Economy’s future depends on fixing the gas dilemma
By the end of this year liquified natural gas (LNG) will likely for the first time be imported to Australia’s east coast to meet the nation’s gas needs, with likely devasting consequences for our fragile economy.
Gross policy errors allow Queensland’s gas cartel to link Australian gas prices to global pricing which it can do by reducing supply to ensure local prices rise to international import parity.
It’s a policy that will make life harder for Australian households – already some of the most heavily indebted by mortgages in the world -- and increase already record collapses among companies where solvency is to a substantial extent dependent on gas prices.
Remember how Australians grew rich when gas was $3 a gigajoule (GJ)? Since the establishment of the export gas cartel that’s risen to $13.73GJ, and Macks Advisory has been informed that once gas imports begin, gas could cost about $25GJ in Australia.
In the past decade governments have watched idly from the sidelines as Australians endured an 830% increase in gas prices for badly locally needed LNG that was being shipped to China. But wait, there’s more: gas-fired power sets the marginal cost of electricity on the east coast which comprises about a third of power bills – so that the import scenario forced upon us represents a 273% increase we now pay for electricity.
To date, sleight of hand may have made you think you’ve escaped the worst of this impost because state and federal governments have combined to rebate power bills in the wake of the Ukraine war – and the re-elected Albanese government is committed to extending its share of rebating -- but of course ultimately you’ll be paying for this in slow motion one way or another by higher taxing.
Imported gas is so expensive for Australia, not just because of suppliers’ production coasts and shipping, but also because it must be bought with an already weak Aussie dollar in a market dominated by the US dollar. If the $AUS weakens – and that could happen if existing wars escalate or new ones eventuate, or if there’s a US or Chinese recession – then expect Australian gas and electricity prices to skyrocket and the Australian budget not to be worth the paper it’s written on.
So, what’s to be done
It isn’t as though Australia’s calamitous policy on LNG is unfixable. It’s fixable cooperatively by state and federal governments getting together and declaring a coast-to-coast 15 % domestic reservation policy for gas.
This could be supported by a national gas export levy funded by a 100% tax on every dollar above $7GJ sold overseas, which would have the effect, according to leading economists, of keeping the domestic price to $7GJ while concurrently boosting Australia’s Treasury by about $10b.
WA has had a long-standing reservation policy whereby 15% of gas produced is retained for domestic use, an arrangement widely credited with stabilising that state’s prices even during times of high global demand.
It’s because Australia’s east coast doesn’t have a reservation policy for gas that the country’s most densely populated area suffers most economically, where the high price of gas translates to a high price of power, and subsequently to the high cost of living.
Governments therefore should consider development of a national LNG policy.
If they’re prepared to consider it at all, it will be in the face of fierce lobbying by the gas cartel and its biggest international customers. Lobbyists for these people argue the more LNG Australia can sell abroad at top prices to meet growing global demand, the better off Treasury will be from producers’ tax payments that will enhance the budget for the benefit of all Australians.
But would the Australian economy be better off if the high cost of power -- which contributes so much as the gas is used extensively throughout the economy to the high cost of living -- were reduced by cheaper LNP for domestic use?
Challenges to be faced
One reason the east coast doesn’t have a unified gas reservation policy like WA is because gas produced in Queensland is exported through three major LNG terminals at Gladstone, while concurrently NSW and Victoria are experiencing declining production from mature sources such as the Gippsland Basin.
However, unchanged policies and a lack of new sources will likely result in supply shortfalls of LNG by 2027, according to a recent statement by Australian Energy Market Operator (AEMO).
Presently up for consideration is a widely supported national gas reservation policy that involves capping exports or requiring producers to guarantee baseline domestic supply before shipping gas abroad. It’s widely supported because it’s aimed at reducing domestic prices below $10G.
If implemented, the policy would also increase energy security, protect manufacturers and consumers from volatile global prices and create a more predictable investment environment for domestic infrastructure.
But critics, including some major gas producers, say in this event exploration would be disincentivised as would new project development, and to avoid breaching long-term contracts they may have to be renegotiated. It was also possible such a policy could trigger unintended price hikes in international markets that would adversely affect trade relations.
Conclusions and queries
It’s clear gas reservation policy is no longer just an issue for WA. There’s urgent economic need for national intervention that will reset the way Australia produces, prices and priorities use of its natural gas.
A sharp eye must be kept on how a national reservation policy would affect projects and people, particularly those in the workforce.
Such a policy would mean more activity in projects geared towards domestic use, new compliance and regulatory roles to manage supply obligations, regional workforce shifts as the east coast becomes more strategically important, and a need to deal with contractual uncertainty for businesses (involving transport for example) linked to LNG terminals.
The policy could bring short-term relief to east coast buyers, outcomes depending on how it’s designed and enforced. There could be price relief for manufacturers and power generators, increased transparency around supply obligations, but probably reduced investment in high-coast marginal fields and shifts in project financing if export earnings are limited.
Sure, the issue is complex. Benefits form a national gas reservation policy may come at a cost, and all stakeholders won’t be equally affected by it, but that’s no excuse for leaving the matter in the too-hard basket – particularly in light of costs and shortfalls referred to earlier, and because of media reports about companies looking to move their operations overseas because the cost of power in Australia is too high.
