Australia needs to focus on domestic gas policy

LNG.jpgGas is a major source of energy in Australia. It provides 20 per cent of our energy consumption. Australia has abundant reserves of gas. Our proven reserves of coal seam gas and conventional gas are enough to meet more than 70 years of know n gas demand. The government's 2012 energy white paper shows that exports of natural gas are booming. Australia has seven of the world's 12 major LNG projects currently under construction. Gas exports are projected to triple from 20 million tonnes to over 63 million tonnes by 2017. This export boom is accompanied by a huge investment in Australia by those countries looking to develop gas for export facilities. This investment is around $50 billion in Queensland and around $116 billion in Western Australia.

However, out of this boom in gas production we are not seeing a competitive advantage for Australian manufacturing or for domestic customers. In fact, international demand for Australian gas will drive up domestic prices and make supply on the east coast scarce. This is because of the structure of the Australian gas market. Largely for geographic reasons, Australia has three gas markets that are separate and distinct from each other—the eastern, northern and western gas markets. For mostly historic reasons, there are no pipelines that link these markets.

In the eastern gas market, the market that supplies the entire east coast of Australia in 2014, gas production will be available for export for the first time. Until now there has been no way for gas producers to sell eastern market gas into the export market. The entire production capacity of the eastern gas market has only been available for sale into the domestic gas market on the east coast of Australia. This has kept domestic gas prices low and supply plentiful.

Australia's gas resources are controlled by the world's largest oil and gas companies. Not surprisingly, these companies favour LNG contracts worth billions of dollars with a handful of overseas customers rather than supplying gas to smaller Australian companies. Presumably they see this as their job in maximising return to their shareholders. The 2012 energy white paper highlights how the supply of gas to domestic and export markets will likely experience tightness from 2015 and possibly through until 2020. The limitation of supply is due to a number of factors, with gas suppliers focused on ensuring that export contracts are filled and that infrastructure, like LNG terminals, are applied primarily to the export market. These limits on the supply side are mostly projections at this stage. The government's energy white paper describes how some LNG producers are already stockpiling gas for supplies for future project development.

The development of gas fields is being managed to provide export contracts. While it makes commercial sense, it is not necessarily driven by the Australian national interest. Some argue that Australia is trading away its competitive energy advantage. I agree. Australian domestic wholesale gas prices have been low by international standards until now. But now demand from export markets is high and the international prices on offer are high compared to Australia's domestic prices. In the international market, Japanese buyers are prepared to pay $15 a gigajoule for our gas. At the same time, Australian gas prices have been around $3 to $4 a gigajoule. Our domestic gas prices are therefore set to steeply rise. In fact, many believe that Australian gas prices are set to at least double by 2020. It is ironic that, in the midst of a booming gas export market and higher levels of production of gas, in Australia it will lead to higher prices for local consumers. For all the huff and puff from those opposite on electricity prices and cost-of-living pressures, we have not yet heard one word about this more serious issue. It has intense implications for the Australian market.

These changes in the eastern gas market are occurring at the same time as many gas contracts are expiring. Many large domestic contracts are set to expire from 2014 onwards. New domestic supply contracts will be negotiated in competition with negotiations for export supply. According to the managing director of one of New South Wales's largest gas suppliers, AGL, Gladstone is going to be like a giant vacuum cleaner for the east coast market, hoovering up all the gas it can get its hands on. AGL, which supplies half the New South Wales market, will see its contracts expire at the end of 2016 and 2017, at the same time as international prices are high and rising and exports are booming.

This also has significant implications for the manufacturing sector. Australian manufacturing already faces tough times due to the high Australian dollar. Even with the recent drop in the value of the dollar to, at any range, about 80c to the US dollar, our high currency makes it difficult for our manufacturing to compete. I have already spoken about this in this place and about the importance of Australian manufacturing to our national interest. The engineering know-how that accompanies a manufacturing industry creates a cultural and knowledge base within a town and within a society which I believe is critical to the future of this country. It is a fact that there are more jobs in the manufacturing and associated industries than there are in the gas export industry. Manufacturing is not only critical to our economy but critical to the sort of country that we want to live in.

Natural gas makes up between 15 and 40 per cent of the cost base of industries—in particular, manufacturing industries like fertiliser, alumina, cement, float glass, brick and roof tile production and many others. Many of these industries are also trade exposed, facing tough competition from countries with better access to lower priced gas. Perversely, high gas prices and a lack of available or secure long-term supply of gas will drive some industries back to coal fired power, and others will have no alternative but to close their Australian operations and head to cheaper-energy countries.

The development of Australia's gas industry plays a key role in reducing Australia's carbon emissions. A gas fired power station produces half the emissions of a black-coal power plant and a third of the emissions of brown-coal power plants. Currently, one-third of the gas consumed in Australia is used to generate electricity. It is indeed unfortunate that high gas prices are making the economics of switching from coal generated electricity to gas generated electricity potentially unviable. This situation makes it all the more difficult for industry to reach its lower carbon emission targets by 2020.

In August 2011, the Western Australian government became the first to implement a domestic gas reservation policy. Under this policy, that state government retains its 15 per cent domestic gas reservation requirement for all gas projects. In the USA, a gas reservation policy is in place for shale gas production. It is interesting to note that just today it has been announced that Israel will be reserving 60 per cent of its natural gas reserves for domestic consumption. A gas reservation policy of even just five per cent of the eastern gas market would see 95 per cent of gas production available for export, barely affecting the returns to taxpayers or disrupting the gas market. The availability of even five per cent of gas reserved for domestic users and manufacturing could go a long way to save many Australian manufacturing jobs and put downward price pressure for domestic users.

The federal government is responding to these issues primarily by dealing with market transparency. Funding has been provided for a domestic gas market study. I welcome this. We also need to have sensible policy options on the table. There are other policy options, like gas reservation, which should be considered. Other options, including forcing big export companies either to develop gas tenements or to give them over to other, smaller gas developers—the use it or lose it approach—should also be considered.

I believe that these matters deserve the urgent attention of the Australia parliament. In doing so we would not be acting alone. I have already mentioned other states, but other countries are considering exactly the same issues as they juggle the need to exploit their bounties of natural gas but at the same time ensure that there is a plentiful and affordable supply for domestic users, including domestic manufacturing. I have spoken previously about how the US government has seen that it is able to use a domestic gas 'priority to domestic users' policy to reboot the American manufacturing industry, and over 500 million jobs have already been created as a direct result of this policy.

Our abundant natural gas resources should be a competitive advantage for domestic users, particularly for Australian manufacturing. In regard to our policy settings for the gas market, we have to ask ourselves whether the economic benefit of the gas export market is enough for us to overlook the potential crisis that is looming in the Australian manufacturing sector.

Be the first to comment

Please check your e-mail for a link to activate your account.