Flirting again with an LNG own goal

It’s curious how poor policy ideas keep bouncing back. Manufacturing Australia’s call for government intervention to avert a claimed domestic gas supply "crisis" is a good example of the genre.

Thankfully both the resources minister, Gary Gray, and his opposition counterpart, Ian Macfarlane, have each dismissed calls by the manufacturing lobby for reserving of gas for domestic use and other measures to lower the price of gas to domestic consumers.

When industry calls for governments to act to ensure competitively priced energy what they are actually arguing for is subsidies and a sub-economic use of the energy.

The same debate has been raging far more intensely in the US, where the sudden emergence of shale gas and the prospect of energy self-sufficiency has seen the manufacturing industry argue against LNG exports and the use of the gas to create industrial competitive advantage rather than direct export revenue.

Only last week the US Energy Department gave a go-ahead for the country’s second export LNG terminal, the Freeport LNG project in Texas, which signals that it has accepted the advice of its own consultants – that where exports of gas make sense they produce net economic benefit.

In a sense that’s such an obvious conclusion it barely needs to be articulated. Unless the gas were more highly valued in export markets than for domestic use – after taking into account the major investments and costs involved in its liquefaction, transportation and re-gasification – it wouldn’t be directed to those markets.

The consortia building the three big coal seam gas-fed LNG plants in Queensland wouldn’t be spending the best part of $75 billion if the economics of exporting that gas, relative to its value in the domestic market, weren’t compelling.

For the east coast energy market, which manufacturers would be most concerned about, it is those plants at Gladstone that are generating the angst. At the moment the only market for east coast gas is the domestic market.

Once those plants are operating producers will have the option of selling into the international LNG market or domestically and given that the international price is multiples of domestic gas prices it is inevitable that domestic prices will have to rise.

The issue is one of price rather than availability (although the NSW government has done an effective job of shutting down its coal seam gas industry despite the reality that NSW imports almost all of its gas, much of it from regions that have the option of supplying the Queensland LNG plants).

There are plentiful Australian reserves of gas both onshore and offshore – there is an estimated resource of about 400 TCF of conventional gas and a similar resource of shale gas – so the issue is one of the cost of exploiting those resources and the price that implies for consumers.

The best strategy for ensuring access to that undeveloped gas and the lowest price for consumers (whether or not that’s higher than the current price) is to ensure that it is developed.

The US experience is a useful guide to how that might unfold. It was domestic gas prices around the $US10 per mBTU that ignited the shale gas drilling boom in the US then, as the gas started flowing, the price fell back to below $US2.50 per mBTU before more recently edging back up above $US4.

Australian producers have begun signing domestic supply deals at prices pushing up towards export parity (minus the processing and transport costs and capital associated with LNG) and at those levels some of the unconventional resources, including shale gas, would become economic and contribute to a major increase in supply and therefore a disciplining influence of prices in future.

Also, as some of the US gas begins feeding into export markets in four or five years’ time (there is some debate about how much of it will actually be exported), or the US coal that is being displaced by shale gas flows into Asia Pacific energy markets, the price of LNG ought to be pushed down.

A combination of lower export prices and higher domestic production would help to both ensure a secure supply of gas into the domestic market and to moderate its price, even if it may be somewhat higher than has historically been the case before the eastern seaboard producers opened up a pipeline into the international market.

To bring about that outcome, however, gas prices will have to be higher than they have historically been and governments and the community will have to be prepared for far more intensive onshore drilling than it has been accustomed to.

Given that much of Australia’s known shale gas resources lie in the Cooper Basin and central Australia, where gas has been produced for decades with little controversy, that might not be quite as contentious as coal seam drilling has been in NSW and some parts of Queensland. It will, however, require more sensitivity and better communications from the producers and a stronger and more sophisticated appreciation of the national interest, including the interests of the manufacturing sector, by the community.