Energy policy: no end to damaging political interference

The idiocy of Australian gas policies continues to add to those followed in electricity. Labor and the Coalition, having been spooked by Green-Alan Jones campaigns, have prevented new exploration in eastern states, bringing predictable and inevitable outcomes.

Prices at the Wallumbilla hub have risen from their former levels of $3 per gigajoule to $10 at present and in the peak summer periods were $16 plus; this was before the Hazelwood closure and there are reports of forward contracts at $20 per gigajoule.  Prices in the US remain at about $A4 per gigajoule and the prospectivity of Australia for gas is, according to the US Energy Information Agency, similar to that of the US.

In the light of state based restrictions on new development and federal and state policies forcing closure of low cost coal electricity generators governments are confronting the likelihood of extreme prices both for gas itself and for gas fed into electricity generation.

The Commonwealth has been jawboning and threatening gas firms to divert product from their contracted overseas markets back into Australia.  The threat is that a national gas reservation policy will be imposed unless the suppliers “see reason” and reduce their profits by supplying a domestic market where supply has been made scarce by government policies.  Of course, the short term palliative of a gas reservation policy only means longer term costs and an increased risk profile, but these factors weigh lightly with politicians reflecting on their own survival in the face of the damage their policies have created.

Tomorrow there is yet another meeting between government and the firms  to prevent the political fallout of the high prices policies have created.  There is even the suggestion that gas producers be allowed to swap deliveries of overseas purchases of gas for domestic supplies, as though that is some sort of novel solution not routinely entered into in the petroleum world.

It is hard to engineer a situation where the nation with among the world’s most abundant supplies of energy has achieved energy prices that are among the world’s highest and where reliability of supply approaches third world levels.  The cause is government policy making, interference  and the successively more senior levels of political control being imposed.

The solution is to remove the causes of the problem starting with the renewable energy policies that have created an electricity shortage and a doubling of price; and the gas exploration and development policies that have added to this in NSW, Victoria and South Australia.

Hopefully we will not have to wait until the next government but one to see such obvious policies enacted.

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23 Responses to Energy policy: no end to damaging political interference

  1. Jannie

    Hopefully we will not have to wait until the next government but one to see such obvious policies enacted.

    Hopefully indeed. Not this government, nor the next. Maybe the one after that, hopefully.

  2. IRFM

    A good summary indeed – deregulation of supply (gas resources) and the transport (pipeline) is needed to ensure a market that is at least competitive at other than the retail end. While CSG is attractive to a certain degree conventional exploration close to market has all but died. Australia does not match the untapped resources of USA sic “USGS estimates between 4 billion barrels of oil and 304.4 trillion cubic feet of natural gas sit untapped in the Haynesville and Bossier shale formations (in the Gulf States). More natural gas was found in these two formations than any other continuous assessment the USGS has ever conducted. Even more can be realised by the use of hydraulic fracking” Walter Guidroz, 14/04/2017 Coordinator USGS Energy Program. Here in Australia energy resource ownership is limited to a few ensuring little or no competition on the supply side. Coupled with poor local access to market then it is not surprising that most of the CSG gas is shipped out through Gladstone.

  3. Dr Fred Lenin

    When we got a Populist government ,they should oass a retrospective law punishing tge cause this monstrous stuff up ,I suggest confiscation of family assets and a minimum twenty years hard labor {ha ha )gulags shiuld be built in the desert where they can move around sand 16 hours a day ,seven days a week for porrige in the morning and thin soup at night ,no days off ,and each leap year they get to work an extra day no pay of course,added time for breaches of rules two years for first offence doubling for each new offence .

