Slay the coal-seam price dragons

Ancient maps used “here be dragons” to mark large areas of the globe about which little or nothing was known. Here today, the same note can be attached to a topic about which a lot seems to be known but little appreciated: the east coast price prospects for gas as LNG demand kicks in.

Regardless of who wins the federal election, policymakers in Canberra and the state capitals have price dragons waiting for them in the very near future.

One of the more lucid descriptions of what’s lying in wait is to be found in an ACIL Allen Consulting report being used by the Australian Pipeline Industry Association to support its take on future gas policy.

ACIL Allen has produced a “base supply scenario” in their modelling for APIA.

It expects domestic gas consumption on the east coast to remain relatively steady at between 700 and 730 petajoules per year until 2020. Thereafter it expects steady growth to demand of around 830 PJ/a by 2030.

This is essentially non-controversial; many in the energy industry would broadly agree with the outlook.

The critical issue is whether politics will prevent the gas suppliers from accessing the huge resource that is available in eastern Australia – and what happens to costs if they do.

There is no debate about the size of the resource either.

Everyday consumers whose heads swim over talk about petajoules and gigajoules and “2P” resources (that’s “proven” and “probable”) just need to know that the coal seam gas resource alone is thought to be large enough to serve the needs of a city like Sydney or Melbourne for 1000 years.

And, no, that’s not a typo. This country sits on top of an ocean of gas that its inhabitants and hundreds of millions of others in the Asian ‘hood want and need.

The Greens, on the other hand, want it to stay in the ground for fear of adding the the planet’s climate change issues.

Rather a lot of rural Australians are unconvinced that tapping this resource will not come at a cost to water resources and their concerns are being played like violins by environmental activists.

Most of the 4.35 million Australian residential and small/medium business customers and 2000 large industrial and commercial consumers are on the east coast.

They need reliable and affordable access to the gas resource for cooking, space heating and hot water in homes; heating, cooking, hot water and laundry purposes in hospitals; and as an integral part of manufacturing basic chemicals, fertilisers, paints, pharmaceuticals, soaps, detergents, cosmetics and rubber and plastics products. Dependent large-scale manufacturers include the cement, brick, tile, glass and plasterboard industries. The mines and minerals sectors need gas to fire smelters and ore processors as well as for power generation.

In short, like electricity and water, gas is an integral part of the Australian fabric of living – stuffing round with its supply and its cost really matters.

Which brings us back to ACIL Allen, which warns that the most likely outcome of the present situation is a “CSG squeeze” scenario, leading the Australian Pipeline Industry Association to call on federal and state goverments, via the energy ministers’ committee under the CoAG umbrella, to come up with an urgent position on how a short-term gas supply shortfall can be handled.

Presumably this part of the remit federal energy minister Gary Gray has given the Bureau of Resources & Energy Economics in asking it to produce a fast-tracked report on the east coast situation by the year’s end.

The devil in the detail of the Rudd Redux era, where marginal seats again really matter, is that neither Labor nor the Coalition has an interest in sparking a debate about an “energy crisis” in which the pushback against CSG from rural communities has to be set in the real context of national interest.

Which is why one need not expect either side to seize on the sober words of the ACIL Allen report: “There is a real risk now that the emergence of the coal seam gas LNG industry will cause a transient gas price spike arising from a delay or shortfall in the ramp-up of production needed to supply (export) plants.

“If production capacity is initially unable to keep pace with demand, gas prices could be pushed to levels above long-run LNG netback prices.”

This is economist-speak for the possibility that wholesale gas prices in eastern Australia could be more than double their recent values – and a 100 per cent rise in feeds through to a 30 per cent increase in consumer prices.

ACIL Tasman adds: “The severity and the timing of any such gas price spike is uncertain, but it could persist for some years.

“The risk is that gas-consuming industry that would be economically viable in the long term could be lost in this transition period, resulting in unnecessary economic waste.”

Translated to tabloid terms, “unnecessary economic waste” includes the loss of thousands of manufacturing jobs and more in sectors serving factories.

The alternative is a situation, requiring the unlocking of New South Wales CSG resources in the immediate term and the early start of development of Cooper Basin shale gas down the track, that will see a price spike next year, a drop in 2015 and then a steady rise towards $8 per gigajoule in the longer term, on the consultants’ modelling.

ACIL Allen and APIA spend 125 pages analysing the situation and arguing for new policy approaches – with which the Australian Petroleum Production & Exploration Association, representing producers, disagree by the way – but the bottom line is clean enough: how do governments in Canberra and the east coast capitals plan to move to keep the gas price as low as possible, the length of the spike as short as possible and the longer-term price as non-volatile as possible.

Politically, there are the dragons and tip-toeing around them is not an option.

Some of us think that the ramifications of politicians being allowed by the media to get away with the tip-toe routine through the never-ending election campaign will be rather serious.

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of OnPower, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.