Did you know Australia has now overtaken Qatar to be the largest exporter of natural gas in the world? But, thanks to private profiteering and government bungling, this seeming triumph comes at the risk of further diminishing manufacturing industry in NSW and Victoria.
It’s yet another example of naive economic reformers stuffing things up because real-world markets don’t work the way they do in textbooks.
Last week Dow Chemical announced it would close its Melbourne manufacturing plant due, in part, to high gas prices. This came after RemaPak, a Sydney-based producer of polystyrene coffee cups, and Claypave, a Queensland-based brick and paving manufacturer, went belly-up citing rising gas prices as an important contributing factor.
“Many other manufacturers are close to making critical decisions on their future operations,” according to Australian Competition and Consumer Commission boss Rod Sims. “If wholesale gas prices do not [come down], it is just a matter of time before they follow Dow, RemaPak and Claypave.”
When expected world liquefied natural gas prices rose last year, Australian gas suppliers were quick to raise their prices to local manufacturers, which use much gas in their production processes.
But expected world prices have fallen significantly over the past six months. Have the three suppliers dominating our east coast market cut their prices with the same alacrity? No. Most commercial and industrial users will pay more than $9 a gigajoule for gas this year, with some paying more than $11.
Why haven’t suppliers cut their prices? Because their pricing power means they don’t have to if they don’t want to. Why would they want to? Only because the government threatens them with something worse if they rip too much off their customers.
This was the big stick the softly spoken Sims was carrying last week as he urged them to do the right thing.
Is this the best way to regulate a market? No, but once you’ve stuffed it up you have little choice. The stuff-up evolved over some years, under federal governments of both colours and, predictably, with a lack of federal-state co-ordination.
It began in the resources boom, when Labor’s Martin Ferguson approved the construction of no less than three gas liquefaction plants near Gladstone in Queensland. That was one plant too many.
The companies secured the cost of building their plants by writing future contracts to export LNG to foreign customers. The first two companies secured the supply of sufficient gas from local sources, but the third had to scramble for what it needed to meet its sales contracts.
They expected far more gas to be available than transpired because they failed to anticipate the NSW and Victorian governments’ moratoriums on fracking for unconventional gas from coal seams.
Until the construction of the liquefaction plants – which enabled gas to be shipped overseas – the east coast gas market was cut off from the world market. This meant its prices were much lower than world prices.
The federal government knew that allowing the plants to be built meant opening the east coast market to the (much bigger) world market, forcing local prices up to the “export-parity price” or LNG “netback” price.
But, as Sims noted in a speech last week, the east coast was "just about the only region in the world that allowed unrestricted exports”. By contrast, when our west coast gas market was opened up, the West Australian government insisted on reserving sufficient gas to meet the needs of local users at local prices.
So, the east coast market opening was textbook pure (and much to the liking of the gas companies). Trouble was, the market worked nothing like the textbook promised. Lack of competition meant prices shot up to way above the export price.
The gas producers were able to overcharge the big industrial users, the three big gas retailers – AGL, EnergyAustralia and Origin – charged the smaller industrial users even more, and the pipeline owners whacked up their prices, too. Retailers’ prices peaked at $22 a gigajoule.
The threat to manufacturing was so great that Malcolm Turnbull eventually stepped in. Arming himself with the “Australian gas domestic security mechanism” (permitting him to set up a domestic reservation scheme), he forced the LNG producers to agree to offer domestic users sufficient gas on reasonable terms.
Now, however, prices have drifted back above export-parity. And the Australian Energy Market Operator is warning that gas shortages in NSW and Victoria could arise as soon as 2024 in the absence of major pipeline upgrades to allow more gas to flow from Queensland, or new sources of supply emerging.
This uncertainty adds to the risk of manufacturers giving up the struggle. The easiest and best solution would be for the Victorian government to lift its restrictions on development of – would you believe – conventional gas deposits.
