Gas majors, hot air and supply

Question: what do drop bears and the east-coast gas shortage have in common?

Answer: they are both great Aussie myths.

The story of the drop bear is designed to scare American tourists and small children; not necessarily in that order. The story of the east-coast gas shortage is designed to scare communities and governments into fast-tracking mining projects.

Some of these projects, unfortunately, are reckless coal seam gas (CSG) ventures.

It is convenient for gas producers to talk up the line about a supply shortage. The talk alone is forcing prices up. The producers win.

Truth is, there is plenty of gas about. There is no supply problem. There is a value problem. It is worth more to ship the stuff to Asia.

Exxon Mobil itself recently said there was no crisis in supply. The real issue was infrastructure constraints. What was needed to resolve prospective gas shortages in NSW were upgrades to pipelines and storage facilities.

If there is a big squeeze in coming years it will entirely be the fault of governments, Queensland's in particular, which have failed to earmark enough gas for the local market.

Two things can be done, and should be done, to stave off escalating gas prices. The first is to introduce a "domestic reservation policy" so the nation's natural endowment can be directed firstly, and more cheaply, into the local economy. Selling gas to Japan and China may mean higher prices for producers but the upward pressure feeds through into higher energy costs for the domestic market.

In short, all businesses and consumers lose, except gas producers. Many are already hurting. In a speech last month to the East Coast Gas Outlook Conference by Innes Willox of the Australian Industry Group, Willox said a survey of gas users found one in 10 was unable to lock in a contract at all. A third were unable to get an offer they considered realistic and a quarter were only able to source an offer from one supplier.

The second thing needed to ensure supply is to bring in a "use it or lose it" policy to prevent mining companies from hogging prospective ground - keeping their rivals off it and keeping commodity prices up.

The most celebrated failure - thanks to the lack of a "use it or lose it" regime - is the delay to the Olympic Dam project in South Australia. This monster has a life-of-mine of 100 years but the new BHP boss is now talking up potash as his "fifth pillar". Not good news for South Australia, or the national economy for that matter.

"Use it or lose it" will solve a lot of problems, and not just in gas. Former Liberal minister Peter Reith, in the brief to government on coal seam gas - which has now been effectively sidelined by Victoria's decision to extend its moratorium on CSG mining - called for a consideration of a "use it or lose it" regime.

In gas, ironies abound. A feature by BusinessDay's Peter Ker on Saturday described how BHP Billiton and Exxon Mobil stay mum on their Bass Strait oil and gas reserves. This too contributes to the hysteria over a gas shortage.

The worrying thing is that the gas producers have been able so effectively to shut down any debate over a domestic gas reservation policy.

A debate, or a review of the economics and the national interest, at least, is a no-brainer.

Meanwhile, the gas producers aggressively push for CSG to be expedited before the science and the prospective environmental damage have been properly thought through.

In its submission to the parliamentary gas inquiry, Santos proposed that its Narrabri project use existing infrastructure where possible to minimise the time required to deliver gas to market and connect the project into the existing Moomba-Sydney Pipeline.

To this effect, construction of new transmission pipeline systems would still be required in order to transport gas from in and around the Pilliga Forest area to the pipeline. It is envisaged that the first phase of the project could deliver more than 100 terajoules a day, or in excess of 25 per cent of NSW annual gas demand, to the NSW market as early as 2017 should construction start today.

But what hope is there even of construction starting in two years, what with the myriad approvals, the community opposition, the engineering and construction period and so forth? Very little. Realistically, this looks more like 2020.