Plugging the pipe on lost gas opportunities

The differences in the US and Australia's approach to abundant domestic gas supplies is stark. We need to use our advantage in cheap energy to reposition for a more diversified post-mining boom economy.

This is an edited version of a speechgiven by Incitec Pivot managing director and chief executive director James Fazzino, at the American Chamber of Commerce in Australia, on July 26. Read the first part of the speech here.

While productivity is a foundation of success, the basic inputs into production are also critically important and this leads me to a challenge, and a fundamental contrast between Australia and the US government vision as it relates to the affordability and accessibility of energy, of gas.

It is illogical and short-sighted that we are not leveraging the abundant natural resource we possess for the greater national interest. The US sees its gas reserves as an enabler of value adding and local production in revitalising the economy. We, in contrast, have naively allowed the export of this resource without regard for the immense opportunity lost.

Juxtapose these two government positions between the US and Australia on the best use of energy resources. President Obama, in his 2012 State of the Union address, said: "We have a supply of natural gas that can last America nearly 100 years, and my administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade."

The US Energy Agency, through the Natural Gas Act restricts LNG exports, ensuring supply and local affordability.

In Australia, we too have abundant gas but our lack of vision means it will be processed through giant refrigerators to send overseas for others to add value. Additionally, we are exporting our so-called "Clean Energy Future”.

Australia is one of the very few countries that has an unregulated gas market and allows the unrestricted export of its gas. For example, Australia is poised to overtake Qatar as the world’s biggest LNG exporter by the end of the decade. Qatar provides heavy subsidies for domestic consumers of its gas.

In May, our prime minister told the heads of Australia’s resources companies that Australia’s minerals are not owned by the government or mining companies but held in trust for the Australian people. An admirable philosophy but shouldn’t they be used for the best use of the people who own them by providing a small percentage for downstream value-adding?

The export of gas creates a three-time value-add. If we used some of Australia’s gas for high value-added manufacturing we would achieve a return on investment, in the case of Incitec Pivot, of up to 20 times – and that number does not include the further value-add when our products are used in the agriculture and resources industries in Australia.

For example, the practical outcome of the contrasting US and Australian government positions is that the price of gas in the US is currently around $2 to $3 per gigajoule compared with an estimated forward contract price of up to $12 per gigajoule in Australia, as estimated in the 2012 Queensland Gas Market Review.

Of further concern for everyday Australians is that the lack of gas supply and the high cost of gas will impact not only manufacturers, but potentially everyone using energy including domestic consumers. Economic analysis by Port Jackson Partners warned in 2009 that wholesale energy costs could double over five years citing eastern Australian gas prices approaching world parity price as export LNG gas facilities are developed.

Research released this week by the DomGas Alliance, predicted that serious gas shortages and sharply rising gas prices in Queensland could cost the state between $420 million and $1.8 billion in higher energy bills.
It is estimated that by 2016, exports of gas through Gladstone will reach 20 million tonnes per annum. To manufacture fertilisers and explosives in Queensland, we need a tiny 1 per cent of that total.

After 18 months of seeking a contract with gas companies, we have only this week received an indicative offer of supply from one gas company with an indicative price of $10 a gigajoule. This is three times the previous contracted price and five times the US price.

At the same time, we received the verbal warning from the gas company that we needed to be quick because there is not enough gas for everyone. And yet we have federal and state government ministers regularly advising that there is enough gas for everyone. Didn’t they hear the colourful words of one gas company chief in April: "Gladstone is likely to be like a giant vacuum cleaner for the east coast gas market, hoovering up all the gas it can get its hands on.” In addition, the 2012 Queensland Gas Market Review identified that there is market failure.

The potential impact on our fertiliser operations is extreme. Incitec Pivot operates Australia’s only ammonium phosphate and urea plants. Both use gas as a feedstock. Without gas, these plants close and Incitec Pivot becomes an importer and distributor of fertilisers like our dozen competitors.

Only last week, the federal government announced their National Food Plan for Australia. It followed comments by our prime minister in May that Australia could become "a great provider of reliable, high quality food to meet Asia’s growing needs”. This is an admirable vision but without access to gas, it will be an Australian food industry without local fertiliser production.

Don’t get me wrong – I am highly supportive of thriving gas exports. Incitec Pivot is very much the beneficiary of global trade. Yet a balance needs to be struck to encourage opportunities for local manufacturing growth and for affordable domestic and commercial energy. We can have our cake and eat it too but if we don’t act, we will suffer the consequences of an uncompetitive investment environment.

Like the productivity challenge, this issue requires both industry and government to work together to find a solution for the benefit of the nation. Australian companies, like Incitec Pivot, are making choices now about ongoing operations and future development. Unless we move quickly, it will be too late; plants will close never to reopen; production will be moved offshore.

Let me tell you a tale of two plants – one proposed for Australia and the other, the US. We are currently running feasibility studies on an ammonium nitrate plant for Newcastle, New South Wales, and an ammonia plant in Louisiana.

Normally an ammonium nitrate plant would include an ammonia plant. That’s what we have done with our ammonium nitrate plant in Queensland’s Bowen Basin coal province which started commissioning earlier this month. To make ammonia, you need gas as feedstock. Construction of an ammonia plant costs around half a billion dollars and employs hundreds in construction and about a 100 in operation – and as a rule of thumb, a flow-on employment of five or more people outside the plant.

So why is an Australian company not looking to build an ammonia plant at Newcastle, but we are in Louisiana? It’s true that gas is a huge factor but it is also about what the availability of gas says about the vision of governments in the US which have committed to local supply. In Australia, we should be promoting the availability of energy as our natural competitive advantage. Look at China, the source of much of our gas. China has the advantage of cheap labour, but expensive energy. Our advantage should be competitive energy so we can support strong worker benefits. Instead, our lack of vision means we are squandering our birthright.

Let me close with a challenge. Cast your minds forward to 2025 – only 13 years. What does the Australian economy look like? Are we still riding on the backs of the miners or is our resources industry challenged by Africa, Latin America and Canada? Based upon a Deloitte Access Economics report released this week, mining and resources investment is close to peaking. What of agriculture? Have we become the food bowl of Asia as predicted by the federal government or are we a service economy driven by tourism, health and financial services?

In 2025, what has become of manufacturing? Has it been allowed to wither or is it still making its contribution to employment and a balanced economy. In the words of Professor Tim Mazzarol of the University of Western Australia: "It is important that Australia prepare itself for the inevitable slowing down in our mining and energy sector’s growth. A more diversified economy is essential for the longer term, and manufacturing has an important role to play.”

The choice is in our hands but we must act immediately. I’m reminded of the Chinese proverb which begins by asking: When is the best time to plant a tree? The answer: 10 years ago. When is the second best time to plant a tree? The answer: now!

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles