In yesterday’s AFR, Peter Roberts made explicit a proposal that is lurking within the Government’s draft White Paper on energy. He called for suppliers of gas to be forced to ensure the diversion of supplies to local users, implicitly (or such forced action would be unnecessary) at lower prices than the producers would opt for. My letter said,
“Peter Roberts (‘Globalised gas pricing has local costs’ AFR 30 Jan) applauds the Commonwealth’s National Energy Security Assessment which advocates using export controls on gas. The objective of this is to ensure that domestic consumers obtain supplies at less than the world price. Roberts argues that dedicating a proportion of gas supplies for domestic use will allow more jobs by diverting exports of gas for electricity production for gas allocated to industrial processes.
“In supporting this protectionist approach Roberts fails to make the connection with the carbon tax, which penalises domestic but not overseas users of local supplies of coal and gas. This places a far greater penalty on Australian domestic energy supplies than any advantage that export controls could offer.
“Moreover, he says we can say goodbye to $4 a gigajoule gas at a time when the US price has dropped to under $3. Technology is unlocking formerly inaccessible coal seam and shale gas and is creating a glut. Australia has valuable gas resources in coal and shale but so have many other countries. If we insist that project approvals should be conditional on diversion of supplies to local users at preferred prices, this cost imposition will reduce Australian development in these highly prospective fields as well as confronting investors with new and unwanted thickets of regulation.”
The new supplies of gas are leading to a mini-revolution in energy markets, with the US – in spite of the Obama administration’s protectionism in forbidding the building of a new pipeline from Canada – likely to become a gas exporter in the near future.
Australia has massive potential in the new gas sources and there can be no question of some form of monopoly being able to gouge domestic customers. The requirement to divert supplies to local use therefore amounts to an export tariff. Seeking to divert supplies of gas at artificially low prices can no more build a competitive secondary industry using those supplies than if we introduced a protective tariff to foster the growth of those indutries in the first place.
It seems at every opportunity, protectionist voices emerge to promote a philosophy that needs to be disproven continually.
Hmm, I seem to recall you arguing that domestic gas prices would not rise to the world price as LNG took off, Alan.
Entropy
31 Jan 12 at 7:28 am
Not that I disagree with your letter…
Entropy
31 Jan 12 at 7:28 am
…which inadvertently keeps a lot of us who oppose them employed.
.
31 Jan 12 at 7:38 am
Entropy,
Domestic prices are unlikely to rise to the delivered world price since this is likely to include a liquifaction and transport component that is greatly reduced where local supply is by pipeline.
Alan Moran
Alan Moran
31 Jan 12 at 7:45 am
You are right in the detail, I guess it all depends at which point of the supply chain you determine. World price. Is it before liquification? Or after liquification,transport and re-gasification?
From a domestic perspective, it is never liquefied. So I would regard the comparative price as that delivered to the liqufication plant. Domestic gas in the US, for example, would not be liquified before use.
Entropy
31 Jan 12 at 9:29 am
Alan, WA stands as an interesting example, which you failed to address. WA has had a 15% gas reservation policy that requires gas exporters in the state to reserve 15% of their export gas reserves for local supply, with the usual commerciality tests etc. The effect? WA has the highest domestic gas price in the country where contract domgas prices are commonly reaching price parity with international LNG net back prices. The commerciality test obliges LNG producers to seek LNG netback prices for their domgas. Smaller gas producers which would only sell into the domestic market are being crowded out by large LNG producers who are obligated to provide 15% of their gas stream to the local market. This produces a significant supply overhang, strongly discouraging smaller local suppliers. With all this gas in the market, why the high price? The market has become far less competitive with local suppliers unwilling to enter the market with very large supply overhang and LNG producers marketing domgas with very little competition from other suppliers and significant demand from buyers in the short and medium term.
Antipodean
31 Jan 12 at 10:01 am
Entropy, it is very common for US domgas to be liquefied and re-gasified for seasonal peak shaving purposes primarily.
Antipodean
31 Jan 12 at 10:07 am
It has little relevance to the average consumer who pays a mark up of around 200% from the wholesale price to the retail price. The question is why do the retailers of gas apply such a mark up retailing gas at about the same price as oil if you take the taxes out. Wholesale is $6 per gigajoule and retail is $19.50 per gigajoule in Brisbane. This works out at around 66c per litre petrol equivalent energy value. Previously gas was cheap in Brisbane with the government setting the price and then they decided to deregulate it or in otherwords allow the monopoly retailers to put the prices up mucher higher than they have to be. It is also the case that they retail electricity and sell those solar panels so no need to compete with themselves.
kelly liddle
31 Jan 12 at 8:46 pm
A further point the $6 price if it is to wholesale customer is for 15 years. But dont’ worry the current government will stuff up whatever they are trying to achieve.
kelly liddle
31 Jan 12 at 8:57 pm
Doesn’t that make it relatively cheap? If you’re talking 66c per litre retail with taxes, it’s very cheap.
wreckage
31 Jan 12 at 11:39 pm
Wreckage
No it is relatively expensive and if petrol had the same mark up as a percentage it would be $2.50 per litre approx. 65c (oil at $100 per barrel) times 3 plus tax around 50c. True it is still cheaper but not compared to what it should be. Another point is the pricing I gave for gas above is after paying a monthly connection fee and using a certain amount per month. Main point is that utility retailers should have an eye kept on them and to remember if they have a monopoly position they will not offer the best pricing. What is suggested in the article above is a slightly different thing about the wholesale pricing which is not a problem at this stage (also unlikely to become a problem due to the very large costs in refridgeration for export) and it is the retail pricing for small business and households that is high. I agree that Australian’s should pay the same rate as the delivery to port price for wholesale gas which is already happening.
kelly liddle
1 Feb 12 at 12:40 am