  4. val majkus

    Alan, thanks for all your great articles on the subject of energy recently. The US and the UK are making noises about exiting the Paris agreement. Our politicians are too timid and possibly too self serving to follow them. As you say:

    The solution is to remove the causes of the problem starting with the renewable energy policies that have created an electricity shortage and a doubling of price; and the gas exploration and development policies that have added to this in NSW, Victoria and South Australia

  5. val majkus

    This is one of Alan’s articles on energy (part cut and pasted):

    Matt Zema, inaugural head of the Australian Energy Market Operator (AEMO), attended a meeting a year ago of the Regulation Economics Energy Forum at which a number of prominent electricity industry executives were present. Proceedings at the meeting were private, but the need for confidentiality was removed with Matt’s sad death three months later. The following were among his remarks:

    “The renewable developments and increased political interference are pushing the system towards a crisis. South Australia is most vulnerable with its potential for wind to supply 60% of demand and then to cut back rapidly. Each new windfarm constrains existing ones and brings demand for more transmission. The system is only manageable with robust interconnectors, but these operate effectively only because there is abundant coal-based generation in Victoria…

    … wind, being subsidised and having low marginal costs, depresses the spot price and once a major coal plant has a severe problem it will be closed…

    … wind does not provide the system security. But the politicians will not allow the appropriate price changes to permit profitable supply developments from other sources. And the original intent of having the generator or other beneficiary pay for transmission and services over and above energy itself has now been lost so there are no market signals, just a series of patch-ups that obscure the instability and shift the problem to include Victoria. In the end the system must collapse…”

    A month later South Australia’s coal-fuelled Northern Power Station was disconnected from the network because it was unable to operate profitably against subsidised intermittent renewable energy that has priority over other supplies …

  6. EvilElvis

    In this present crisis, government is not the solution to our problem, government is the problem

    Bless his cotton socks. Ronald Reagan.

  7. val majkus

    greatest embarrassment this year? Turnbull declaring himself a nation building PM (I know you know what I’m talking about)

  8. john constantine

    Their sky business channel proclaiming the need for nationalisation of gas in australia.

    Gas swaps, tell producers they must operate in the national interest.

  9. john constantine

    Remember their south australian wrecking crew claiming they had the power to shut down the gas pipeline out of the Cooper Basin?.

  10. john constantine

    Sky business gloating that gas shortages could shut down Australian gas dependent business within 100 days.

  11. val majkus

    tell producers they must operate in the national interest.

    when politicians fail to do so …

  12. OldOzzie

    I will repeat a post from Catallaxy Files Forum 15th March 2017

    OldOzzie

    #2326848, posted on March 15, 2017 at 11:06 am

    Time to give Credit to South Australian Premier Jay Weatherill for something Liberals should have done years ago, and should do now in NSW, but unfortunately NSW Liberals are too Dumb

    South Australia’s royalty plan a gas game-changer

    South Australia’s decision to offer farmers a direct share of the royalties that would be generated by expansion of the state’s rich onshore oil and gas bounty should resound nationally as the most important single initiative in a new energy plan that is otherwise surprisingly rational and generally positive.

    Sure the plan arrived replete with a self-serving narrative that blames the faceless energy bureaucrats in Sydney and Melbourne for South Australia’s energy frailty while utterly failing to acknowledge the national network instability caused by the state’s excessive dependence on renewable power.

    But Tuesday opened to fears that the South Australians were about to force retrospective gas reservation on its Cooper Basin producers, a move that would risk further market destabilisation, raise questions of sovereign risk for a state excessively dependent on a diminishing cohort of direct investors and also ramped up the pressure on one of the state’s few home-grown industrial champions, Santos.

    So the fact that Tuesday’s bellicose political rhetoric from South Australian Premier Jay Weatherill was not preceded by anything like the market interference that had been anticipated was a serious positive.

    There is nothing wrong either in the idea that the state should build itself a new peaking gas power station, or that it should demand that gas developers who accept state funding at any point in their progress should deliver gas to South Australia as a priority.

    How the government’s plans to deliver itself new powers to direct the way the power industry supplies the state fit with South Australia’s national market obligations and with its existing commercial generators, well, time will tell.

    But nothing in the package stands as nationally significant as the decision to offer farmers a direct financial incentive to further embrace oil and gas development on their properties. This is a first in Australia and it is the sort of direct incentive that the National Party’s federal leadership has been banging on about for some time.

    The petroleum industry will be just as welcoming, not least because South Australia, for the moment at least, is offering farmers a share of the state’s existing royalty.

