“Santos now argues that its aim in CLNG was always as much about raising the domestic gas price, and therefore re-rating large parts of the portfolio outside of GLNG, as it was about the project…….What is more, with a ~0.8% drag on Australian GDP from every $2/GJ rise in the domestic gas price, this view certainly wouldn’t have been terribly popular with politicians who approved the project.” [Credit Suisse, Asia Pacific/Australia Equity Research: Santos, 11 March 2014]
The reality for Australian householders is that on on average gas cost the same or more than electricity by 2012.
After managing to artificial inflate the domestic price of gas still further and wanting to reserve as much LNG as possible for the larger export market, now the Australian gas industry is crying shortages in order to blackmail state governments into opening up more conventional and unconventional gas fields across rural and regional Australia.
The fact of the matter is that since at least 1975 domestic energy consumption has been lower than energy production and export, while current gas domestic consumption remains significantly lower that current gas production.
Natural gas production rose by 5 per cent in 2014–15 to 2,607 petajoules (66 billion cubic metres). Western Australia remained Australia’s largest producer of natural gas, producing nearly two-thirds of total gas production in 2014–15. Queensland production grew 45 per cent to become Australia’s second largest producer, overtaking Victoria, where production fell by 11 per cent. Production of coal seam gas increased by 50 per cent in 2014–15, to reach 462 petajoules (12 billion cubic metres), as new wells were drilled in Queensland to support the start of LNG exports from Gladstone. Coal seam gas accounted for 18 per cent of Australian gas production on an energy content basis, and nearly half of east coast gas production.
This Australia Institute graph makes the relationship between 2016 gas production and domestic consumption levels clearer:
Graph retrieved from Twitter
So why the alleged gas shortage?
The gas industry in Australia ignored signs that domestic gas consumption would rise and, in an excess of greed made commitments to export markets which appear to have been predicated on the assumption that it would be able to easily and profitably make up the competitive squeeze between domestic need, client country needs and its own commercial aims - because it would still be allowed open slather to drill or frack every available square kilometre of land with gas reserves beneath it.
This can all be explained in one sentence. The gas industry has been deliberately manipulating and starving the domestic market for years.
Mainstream media is finally looking at
this problem a little more closely and explaining how businesses and consumers are being played for fools.
Let's
be clear: there is no gas shortage. Not in Australia, and not around the world.
In fact, there's the opposite: a global glut of the stuff. BHP has already
admitted there's enough gas in Bass Strait to supply the east coast
"indefinitely". And globally, by the end of 2015 the gas industry was
capable of producing about 25 per cent more liquefied gas than the world wanted
to import.
By
2020, production capacity looks set to increase another 30 per cent. Even if
demand is increasing – and that's not absolutely clear – it's not keeping pace
with that. The world's biggest importer, Japan, has been reducing its demand
for several years, and according to its own government, will be buying 30 per
cent less gas by 2030 as it turns its focus to renewables….
So it
was all very encouraging to hear Turnbull boasting this week about the size of
his constitutional stick. "We have a responsibility – which we do not
shirk from"; the industry understands the gravity of its "social
licence" to operate. Et cetera. But the government has steadfastly refused
to use that stick previously. And when you have gas companies slugging
Australians record prices while charging their Asian customers record low
prices, it's a little hard to believe they stay awake at night worrying about
the terms of their "social licence".
What's
much easier to believe, though, is that the gas industry is desperate to get
its hands on gas supplies that are off limits – especially controversial ones
like, say, coal seam gas. And if they have to offer a little more domestic
supply to do it – at a time when global demand is slowing anyway – then it's
hardly a sacrifice. Oh, and as it happens, that's exactly what Turnbull would
like to offer them, hence his condemnation of the states' bans on further gas
extraction.
It's a
neat trick, really. Take a country with enough gas to supply itself
"indefinitely", send the vast majority of it overseas, refuse to sell
locally at a fair price, create a domestic shortage, then demand access to some
of our most environmentally sensitive resources as though it's an emergency
measure.
According to a report compiled by
Energy Edge, the $US18.5 billion ($24.1bn) Gladstone LNG project, run by
Santos, has at times been buying the equivalent of up to half of the whole east
coast’s energy demand to meet a shortfall of gas to put through its two LNG
production trains.
It is little wonder then that high up
in the gentlemen’s agreement struck on Wednesday were commitments to supply,
rather than deplete, domestic gas markets.
