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Gas, Gas, Baby — Gas Crises In Australia

It is hard to choose the right metaphor. Has the Australian gas industry shot itself in the foot, painted itself into a corner, or is it just throwing a hissy fit? Maybe it has just lost the plot? Perhaps breathing too much of its own product? Gas, gas baby!

Recent Australian government legislation has capped the price for domestic gas sales on the eastern seaboard at $12 a gigajoule (GJ). In the opinion of the IEEFA, this “ensures a bright future for gas companies but continual decline for Australia’s manufacturing industries.”

The gas industry is calling this a “soviet style” action, and warned that there may be gas rationing or that international contracts might have to be broken (with all the consequences that will entail). It should be pointed out that there are no such issues in Western Australia, where the state government negotiated prices with gas companies some years back. The problem lies with the former federal government, which allowed gas companies fee reign over the eastern states.

“The fact is there is no shortage of gas in Australia, just a shortage of desire to supply it at a reasonable price to domestic consumers. Further, the $12/GJ gas price cap actually ensures super profits in the east coast market for these companies as the average costs of production for gas fields in Eastern Australia is around $5/GJ.

“Share price reactions from both Santos and Woodside have been muted. Clearly the market does not see the price cap as a ‘Soviet style’ nationalisation or even affecting the companies’ profitability on any time horizon.”

This is because it is public knowledge that the domestic market is not the principal driver of profitability. “On the east coast of Australia, 72% of gas is exported.” So, the unfounded threats and the name calling hissy fit from Santos and Woodside may spur more government action. Hence the shot in the foot. Gas rationing in the electorates of government politicians would not be tolerated. The next step might a reservation of supply.

What about the viability of international contracts? IEEFA analysis shows: “This simply won’t occur. Eastern Australia is swimming in gas. According to the Australian Energy Market Operator, the developed proven and probable reserves — that is, those the gas industry could utilise in the short term — are equivalent to 8.4 years of production at the current record production rates of 2021.”

A greater threat is reduced domestic and global demand. Australian domestic demand is down 17% since 2014 and gas usage for gas-powered generation is down 43% over the same period. Renewables with battery firming are set to reduce this further. These will give the grid the base load of coal and the flexibility of gas.

The use of gas in the home is likely also to be reduced drastically. The state of Victoria has over 2 million homes using gas appliances. Through its Gas Substitution roadmap, the government is planning to move Victorians across to electric power in the home. Demand reduction from domestic use will allow gas companies to export more.

An unintended consequence from all this is the possible decline of energy intensive manufacturing in Australia, such as urea-based fertilisers for our farmers, plastics, and alumina.

“Australian manufacturers already face a number of challenges: a relatively small domestic market, high labour costs and distance to export markets. Among the few competitive advantages they do have is abundant energy in most forms — coal, gas, wind, solar, and rare earths for batteries. An abundance of gas has not led to low domestic prices in Eastern Australia unlike our Western Australian compatriots. In WA the domestic gas price has commonly traded in the $5–7/GJ range ensuring gas-intensive manufacturing stays onshore.

“The flow-on effects from high domestic gas prices to electricity prices ensures all Australian industry is less competitive. Gas sets the price for electricity when the prices are high in the market. It has an effect on prices far greater than its contribution to generation.

“IEEFA research has shown that $7/GJ would provide a return on equity and a handsome profit for all Eastern Australian gas fields. The issue for Australian manufacturers is can they survive in the interim or will they close before a reasonable price for gas is achieved.”

And that might depend on a certain Russian that is trying to rebuild a defunct empire from two centuries ago and in the process turning the Australian gas industry into a mutant Daddy Warbucks. All Australians need to do what they can to move away from fossil fuels as quickly as possible.

Featured image courtesy of Geoscience Australia, Australian Government

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Written By

David Waterworth is a retired teacher who divides his time between looking after his grandchildren and trying to make sure they have a planet to live on. He is long on Tesla [NASDAQ:TSLA].


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