Taking control of our gas advantage

How we use gas will determine out industrial base and our carbon footprint. Yet we risk outsourcing gas policy to North Asia.

When the former Minister for Resources, Gary Gray, announced an investigation into the domestic gas policy in May of this year, many people in the manufacturing sector were heartened.

With more than 184 years of exploitable natural gas reserves under our feet, and easily tapped reserves at Bowen, Cooper and Bass already on stream, there had to be a problem with our domestic gas policy for the price of gas to be rising so dramatically.

The Prime Minister’s Task Force on Manufacturing reported in 2012 that since the late 2000s, gas prices had risen by 70 per cent and were predicted to go higher. In a few years Australian manufacturers had found the price per petajoule of gas jumping from $3 to $8, with a further leap to $12 being signalled by gas producers.

Furthermore, the task force reported that many large manufacturers were finding it near-impossible to secure gas supply agreements beyond 2016, a situation that has become known as the ‘gas cliff’.

The culprit is export parity pricing. Export parity pricing essentially means that if the gas-poor Koreans are prepared to pay $12 per petajoule for Aussie gas, then Australian industry should pay the Korean import price.

Natural gas is a low-carbon emitting fossil fuel, with not only efficient thermal and power-generation uses for industry but also transformational uses in processes such as fertiliser manufacture.

According to the Australian Bureau of Agricultural Resource Economics and Sciences (2010), the Australian consumption of gas will more than double between 2008-2030, largely replacing coal usage. In 2030, oil will still be our biggest energy source (2787 petajoules per annum) but gas will be a close second (2575), as coal falls to 1763.

The Australian Council of Learned Academies, in its A Study of Shale Gas report of 2013, summarised its view on coal seam and shale gas, thus:

...it is likely to be plentiful and it has the potential to be an economically very important additional energy source. Increased use of shale gas (and other gas) for electricity generation could significantly decrease Australia’s greenhouse gas emissions based on gas replacing coal.

In other words, the conundrum of having both a viable industrial base and a reducing carbon footprint is going to involve how we use gas.

So how is this publicly-owned, strategically important energy resource being allowed to spiral upwards in price, with no controls?

Australia – alone in the developed world – has no domestic gas policy. This means export parity pricing of our natural gas and coal seam gas goes unchallenged by federal governments (except for the WA government). In this vacuum of policy, North Asia is setting gas policy for us.

The gas industry has ring-fenced the discussion with arguments that anyone from manufacturing who mentions a domestic gas policy is an interventionist, a reverse protectionist, a self-interested lobbyist, a hater of innovation, a tool of the Greens or a nationaliser of mining.

However, domestic gas policy is the global rule, not the exception. The world’s largest gas producers – Norway, Qatar and Russia – all have policies that allow domestic households and businesses to buy their national resource at a stable, local price.

In Canada and the United States there are clear rules for gas producers that limit their ability to export LNG unless they can prove to regulators that domestic demand is satisfied. Export pricing is not allowed to ‘blow back’ into the domestic economy.

Is this interventionist? The US and Canadian outlook on gas is that because it belongs to the nation, and because it is integral to a carbon-reduced future, it should fulfil local demand before the producers can make their export riches.

By comparison, in our gas-rich country the entire Eastern domestic market is aligning towards the export terminals at Gladstone and into giant LNG freezer/compressors.

One of the misconceptions of the gas debate is that there’s a shortage of the stuff. There’s no shortage. It’s just that producers have geared themselves up for export, and there is nothing in their production licence that stops them from ‘banking’ the gas – leaving it in the ground until they can get the price they want.

Most developed countries have ‘use it or lose’ conditions on licences to produce gas.

This creates a gas market driven by one outlook, when good economic policy should have many interests represented.

The damage that Australia’s unplanned and unmanaged phase of this resources boom is having on local manufacturing, will become clearer as we approach 2016.

For now it’s worth looking at what the economy gives up in order to skew its natural resource towards export. The National Institute of Economic and Industry Research estimates that for every $1 gained in LNG exports, between $21 and $24 is foregone in domestic industrial production.

That is a large trade-off and one that governments will have to address.

Another misconception that must be corrected is the view that industry is calling for a reservation on gas. We have made it clear that we are not calling for reservation – we’d rather that government help fix the policy settings so that all businesses can benefit from Australian gas.

We are also not opposed to the gas producers making profits. Moreover, manufacturers want a reliable and abundant supply of gas and this will only happen if the gas producers are financially healthy.

And we have no problem with industries exporting. The gas industry exports Australian gas for energy; the chemicals and plastics industry uses gas to make and export high value products; and the agriculture and food sectors use fertilisers made by our industry (from gas) to increase crop yield and export Australian food.

These exports are all made possible by the existence of Australian gas, part of our natural endowment.

The issue is not, and should not be, preventing one sector from increasing its export potential. The issue should be how all sectors can add value to Australian gas in the national interest.

We welcome working with the incoming government on their commitment to urgently convene a meeting of governments, gas producers and users to put in place a gas supply strategy for the East Coast gas market to the year 2020. We look forward to working on the new Energy White Paper and the Australian Energy Market Operator providing up to date information on gas usage.

Australians should keep an eye on what happens to former minister Gary Gray’s investigation into the domestic gas market – will the new minister (expected to be Ian Macfarlane) follow through? The manufacturing industry has the most immediate interest, but it’s the broader economy that will suffer unnecessarily for decades if we fail to introduce a sound domestic gas policy.

Margaret Donnan is the chief executive of the Plastics and Chemicals Industries Association.