The report suggests that there will be a loss of manufacturing output of $118 billion and the loss of 14,600 manufacturing jobs by 2021.
That is too high a price to pay for the hoarding of gas for export by the LNG industry.
How quickly things change.
Five or so years ago, requests for wholesale gas prices from Australian producers were met with suggestions that natural gas was headed towards a world pricing structure, and that the proxy for a “˜world price’ for gas was the price at the Henry Hub in Louisiana, United States of America (USA), which at that time was around $US12 p/GJ and rising.
Natural gas in the USA was entering a period of relative scarcity, and coal seam and shale gas developments were in their infancy.
The same gas producers no longer quote the Henry Hub price as, with the advent of shale gas, it fell to a low point well below $US3 in 2011, only to steadily rise again to today’s trend line price of around $US4.50.
Gas futures for some years out are trading at not much above the marginal cost of production of shale gas (about $US6), and that is where the price is expected to settle as shale production techniques mature and production stabilises.
The value of any commodity is enhanced by delivering it into a receptive and active market and then assisting that market to grow.
Major oil producers have prided themselves on their free market values: as a result the world has been supplied for over a century with adequate supplies of this vital commodity, and oil producers have made a great deal of money.
There have been a couple of blips of cartel behaviour by Middle Eastern interests, but mostly it has worked.
Up until the late 1960s natural gas was considered by these same oil producers to have little value: it was extensively flared from oil fields to enhance the production of valuable liquids.
Oil companies fought long and hard for the right to flare gas.
By the time Australia’s conventional reserves were discovered, this practice was about to be outlawed in most developed economies.
Though wasteful and environmentally unsound, flaring was permitted in the early years of our oil and gas boom whilst gas markets had to be created in Australia to enable the enormously profitable oil and condensate production to be maximised.
As a result, during the initial two decades or so of the oil and gas development phase, Australia was very generous to oil and gas producers.
They enjoyed negotiating pricing in risk free, high volume, long term take or pay government backed contracts, with (mostly) state governments taking the entire market risk through government owned entities.
Famously, the Whitlam Labor Government nationalised the planned Moomba to Sydney Pipeline Project and entangled the Federal Government in the Rex Connor dream of a federally-owned national gas grid.
As an example of governmental largesse, the domestic price paid for gas by the Government of Western Australia (WA) was greater than the first net-back export price attained for North West Shelf gas, and the WA Government take-or-pay obligations produced an unsold but paid for gas overhang for the taxpayers of WA worth hundreds of millions over the first decade or so of the contract.
Furthermore, government-funded infrastructure such as transmission pipelines, distribution networks and gas fired generation provided a profitable domestic outlet for the producers’ gas when LNG technology was in its infancy, and most importantly allowed the associated and profitable condensates to flow.
Government funded pipelines built in the 1970s and 1980s were very optimistic about “˜build it and they will come’ exercises.
Today, as reflected in the Deloitte report, gas for the domestic market is increasingly in short supply to a market becoming very frustrated by shrinking availability and rising prices.
Australia is blessed with some hundreds of years of natural gas reserves, yet daily we read of industry leaders complaining they cannot get gas to run their furnaces or gas as feedstock for their process.
Repeatedly they threaten to close down in Australia and to re-open in countries where gas is available at true market prices, such as the USA.
The President of Dow Chemical, Andrew Liveris, was vocal in his criticism of the Australian gas market in 2012 and 2013, and has since announced the investment of several billion dollars in new plant capacity in the USA, which should be an ominous signal to their Australian plants.
Incitec Pivot is investing nearly $US1 billion in a new ammonia plant in Louisiana.
What a travesty it would be if the domestic shortfall of gas was corrected in part by the closure of fertiliser and explosive manufacturers and the exporting of that manufacturing capacity to countries where fairly priced gas is available.
Another symptom of the ailment is the recent closure of gas-fired power generation in Queensland and the re-start of previously moth-balled coal-fired stations.
An interesting side-light in that story is that the power station owner is reported to have made a profit by on-selling the gas supply contract into a rising market for LNG export.
