Resources Minister Matt Canavan says bluntly subsidies are no answer to the high gas prices now undermining the viability of many commercial and industrial customers.

Nor does he believe in domestic price controls on the basis this would only deter the investment necessary to build more supply – creating a greater problem long term.

This still won’t be a popular message for many commercial and industrial customers used to relying on relatively cheap Australian gas prices to sustain their competitiveness.

The government’s determination last year to force companies to put more gas into the domestic market ahead of the LNG export market – under threat of export controls – has certainly helped improve supply.

Warwick King, chief executive of the Australian Pacific LNG project in Gladstone, told the summit the projects have been ...
Warwick King, chief executive of the Australian Pacific LNG project in Gladstone, told the summit the projects have been tougher and more challenging than anyone expected.

Jessica Hromas

But the era of cheap gas – even in a country with abundant natural resources – is over.

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Explaining that equation is politically tricky.

Linking exports to domestic prices

The government has to defend the massive economic benefits that come from Australia becoming the world’s second largest exporter of LNG – worth almost $50 billion next year – but with domestic gas prices now linked to international prices for LNG.

To someone like Alberto Calderon, chief executive of Orica, this trade-off makes no sense – in terms of the national interest as well as his own business.

For Alberto Calderon, chief executive of Orica, this trade-off makes no sense – in terms of the national interest as ...
For Alberto Calderon, chief executive of Orica, this trade-off makes no sense – in terms of the national interest as well as his own business.

Jessica Hromas

“The reality right now is it’s making the bulk of Australian manufacturing not competitive,” Calderon told The Australian Financial Review Energy Summit. He finds it absurd, for example, it would be cheaper for Orica to import ammonia for its explosives business than it is to make it here, even with a fully depreciated plant.

Australia’s position on this is also unique, he argues. Other gas exporters like Canada and the US, as well as Russia and Middle East countries, have restrictions in place permitting exports only after their domestic markets has sufficient supply at reasonable prices. The result, he says, is that gas for their manufacturers is available much more cheaply than in Australia.

In Australia, in contrast, prices on the east coast are now set according to the “netback” price – the international LNG price minus the cost of freezing and shipping it overseas. How did we get here?

In Western Australia, rules governing development of major gas projects off the coast were always clearer, including insistence by successive state governments on a domestic reservation policy to ensure plentiful supply for local users, translating into lower prices.

Horrific implications 

But states like NSW and Victoria have effectively locked up their own states from further gas development while traditional supplies from Bass Strait and the Gippsland wind down and production costs rise. That means the east coast market has become more reliant on Queensland’s coal seam gas projects for supply and pricing – plus transport costs.

The result is that gas in Sydney is now running at close to $12 a gigajoule, compared to historic average costs more like $3-to-$4.

Government ministers like to point out this figure is down from last year when producers were actually charging above the netback price until they were pulled into line.

But the Australian Competition and Consumer Commission expects LNG prices to be sharply higher in 2019, pushed by surging demand particularly from China and the increasing cost of oil, which affects the price of gas.

Many Australian industrial consumers are horrified at the implications.

Not that Calderon favours government subsidies or price controls. Instead, he has a more optimistic – although unrequited – ambition.

He wants gas producers to realise it is in their best interests, both politically and commercially, to negotiate better terms with their major industrial customers in Australia.

“It is in nobody’s interest to strangle manufacturing because then everybody loses,” he said.

“I do not think it’s in the best interests of this country to solidify netback gas prices long term … we will never be competitive. And for a country that has 100 years of gas, that is not the right solution.”

So far, however, there’s little enthusiasm for shared financial sacrifice from producers given the risks and cost of big projects. Had it not been for the LNG export market, the Queensland coal seam gas industry would never have happened, they say.

And coal seam gas here comes with no oil to mitigate development costs. Warwick King, chief executive of the Australian Pacific LNG project in Gladstone, told the summit the projects have been tougher and more challenging than anyone expected.

Short-term solution

So what is the right short-term solution? One possibility attracting attention is the notion of importing gas to the east coast. Admittedly, this sounds like a contradiction in terms given Australia’s supplies of gas and its status as a major exporter.

“This is like Saudi Arabia importing oil,” Calderon said. “Is this the kind of country we want to be?”.

It may well be, given the absence of alternatives any time soon. Both AGL and a new player, Australian Industrial Energy, are planning import terminals – AGL in Victoria and AIE at Port Kembla in NSW.

AIE is backed by Andrew Forrest, most famous for successfully challenging the established order in iron ore. Another partner is Japan’s Jera, the world’s largest purchaser of LNG.

According to chief executive, James Baulderstone, a new terminal could be built within 18 months at a cost of $200 million plus $50 million in floating costs, with the aim of delivering gas for around $10-$12 a gigajoule over five-year contract terms.

But to get started, AIE needs customers. Although 15 have signed memoranda of understanding, those commitments aren’t yet firm.

State and federal government are similarly interested in the proposal but not guaranteeing any support.

It all sounds like waiting indefinitely for take-off.

Will the gas market – and the country – still be suffering from failure to launch this time next year?

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