Watch this space for a gas price explosion

As gas prices continue rising in New South Wales, government and industry seem clueless on the critical question of how severely international price parity might affect local bills.

While all the news reports about New South Wales gas have, as April ends, been about the proposed large bill hike for households and small businesses, the bigger story is that no one knows where east coast domestic wholesale prices are heading.

The state’s Independent Pricing & Regulatory Tribunal has made this clear in its draft determination which will push up retail prices between 14.4 per cent and 19.4 per cent – depending on where consumers live – over the next two years, starting on 1 July.

What this actually means is that state householders on regulated prices will be paying about $1,080 annually on average in the urban areas in 2015-16 (compared with $901 now) and as much as $1,500 in rural regions (versus almost $1,300 now).

Small businesses in New South Wales will be shelling out an average of $5,000 to $5,800 a year by 2015-16 compared with $4,200 to $5,000 now.

These changes follow an average 8.5 per cent increase for New South Wales regulated users from July 1 last year and an average 14.2 per cent the previous financial year.

All up, gas prices for the state’s regulated customers have risen 40 per cent in real terms (ie adjusted for inflation) between 2006-07 and 2013-14 while electricity bills have jumped more than 80 per cent.

Both the past gas price spikes were based on substantial rises in network (ie pipeline) charges, but the new round, as IPART says, reflects structural changes in the east coast market, including (but not solely) exposure to the global market via the looming LNG exports from Gladstone.

One of the failures of media reporting following the IPART announcement was that the other key price pressure was also ignored – this being the impact of production shifting to higher cost gas reserves as the low-cost deposits increasingly become depleted.

The depletion issue is hardly something out of the blue.

Bob Carr referred to it in the energy green paper he published in late 2005 while still in the NSW premier’s seat.

He couldn’t be bothered to produce a follow-up white paper, his trio of Labor successors simply ignored the gas issue and Barry O’Farrell made a hash of managing the new environment despite his government focusing on it from its earliest days in office. (This I know because I facilitated a private forum of explorers, producers, customers and bureaucrats for the O’Farrell government to discuss the state of play in 2011, only weeks after it came to office.)

Apart from the question of whether new premier Mike Baird can get the government’s act together to resolve the state’s coal seam gas imbroglio – he has retained Anthony Roberts as resources and energy minister in the cabinet reshuffle – there are two uncertainties hanging over future prices.

One is whether or not the Abbott federal government can herd the revamped Senate into repealing the carbon price after July 1.

IPART has allowed for this to happen but the regulator is as much in the dark as the rest of us on whether it will, and the repeal effect for gas costs is relatively minor anyway.

Far more important for retailers and consumers, including the big gas-intensive manufacturers, is whether domestic prices will reach international parity in eastern Australia, when this might happen and whether the effect will be sustained.

IPART hired consultants at Jacobs SKM to help it wrestle with this.

The new determination comes with a 56 page report from the consultants – and the answer, shorn of all the playing with words, is “dunno.”

Or, as IPART puts it, “there is still considerable uncertainty about how fast wholesale prices will rise and at what level they will peak.”

How long will this uncertainty last?

“Some time,” says IPART.

To state the obvious, the domestic market is being increasingly influenced by the international one.

The situation, IPART notes, is changing the incentives faced by consumers and producers of fossil fuels, not just of gas.

Expectations of much higher prices, for example, have altered the outlook of some producers and incentivised them (and others) to pursue new supplies – except, of course, in New South Wales itself where the set-up is now such a shemozzle that the wonder is why existing wannabe producers are sticking around, let alone whether any new ones will come by.

Overall, says IPART, “we expect the process of transitioning to international gas price levels is unlikely to be smooth.” 

Sir Humphrey would like that one.

Meanwhile, the environmental radicals will continue to proclaim that there is plenty of gas elsewhere in Australia and no need to plunder the Pillaga and other parts of New South Wales for it.

The manufacturers will continue to emulate Hanrahan and squeal ever louder that they are going to be “rooned,” demanding government intervention to force producers to sell gas at prices like they used to pay.

And the upstream oil and gas people will continue, as the Australian Petroleum Production & Exploration Association has just done, to reject reservation policy as “new protectionism” and to argue that “downward pressure cannot be applied to rising prices if restrictions on developing CSG continue in New South Wales.”

APPEA points out that the second biggest onshore gas field in the country is within the state and the reserves already identified could meet NSW gas needs for the next 20 years for starters, with potential resources available to maintain supply in to the next century.