Which way will Gillard jump on gas?

Manufacturers are lobbying hard for a domestic gas requirement, and while petroleum exporters have the upper hand, the next election campaign could see the government change its mind.

The ink was barely dry on Martin Ferguson’s 200-page energy white paper, so to speak, when some of those most aggrieved by it were hurling a 150-page retort at him.

Manufacturers from all over the shop banded together to reiterate their concerns about "the immediate gas supply squeeze” in eastern Australia, to accuse Ferguson of "wishful thinking” on the longer-term availability of the fuel at prices they are willing to pay and to call for an independent inquiry into "potential market failures and risks in gas supply.”

Their case was given a fillip by power generator Greg Everett, who is chief executive officer of the NSW government-owned Delta Electricity. He said on an ABC TV show looking at the white paper that there is "massive uncertainty about gas on the east coast.”

Everett added: "Is the price of gas going to be $8 (per gigajoule), or about where it is now, or will shale gas be released from the US and crash the international price?”

Ferguson acknowledges that there will be "tightness” in the east coast gas market as Queensland LNG projects ramp up to full production.

He denies that the white paper, which points to agency research showing that there is sufficient gas to meet both projected export and domestic gas needs until 2035, is a sign of government complacency on this issue.

He acknowledges that "transitional pressures” are emerging, creating price pressures and tightening supply – but he is not going to put the government’s hand up for reserving some of the coal seam methane for domestic consumption.

Ferguson says intervention to force price or supply outcomes is more likely to impede availability of the fuel.

He wants to rely on price signals to drive exploration and development, not least of shale gas, and on the states getting on with the job of removing impediments to having enough gas available when it is needed.

All of this is music to the ears of the upstream petroleum industry.

The well-honed retort to the manufacturers from Australian Petroleum Production & Exploration Association chief executive, David Byers, is that the federal government’s stance in rejecting attempts by "some interest groups seeking a return to protectionism and industry development subsidies to unsustainably reduce input costs” is an important signal to his industry’s investors.

Gas, he says, should be seen no differently to other export commodities such as iron ore, coal and wheat where the development benefits are maximised through overseas trade.

Byers asserts that the current development activities of the LNG industry will create more than 100,000 jobs across Australia this year.

In a joint statement on the heels of the white paper publication, five business lobby groups – the Australian Aluminium Council, the Plastics & Chemicals Industry Association, the Australian Steel Institute, the Australian Food & Grocery Council and the Australian Industry Group – accept that Ferguson is right to promote a free and transparent market for gas, but they say his white paper doesn’t explain how this is going to happen.

The guts of the manufacturers’ argument, reinforced by a large paper they have commissioned from consultants National Institute of Economic & Industry Research, is that the benefits of exporting gas as LNG should be weighed against those that could accrue via its use at home by gas-dependent factories.

Even a period without secure access to gas could have "significant unintended consequences” as would a shift to LNG-linked pricing, they say.

NIEIR reports that contracts for long-term supply of gas to domestic industry users have already "evaporated” as a consequence of the export commitments that have been made via Gladstone.

Old Cicero used to say that, in judging any case, the key question is "cui bono?” – which is Latin for "who benefits?”

Inevitably in these situations proponents and opponents trade modelling arithmetic to demonstrate their point.

Who’s right and who’s wrong is not a job for armchair observers.

For the moment, the upstream petroleum industry has won the ear of the federal government.

Ferguson is also bolstered in his stance by the coalition’s Ian Macfarlane broadly agreeing with him over rejecting the manufacturers’ pleas, but there is no way the factory owners are going to stop pushing – and their weapon of choice, now that the white paper is published, is to call for the Productivity Commission to look at petroleum lease provisions and the supply of gas in to the domestic market.

With a federal election looming, which way do you think Julia Gillard and Wayne Swan will jump if the manufacturers and the unions keep making a fuss?

The point to remember here is that the white paper is not just Ferguson’s opinion – it is a publication approved by federal cabinet.

However, this government’s track record for holding its ground when the going gets tough is not exactly stellar.

The manufacturers, who argue that their side will contribute more economically than the LNG developers, see a political angle for continuing to press their case lying in the impact of very high gas prices flowing through electricity generation to end-users, especially households.

Electricity prices, as the prime minister has told us, are the new petrol prices in voter land.

The flaw in this approach, at least over the next few years, is what gas generation?

Over-supply in the east coast electricity market, resulting from reduced demand, has dropped wholesale power prices to the point where the environment does not invite new generation investment – except for construction of wind farms, forced by the renewable energy target, and this, in turn, will help to keep power production costs low.

As Greg Everett told the ABC: "Nobody will build anything (other than wind) so the coal guys will just stay here – we just won’t make any money – and I don’t see this story changing until the 2020s.”

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

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