    Petroleum extractors in South Australia pay a royalty equivalent to 10 per cent of well head sales value. So this plan will see farmers earn the equivalent of 1 per cent of the value of sales from future wells on their properties.

    It is indicatively ironic that it is a South Australian Labor government that is the first to get the message on pastoral inclusion. Whatever we think about the state’s self-indulgent renewable energy policy, when it comes to the extractive industries, there are few states that get the regulatory and fiscal regimes as right as South Australia.

    And, given the troublesome gas market outlook published on Tuesday by management consultants McKinsey & Company, South Australia’s clear-sightedness is a very good thing indeed.

    The way McKinsey sees it, Australia’s east coast gas demand has peaked with the arrival of three suddenly very controversial liquid natural gas projects but the nation faces a $50 billion investment task just to maintain the current delicately poised supply and demand balance through to 2030.

    The proponents of the Queensland’s three gas chillers expect to spend about $40 billion over the next 15 years on rolling out the coal seam gas wells that will be needed to feed their machines.

    But, McKinsey estimates that the gas industry needs to spend a further $10 billion on new production if it is to get anywhere close to filling a supply shortfall caused by the natural decline of the nation’s original oil and gas wellsprings, the Exxon operated Bass Strait fields and the Santos operated Cooper Basin.

    If timing is everything in business then McKinsey has proved why it ranks among the best in the consultancy game. The key data points offered in its analysis describe with numerical simplicity the nature of the gas supply side task ahead.

    East coast demand is about 2155 petajoules of gas. McKinsey sees that to remain flat or to drift slightly lower between now and 2030. McKinsey assesses that the market is fully supplied.

    But McKinsey warns that, without that additional $10 billion of currently unfilled investment, the market will enter a shortage from 2020 and that by 2030 the shortfall will be equivalent to 21 per cent of total demand.

    McKinsey captures with clinical directness the nature of the contest between suppliers and contract customers over the availability of gas and the tenor and price of future contracted supplies.

    “Historically, east Australia has benefited from lower gas prices than most other areas of the developed world,” McKinsey observes. It finds that, over the five years until 2013, the average price of gas in Victorias was $3.30 a gigajoule. Over that same period gas customers in the US paid an average $5.20/GJ, in Europe $9.70/GJ and in Japan a massive $18.60/GJ.

    Australia’s new reality is more daunting.

    “Conventional gas supply capacity is in steep decline and higher cost unconventional supply sources represent an increasing share of future supply capacity,” McKinsey says. The next wave of supply will demand a cost of between $5 and $8/GJ and the wave after that will cost even more.

    The challenge we have right now is that, for reasons mostly outside of the control of the gas producers, the price signal has not triggered the supply-side response that it should. There are a host of reasons for that and most of them, it has to be said, are linked in some way or other to Santos.

    Of the three Gladstone LNG projects, Santos operates the one that most relies on third-party producers for its gas feedstock. Each of the Gladstone operators runs two production trains. Santos should have stuck to one. Indeed, it would have done better to consolidate its ambitions with one of the other operators.

    Origin’s project is more than self-sufficient and Shell’s BG-built project largely supplies itself. But the disappointing productivity of some Santos coal seam fields has left it short of gas. So it buys gas from Origin’s Queensland fields and its third party gas vacuuming stretches all the way to Bass Strait.

    The other corner of Santos’ problems lies in northern NSW. The original plan was that Santos would be introducing material quantities of new gas from its Narrabri coal seam gas project by the end of this year. The original plan was that the project would quickly ramp up to better than 150PJ of annual production, equivalent to 50 per cent total NSW demand. But nothing went to the original plan.

    But the project and the APA pipeline needed to support it remain effectively stillborn, having only just entered an environmental approval process that everyone knows will be a fierce contest.
    High on the list of reasons why Santos has struggled at Narrabri is that the local farmers see risk but no reward from engagement with the coal seam gas sector. And that is why South Australia’s proposed royalty initiative is so important.

