A nation in need of a clear gas strategy

Mountains of gas under the ground are no guarantee of an energy bonanza. Australia must clear away the cobwebs and build a workable framework to ensure a gas-fired future.

The Grattan Institute’s Tony Wood makes a fundamental point in the institute’s new report on the industry. There is no shortage of gas in Australia.

Wood says that Australia’s proven and probable reserves of coal seam and conventional gas are around 140,000 petajoules, or enough to meet more than 70 years of demand at current rates of production, and that there may be potential resources of coal seam and shale gas four times as large as the known reserves.

Amid concerns about east coast supply shortfalls – a particular issue for NSW – and soaring prices as eastern seaboard gas finds its way into the international market as the export LNG plants in Queensland begin shipping LNG over the next few years, that key underlying reality tends to be lost.

There is more than enough gas to supply both the international market and the domestic market provided consumers – businesses and individuals – are prepared to pay higher prices and the industry and government devise ways to overcome community concerns about the impact of exploiting unconventional gas resources.

The expected exports of US shale gas are likely to push international prices in our region down from their current levels of around $US15-$US16 per gigajoule.

Given that the estimated cost of liquefying and transporting gas currently priced at about $US4 per gigajoule in the US domestic market is about $US8 per gigajoule (and edging up), however, there is still going to be a substantial premium available for exported Australia gas. Australian liquefaction and transportation costs are estimated to be around $5-$6 per gigajoule.

That export premium makes it inevitable that domestic wholesale gas prices, which have been around $3-$4 per gigajoule on the east coast, will rise – indeed they already have been pushing up into the high single digits in recent contracts.

The Grattan Institute report makes the point that the $160 billion being invested in LNG plants and the $53 billion a year of income they will generate is good news for the overall Australian economy but not necessarily good news for all.

Prices for industry and consumers will shift to "export parity" pricing – they will rise – although Wood also makes the point that because of the cost of liquefying and transporting gas to Japan and elsewhere in Asia there is still an advantage to businesses buying gas in a country with gas reserves relative to competitors in countries that import gas.

The prospect of surging domestic prices has led to some calls from industry for "reserving" of gas for domestic use, which Wood aptly describes as a form of protectionism.

He argues that there is no market failure to justify reserving gas for domestic users, just changes in the underlying dynamics of the market and the balance of market power between suppliers and consumers. Reserving gas could adversely impact the economics of LNG investment, make domestic industries less efficient and create net economic detriment relative to exporting the gas.

There is a potential supply issue in NSW, but that has nothing to do with any shortage of available gas but rather the obstacles created by the state and federal governments – in response to community concerns and environmentalists’ campaigns – to exploiting reserves of coal seam gas within the state.

Given the scale of unconventional gas resources within Australia, there is clearly a need for industry and state and federal governments and perhaps, the Grattan report suggests (by favourably citing a US model) environmentalists, to come up with a framework and a set of standards that allows efficient and safe development of those resources in a way that doesn’t unsettle and alienate local communities.

Wood comes up with some recommendations for improving the functioning of the gas market – restricting joint marketing arrangements, creating greater price transparency and facilitating pipeline capacity trading.

The key points the report makes, however, are that there is plenty of gas in Australia to supply both export and domestic markets but the exporting of east coast gas as LNG will push prices up significantly.

Those prices rises, and indeed the issue of access to adequate supply in NSW, will be exacerbated if the abundant sources of gas in the ground aren’t exploited and if an industry built around the requirements of the domestic market doesn’t create the kind of transparency, market structures and physical infrastructure that facilitate efficient domestic pricing of the gas once exports of east coast gas begin.