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Recognizing Australia's east coast gas crisis

Written by  AOG Staff Monday, 13 March 2017 20:01
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The Australian Competition & Consumer Commission (ACCC) chairman Rod Sims said events following the ACCC’s April 2016 Inquiry into the east coast gas market have confirmed the commission’s worst fears.

Speaking in Sydney at the 5th Annual Australia Domestic Gas Outlook Conference 2017, Sims said, “One year ago at this conference, I warned of an urgent need for both new and importantly more diverse sources of gas supply into the domestic market.”

“The outlook for gas supply is now even worse than it was a year ago; indeed, our worst fears are being realized,” he said.

Sims noted the word 'crisis' can be overused but that the scarcity of available gas on the east coast has seen prices increase 1.5- 4 times above historic levels. These price increases have seen a significant reduction in gas used for electricity generation and are expected to flow through to significantly higher prices for residential customers.

“The most important problem, however, perhaps the real crisis is the difficulties faced by industrial companies who rely on gas as a feedstock or as an energy source,” he said.

“Some are experiencing difficulties gaining supply; all are or seem likely to face huge price hikes that will perhaps permanently damage their businesses.”

Sims added that Australia has a surprising number of industrial companies for whom gas makes up 15-40% of their costs; for many other companies gas as an energy source is around 5% of their costs.

“At best, it makes it hard for these companies to invest and plan with such high and uncertain gas prices and with considerable supply uncertainty. At worst, plants will close and jobs will be lost purely as a result of the current gas crisis,” he said.

“Australia often makes it hard to be involved in manufacturing. We are now making it extremely difficult if not impossible for some.”

Sims referred to the April 2016 Inquiry’s description of a 'triple whammy' affecting east coast gas supply. First, the introduction of liquefied natural gas (LNG) exports tripled the demand for gas; second, oil prices fell faster than the optimistic forecasts underpinning these projects; third, regulatory uncertainty and exploration moratoria have significantly limited or delayed gas supply.

“Arising out of this triple whammy we now have a strange debate about the three Queensland LNG projects,” he said.

“As our ACCC Inquiry pointed out Australia has enormous gas resources; gas availability is clearly not the issue. The Inquiry also pointed out that Australia has and will benefit enormously from the three large LNG projects in Queensland.

“These three projects also saw gas resources developed that otherwise would not have been.

“If there is a criticism of the three LNG producers it is that they fell into the usual commodity project trap of assuming then-high $100 plus oil prices would continue when long-run average prices of around $55 would have been a better planning assumption,” he continued.

“The three LNG producers, however, could not have foreseen that after their investment decisions were made east coast onshore gas exploration and development would be largely prevented.

“I doubt anyone in the industry expected Victoria to ban all onshore gas exploration and production which has stopped even conventional gas projects; nor could they have foreseen the delays and uncertainty over projects in NSW and the NT.

“It is of course up to governments to make such decisions. Having made them, however, it is difficult to see how people can then criticize the commercial contracts that were freely entered into by the LNG producers at a time when the likely supply outlook was very different,” Sims said.

“That said, if I was providing private advice to the LNG producers, I would say they would be well advised to support the domestic market as much as they can at this critical time,” he added.

“They could, for example, weigh carefully their willingness to sell gas on the LNG spot markets above meeting their contractual commitments. Alternatively, they could develop additional gas for the domestic market.”

Image: Rod Sims / ACCC

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