  13. val majkus

    Jo Nova had a good post recently

    …. Just find us one nation running on wind and solar that has cheap electricity. They don’t exist. The only cost effective renewable energy comes from hydro. Wind and solar theoretically provide cheap electrons sometimes, but we need electricity all day every day, and the net effect the intermittent sources have on the whole grid makes for expensive electricity. The intermittent generators stop us from getting cheap electricity. The subsidies to pander to them (like the RET) force the cheap generators out of the market. ….
    If the Australia Institute really wanted to understand what Australians think, they would have told Australians the price of coal fired electricity, told them the cost of the subsidy (RET = 8c/KWhr) and asked people how many dollars extra they are willing to pay for the RET

  14. John Michelmore

    When the US and UK exit the Paris Agreement then our government will follow like a lamb. Our politicians are not capable of thinking these issues through to rational conclusions that would be beneficial to Australia and all Australians. Their only capability is that they are suckers when it comes to professional snow jobs, that they fall for nearly every time. We cannot blame them, what training have they had in their port folios, where is their qualification in good governance, and what qualifications do they have in their respective portfolios? How would they know if their inherited bureaucracy were pulling the wool over their eyes?

  15. OldOzzie

    And a post from Monday Forum April 10th 2017

    Can one of the Cats Economics Contributors explain to me with our looming gas shortages in NSW, why we are not importing Gas from the US?

    How U.S. LNG Transformed The Market

    The global market for LNG is changing quickly, spurred on by new sources of supply from U.S. shale.

    U.S. natural gas production surged over the past decade, as fracking opened up a wave of new gas supply. That wave led to a glut and a crash in prices long before shale drillers did the same for oil. The U.S. was sitting on massive volumes of gas that routinely traded as low as $2 or $3 per million BTU (MMMBtu).

    At the same time, Asian consumers – mainly Japan, South Korea and increasingly China – paid a hefty premium to import gas, with prices spiking close to $20/MMBtu following the Fukushima meltdown in 2011 that left Japan painfully short of functioning electricity capacity.

    That presented U.S. gas companies with a straightforward arbitrage opportunity – export cheap American gas to Asia, selling it for a much higher price. The race to build LNG export terminals was on.

    But by the time the first LNG export terminal in the U.S. came online in 2016, the gas market was radically changed. On the demand side, Japan – the largest LNG importer in the world – was no longer desperate for gas imports in the same way that it was back in 2011 and 2012. New renewable energy, a monumental efficiency campaign, and a greater reliance on coal cut into gas demand. China’s gas demand has also grown slower than expected.

    The effects on the supply side of the equation are arguably much more significant. LNG export capacity around the world has surged in recent years, hitting 340 million tonnes per annum (mtpa) in 2016, up from 278.7 mtpa at the end of 2011, an increase of 20 percent. New megaprojects have come online, including Chevron’s Gorgon LNG project in Australia. A whopping 879 mtpa of new export capacity has been proposed for the future, although much of that probably won’t be constructed now that the market is oversupplied.

    Surging supply and disappointing demand caused prices to come down from their peaks. Spot prices in East Asia – the Platts JKM marker – hit $19.42/MMBtu in March 2014. By 2016, Japan only paid an average of $7/MMBtu for imported LNG, or around one-third of the prices from three years ago. Spot prices for May 2017 delivery are now trading below $6/MMBtu.

    The glut of LNG today is upending long-standing trade practices. LNG has historically been traded on long-term contracts at prices linked to the price of crude oil. The volume of LNG traded had once been limited, so there wasn’t much of a true market price for the product. Fixing cargoes to the price of crude oil became a common practice. The crash of crude oil in 2014, not coincidentally, also helped push down the prices of LNG.

    Now, with so much supply on hand, the market is no longer favorable to sellers. But the U.S. is just beginning to ramp up. Cheniere Energy brought the first LNG export terminal online last year on the Gulf Coast. Other projects are under construction and by the end of the decade, the U.S. could be the third largest LNG exporter in the world behind only Australia and Qatar. By 2035, the U.S. is expected to pass them to become the largest LNG exporter in the world.