Now that LNG export technology has matured, and prices are attained that reflect the significant cost to liquefy and ship LNG, the producers appear prepared to turn their back on Australian markets, and “˜bank’ gas in the ground.
They do this whilst arguing that the “˜right’ price for the domestic market is that paid in the highest priced export contract, and that such prices are a proxy for the ‘world price’ for gas.
This stance is adopted notwithstanding the vast reserves of Australian gas that should be available for the local market if producers were doing their job and producing it.
Shale gas promises to have a profound worldwide effect on the availability and price of natural gas, and we can expect volatility and regional pricing, particularly where competitive supply exists.
Newly identified reserves are in the early stages of production in many countries.
It is reasonable to expect a downward pressure on future LNG prices as the realisation of how much gas might come to market finally dawns. Asian markets are already demanding re-pricing and rejecting oil-linked prices in new contracts.
A producer has every right to argue for a better price for his product.
Gas customers also have every right to argue that Australia is suffering from market failure in gas.
Although, as a matter of principle I believe, market forces should be allowed to work, some structural adjustment may be necessary to counter false arguments and prevent price manipulation through scarcity.
It is up to those that hold production licences to bring sufficient gas to the domestic market to meet demand and to compete for market share.
Should they choose to do otherwise, then their production licence must surely be at risk.
Indeed they should not be granted licences unless that licence includes an obligation to not frustrate the domestic market.
Natural gas has another problem: no single body represents natural gas in the national political debate. Natural gas needs a champion and the field is fractured.
The Australian Gas Association was disbanded more than 10 years ago, and the outcome for gas has not been good.
The Australian Petroleum Production and Exploration Association represents the producers, not natural gas.
The Energy Networks Association represents gas distributors and marketers, but also represents competing electrical interests.
Gas Energy Australia represents gaseous fuels for transport, but that is a somewhat narrow agenda.
APIA is also taking gas issues to various governments, and the association is to be congratulated for its initiatives and encouraged to maintain this approach.
The debate around natural gas should be about how we can best take advantage of this great fuel.
It should be about the economic impetus, greenhouse gas reduction, balance of trade impact, substituting our gas for imported liquid fuels, job creation, preservation and expansion of our manufacturing base, cheaper home energy bills, and the myriad benefits that should result from Australia being blessed with an abundance of this wonderful fuel.
It has settled instead into a confrontation between the NSW and the Federal governments on one hand and, on the other, a headline grabbing confrontation between some of the producers and the usual “˜do not develop anything anywhere’ suspects.
Armed with incorrect and alarmist information, they push a few disaffected land owners and activists towards the TV cameras and radio microphones and an audience of a poorly informed public and nervous decision makers.
Meanwhile, Australian companies who rely on natural gas as fuel and/or feedstock wait for clean efficient natural gas to be offered via an efficient market, and develop Plan B – closure, redundancies and relocation.
The awful irony is that the current slowdown in development and gas production actually supports the interests of those producers who argue for a “˜world price’ for gas.
Gas scarcity is their friend and the enemy of the Australian community.
The manufacturers’ perspective on Australia’s gas crisis
Jim McDonald’s is not alone in his views on the gas industry and its development in Australia.
Manufacturing Australia Executive Ben Eade says that supply constraints, market distortions and rapidly increasing gas prices could lead to manufacturers looking at options outside Australia.
Speaking on gas reservation policies, Mr Eade highlighted the importance of not allowing Australia’s domestic market for gas to become a “˜residual market’ where Australians would have to pay a premium to divert gas from the export market.
“Maintaining our competitive advantage of diverse and affordable energy supplies is a priority, which is why this gas issue is such a concern,” said Mr Eade.
“Other challenges include removing impediments to productivity and innovation that reduce our ability to compete globally. Often these relate to unnecessary and ineffective regulations, and an inflexible and outdated industrial relations system.”
Jim McDonald is Chairman of the IntelliGas Group of Companies, a start-up gas technology group with world patented technology which enables high density compressed natural gas to be used as fuel in heavy duty fixed and mobile engines.
IntelliGas has offices in Queensland and Utah, USA. He was the foundation CEO of the APA Group, and past President of the APIA.
