to make a profit, the extra supply will not lower domestic prices at all.

The impasse over the east coast gas debacle shows no sign of abating as the exporters continue to overcharge to cover the cost blowouts on their export terminals.

But the simple approach to problem-solving most often is the best.

Rather than spend billions of taxpayer dollars on a dubious infrastructure project the private sector refuses to fund, perhaps it’s time the Federal Government forced the exporters’ hand.

Deliver gas into the market at market prices. Or lose the export licence and be forced to deliver at home.

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