Let natural gas flow freely, and we'll all benefit

Market intervention would distort prices and supply levels, writes Andrew Smith.

In recent months there has been a highly charged public debate about Australia's natural gas resources and how they are best used.

Advocates of an open economy would like to see Australia become a major supplier to the world. Others see the national interest best served by dedicating natural gas resources to local use.

One thing they agree on is that we are blessed with some of the world's most abundant natural gas resources. A recent government report found we have enough gas for domestic consumption for 184 years - not including future discoveries. If we include potential shale resources, there could be as much as 400 years' worth of gas. So the opportunities for export and domestic use are plentiful, but first we have to deal with the local debate on where these resources are best utilised for our national interest.

At a time when global energy demand is growing, particularly in Asia, Australia's huge investments in liquefied natural gas projects are contributing to the strength of the national economy.

For decades Victorians have benefited from the success of Bass Strait's gasfields, and customers in NSW, South Australia and Queensland have long had access to natural gas from Moomba in central Australia. Investment in LNG projects is not new, either. The North-West Shelf gas project in Western Australia has been producing LNG for export since 1989 and domestic gas since 1984.

All these projects were driven by strong demand, and Shell expects to see strong growth in global demand for LNG - particularly between 2015 and 2025 - with most growth coming from north Asia.

We expect Australian natural gas will be a significant source of supply to meet this demand.

One area of contention is the price Australians pay for gas. It is easy to see why the domestic gas debate is getting so much attention, particularly from industry, as the market adjusts to a change in pricing levels off the back of historic lows.

But it is not simply gas exports behind this increase. Drivers include a price on carbon, the impact of the renewable energy target scheme and the global upswing in energy prices over the past decade. All combine with export demand to have an impact on pricing.

Changes in energy markets, such as price increases, often bring calls for government intervention.

Suggestions such as reserving a percentage of the gas from export projects for local use, as is done in Western Australia, are often debated on the east coast. But the tough question is whether a rise in the domestic gas price is usefully avoided by government intervention. At Shell we are of the view that government intervention in domestic gas markets will be counterproductive for both supply and prices, as it will discourage innovation and investment.

The impact of reserving gas from large-scale LNG export projects is that you distort the market, with large, sudden increments of new gas being pumped into the domestic market. As new projects are completed, an additional overhang of gas supply is added. This leads to oversupply, in turn distorting the market and putting off investment in new domestic gas projects.

In the long term the story gets worse - with the ultimate result of intervention in domestic gas likely to be that taxpayers pay the price for uncompetitive industries that were based on subsidised energy.

But to see the development of new gas projects we need an efficient and effective gas market to provide the price signals necessary for innovation and investment.

Any price movements reflecting dynamic supply and demand fluctuations characterise a healthy, functioning market. We see this every day in the movement in prices of commodities such as crude oil, iron ore, wheat and gold. We do not see a debate around the need to reserve iron ore, wheat or coal to bolster Australia's steel or grain industries. Competitiveness of future projects is already being challenged - the last thing the industry needs is more uncertainty.

With Australia's cost issues, new gas projects can't afford to subsidise other sectors. It is better for the industry to grow, pay taxes, pay royalties and let governments decide how to spend the money.

If Australia is to continue on a path to prosperity we must remain an open economy, resisting pressure to adopt policies that generate uncompetitive, protected sectors. Australian industries such as agriculture already perform strongly on the world stage. By fostering international competition we will continue to create opportunities in the energy sector for all Australians.

Andrew Smith is the new country chairman of Shell in Australia.