    “As U.S. exports ramp up, we’re going to see even more flexibility with more people trying to buy and trade volumes. The old models of stable long-term contracts will really have to change,” Zhi Xin Chong, a gas analyst for Wood Mackenzie Ltd., told Bloomberg. “We’ve already seen the impact of U.S. LNG on contract trends, with more destination flexibility coming into play.”

    Contracts used to not only have long time horizons, but would also prohibit buyers from reselling cargoes, limiting the development of a true market for LNG. That is changing, and the more reselling and spot purchases, the more liquid (no pun intended) the market will become.

    But just because new U.S. suppliers are adding competition does not mean that American LNG is the most competitive. At one point it was – cheap Henry Hub prices competed favorably to high-priced LNG in Asia, particularly when oil traded at $100 per barrel. But spot LNG prices in Asia are now lower than some of the American LNG contracts.

    For example, Indonesia’s Pertamina is contracted to buy LNG from Cheniere Energy at Henry Hub prices, plus 15 percent, plus a fixed $3.50/MMBtu fee, according to Bloomberg. When the deal was negotiated in 2013, that equated to something like $8/MMBtu – much better than the $18/MMBtu that LNG traded at the time. However, with spot prices down below $6/MMBtu, Pertamina is now trying to get out of its contract.

    Buyers are demanding that these age-old contract practices be scrapped. JERA Co., a partnership between Japanese utilities Chubu Electric Power and Tokyo Electric Power, is the world’s largest buyer of LNG. JERA formed a common front with Korea Gas Corp. and China National Offshore Oil Corp to establish a buyer’s club in March to force changes in the LNG market. It is sort of the opposite of OPEC – a buyer’s cartel meant to influence prices and dictate contract terms. JERA is expected to sign a deal with France’s Total, which would see flexible volumes delivered based on spot prices.

    But fixed prices and multi-year contracts are not going away entirely – they may just be shifting to lower prices and shorter terms. The former head of Cheniere Energy, Charif Souki, recently offered Japanese customers five-year contracts fixed at $8/MMBtu from an LNG export terminal on the U.S. Gulf Coast beginning in 2023, a contract much shorter than in yester-year when they spanned decades. Now head Inc., Souki is confident his capacity will sell out.

  16. RobK

    A good article Alan.
    Removing the RET would see coal being profitable again, relieving the burden from gas trying to be a baseload whilst at the same time being at call for renewballs….an economic impossibility (again compounded by the RET but also constrained by the laws of physics and engineering). Of course putting nuclear into the mix would give us energy to spare and real competition a long way into the future.

  17. duncanm

    While CSG is attractive to a certain degree conventional exploration close to market has all but died. Australia does not match the untapped resources of USA sic \u201cUSGS estimates between 4 billion barrels of oil and 304.4 trillion cubic feet of natural gas sit untapped in the Haynesville and Bossier shale formations (in the Gulf States)

    https://www.naturalcsg.com.au/about-natural-gas/an-abundant-resource/

    203 trillion cubic feet of proven reserves.. sounds pretty similar in scale to me. Especially considering we’re 1/10th the population!

  18. H B Bear

    It is hard to engineer a situation where the nation with among the world’s most abundant supplies of energy has achieved energy prices that are among the world’s highest and where reliability of supply approaches third world levels.

    Helluva job by the Uniparty. Pro Tip – changing the governments won’t do a thing.

  19. val majkus

    changing the governments won’t do a thing.

    Labor’s targets are higher

  20. OneWorldGovernment

    I will not vote for the LNP until they have shut down ALL coal fired generation AND completely stopped electric trains and trams.

  21. Leo G

    Can one of the Cats Economics Contributors explain to me with our looming gas shortages in NSW, why we are not importing Gas from the US?

    It may be that only Iona/Moomba has the right combination of injection and storage capacity, and Energy Australia and Cooper Basin JV have no economic incentive to displace stock from Moomba. Or perhaps we’re waiting for the Torrens Island storage to be upgraded.

  22. Daithi

    A map of the gas and oil wells here in Australia and surrounds.

    Most are capped.

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