It is also clear that only two of the
three Gladstone projects could agree to being net domestic gas contributors “as
part of their social licence”.
The GLNG project has had to “take the
matter on notice”, the agreement said.
The other two LNG projects — Queensland
Curtis LNG run by Shell and Australia Pacific LNG run by Origin Energy and
ConocoPhillips — have been consistently providing gas to the market (and GLNG,
sometimes) on top of their export commitments.
“QCLNG and APLNG are currently either
net long or balanced to the market, whereas GLNG is significantly short on
equity supplies and must rely on third-party contracts,” Energy Edge said.
That was known by most observers.
But, using a range of public sources,
Energy Edge says GLNG has sometimes bought a staggering 500-600 terajoules a
day of gas on top of its own production.
Illustrating how substantial that
volume is, the combined domestic demand from the pipeline-connected eastern
states of Queensland, NSW, Victoria and Tasmania is about 1250 terajoules a
day.
GLNG appears to already be averaging
the use of about 300-400 terajoules a day of third-party gas — that is, gas
outside the coal-seam gasfields it has developed specifically to feed its LNG
project — for its LNG export.
With APLNG and QCLNG already
fulfilling the demand, any short-term change will need to come from Santos and
its GLNG partners Total and Kogas, although it might pay the rest of the
industry to somehow provide some assistance.
After the meeting, Santos chief
executive Kevin Gallagher, who was brought in last year to fix the problems,
would not comment on exactly what the GLNG response could be.
“As an Australian company that has
supplied the domestic market since its inception, we look forward to working
with and supporting the government on this issue,” Mr Gallagher said.
“We are committed to working across
all of our joint ventures to free up gas as well as continue to identify and
develop new resources for the domestic market.”
As recently as December, at the
company’s investor day, Mr Gallagher said the aim was to ramp up GLNG volumes
to fill 6 million tonnes of the plant’s 7.8 million tonnes of annual LNG export
capacity.
This could be potentially expanded by
offering tolling services to other Australian gas producers who might want to
export their gas but didn’t have the facilities, he said.
Enthusiasm for toll-treating has
probably eased off in the wake of the meeting with Mr Turnbull and the current
alarm around contract prices that Australian Competition & Consumer
Commission chairman Rod Sims said this week “are apparently being offered at
$20 a gigajoule, if they receive supply offers at all”.
East coast gas contract prices were $3
to $4 per gigajoule before the export plants were committed to and are said to
now average $8 to $10, except in extreme cases.
The $70bn worth of Gladstone gas
freezers and associated coal-seam gas wells have rapidly tripled east coast gas
demand and opened the market up to international buyers.
This has ended an era of cheap
Australian domestic gas supply, although the industry says this would have
happened anyway because the cost of developing required resources was rising.
But the expected price hike has been
exacerbated and come with shortages thanks to external factors and industry and
government missteps, many of them flagged by observers before they were
committed to.
Despite calls for industry to
collaborate, three separate, almost identical plants were approved by
Queensland and federal governments and, from 2010, built by the gas industry on
Curtis Island.
This resulted in increased capital
costs because infrastructure was not shared, cost blowouts as the remote
construction market heated up and the building of six LNG production trains
when the associated coal-seam gasfields could only really supply enough fuel
for five.
To achieve efficiencies of scale, GLNG
built two trains when it only had enough gas to comfortably fill one, admitting
it would need to buy an unspecified amount of third-party gas to fill the
second train.
After this, much that could go wrong
has gone wrong.
Oil prices crashed, robbing gas
developers of cash flow and investor funds that would have been used for extra
LNG-related and domestic gas development, while community opposition to onshore
gas production grew, resulting in bans or restrictions on new development in
NSW, Victoria and now the Northern Territory.
At the same time, coal-seam gas
resources did not perform as well as hoped at some Santos GLNG grounds,
Santos’s Narrabri project in NSW (which was also hit by community opposition)
and at the Bowen Basin ground of the Arrow joint venture between Shell and
PetroChina.
It is not clear what the options are
for GLNG, but Credit Suisse analyst Mark Samter has made repeated calls for it
to close down one of its two trains — something Mr Gallagher ruled out last
year.
Now an incredibly rich Liberal Party politician heading a Liberal-Nationals federal government – who was a failure as Minister for the Environment and Water, an abject failure as Minister for Communications and is a profound disappointment as Prime Minister of Australia – expects voters to believe that there is a genuine gas supply emergency which will leave local families and businesses going without unless the states allow indiscriminate gas mining.
