Unpacking the gravity of Australia's gas mess

A combination of terrible industrial relations deals and bad government policy mean the states are running out of time to avoid a gas crisis. It will also hit the buyers of New South Wales’ key port assets.

The most underrated risk facing Australia is the looming backlash from the poor management of one of our greatest assets - natural and coal gas. I believe many businesses, investors and governments are still making decisions in ignorance of the risks ahead. I classified the gas mess as the third of Julia Gillard’s seven deadly sins (Seven deadly Gillard sins, April 30), but three events have caused me to return to the potential gas disaster in our country.

Firstly, Quadrant’s director of research Jeppe Ladekarl last week alerted Australians via Business Spectator and Eureka Report to the fact that global markets are not pricing risk. This has led First Quadrant to short the Australian dollar (Growth hopes built on muddy ground, May 3).

Secondly, the decision by three industry superannuation funds and the Abu Dhabi Investment Authority to buy 99-year leases over Port Botany and Port Kembla for $5 billion may be an excellent investment longer term, but I doubt that the buyers fully took into account the danger posed by one of the by-products of the gas mess - the risk of looming NSW gas crisis. Very few people in Australia’s largest state understand the gravity of the risk and it is certainly not priced into many of the decisions that are currently being made (Leaky gas progress could lead to a NSW exodus, April 16).

It is possible New South Wales may avoid the scheduled 2015-16 gas crisis but time is starting to run out.

Thirdly Incitec Pivot, horrified by crazy Australian carbon policies, the New South Wales gas mess and the rise in Australian construction costs will place its next ammonia plant in the US rather than Australia. Longer-term Australian farmers will pay much more for their fertiliser than their American rivals because of Gillard’s third sin. 

To understand how we got into the gas mess you must start at a strange place – the Victorian Desalination Plant where Leighton signed an industrial relations agreement from hell, which  carried huge risks that were not priced into the contract, and the company lost large sums.  Similarly in Western Australia the developers of the Gorgon gas project signed industrial relations agreements that also gave unions wide powers and also carried huge risks. Those risks were multiplied by the federal government’s industrial relations legislation and the fact that practices from the desalination project could quickly spread to Gorgon, where Leighton was also an important contractor.  It was a lethal cocktail and not surprisingly the estimated cost of the Gorgon gas development has risen by $9 billion to $52billion (Unmasking the Gorgon cost monster, December 5).

It may escalate further. That Gorgon escalation shocked the global resources industry and help spark the mothballing of many projects in Western Australia. 

Over in the east, another gas disaster has also unfolded, which will have much wider implications and that threatens to directly affect the burghers of New South Wales. 

In Queensland the three LNG projects played an absurd game of chicken and all three put up plants on Curtis Island at once. Naturally the construction costs have risen sharply and worse still, the three projects required vast amounts of coal gas to be developed quickly. The risks of rapid development of a large amount of coal gas were simply not appreciated. Pressured managers initially undertook bad extraction practices that would not have taken place had the gas requirement been smaller. New South Wales people saw the mistakes that were made in developing gas in Queensland. Led by radio talk back leader Alan Jones, New South Wales residents responded by forcing cessation of coal gas developments in the Sydney basin that were earmarked to provide gas for Sydney. 

On top of that, Santos’ gas in the Cooper, also earmarked for Sydney, has been swung in to fill the gaps in Queensland. As a result in two to three years’ time New South Wales will be short of gas and there is a risk that the price will go through the roof. Gas provides between 20 and 25 per cent of the state’s energy and any shortage/price jump will affect many New South Wales industries.

There are still actions that the New South Wales government can take to mitigate against this risk but as each month goes by it becomes harder and harder to avoid a catastrophe. If it does occur a large number of New South Wales industrial plants will have to shut and almost certainly the exports from Port Botany and Port Kembla will be affected.

On the other hand imports may rise. The superannuation funds and the Abu Dhabi Investment Authority would say that as they are making 99-year investment, problems in the first three or four years will be relatively unimportant. And that is a fair argument but there will be a lot of explaining to do if the gas-price jump reduces volumes from both the ports.

Meanwhile a stevedore in the Port of Sydney, Asciano, says that the fact that the three Australian superannuation funds and the Abu Dhabi Investment Authority have paid 25 times earnings means that port rents are likely to rise (Asciano concerned by NSW port sales, April 30).

Asciano is correct. By selling the facilities at a high price, New South Wales will cause a great deal of the benefits of the investment in new technology to go to the owner of the ports rather than the operator or the exporters/importers. That is exactly what occurred with Australian airports. But at least in the short term that will be overshadowed if big gas price rises and gas shortages in New South Wales actually come to pass.