From a famine to a feast – for the gas cartel

It is high time competition regulators turned their gaze on the gas cartel. Photo: Erin Jonasson

Has the feted gas “supply cliff” turned into a gas supply mountain? We were told by the gas lobby there would be severe gas shortages on the east coast. We were told the moratorium on coal seam gas mining in Victoria had to be lifted, CSG projects at Gloucester and Narrabri had to be ramped up with the utmost urgency.

Amid the fear campaign, regulators whacked through 17 per cent retail price rises in NSW. In Victoria, where gas heating is a bigger deal, and prices have risen 6 per cent so far, we were treated to this sort of press: “Victorians’ gas bills will skyrocket by hundreds of dollars over the next few years and low-income earners will be the worst affected, according to a report from a consumer utilities body”.

Last Thursday however, with little fanfare, AGL told the Australian Securities Exchange it had entered into a gas supply agreement with Esso and BHP to purchase up to 198 petajoules (PJ) of natural gas from Bass Strait over three years.

This deal, said the release, would enable AGL to “secure competitively priced gas supply until 2020 for our 1.5 million residential and small business gas customers”.

There is even enough for them to pipe up to 50PJ to Queensland to be turned into LNG and shipped off to Asia.

“This whole shortage thing was a total beat-up,” says analyst Bruce Robertson. “It didn’t exist. At any time they could have gone and done this deal with BHP and Esso. The gas has always been there.

AGL has done rather nicely out of all this. In June 2011, it had resold one of its supply contracts to QCLNG. The contract was for three years; 54PJ – 74PJ “at an attractive oil-linked price”.

As Robertson said in his submission to the NSW gas inquiry earlier this year, “I do not in any shape or form condemn a corporation for making a profit. It is however hypocritical to claim a domestic shortage when you are busy selling contracts that you possess that would solve that very same shortage.”

The east coast has always been supplied by Bass Strait and the Cooper Basin, despite bizarre warnings that gas might have to be “imported” if unpopular CSG projects were not advanced. “Imports” are traditionally things that pertain to trade between nations, not things sent down a pipeline between states.

It is high time competition regulators turned their gaze on the gas cartel. Robertson, in a submission to the NSW gas inquiry, argues the gas cartel is colluding and fixing the prices far too highly.

Further, there is zero visibility on gas reserves as the producers don’t tell anybody how much gas they have. Neither do the suppliers disclose their LNG contracts. Yet in the face of trenchant opposition from rural communities who rightly argue the science is still out on fracking and the risks to productive farmland are too great, producers persist with their marginal, high-cost CSG projects.

As for price, the evidence of collusion is that producers can enter into “joint marketing arrangements” while proffering no proof as to the alleged shortage.

In India, the domestic price is regulated and is currently set at $US4.66/mmbtu (equivalent to a gigajoule) based on a world price for gas. Recent price movements on the subcontinent have been down, not up as they have been in Australia.

The Australian Energy Market Operator conducts a spot market. Presently, spot prices are depressed as gas production ramps up ahead of LNG exports.

The price for gas delivered into the Sydney market is $3.49/GJ, while they are virtually giving gas away in Brisbane at $0.52/GJ. The Henry Hub (a proxy for gas in the US) price is $US2.63/mmbtu. Gas has traded below $US3.32 all this year.

In Australia, the gas cartel is withholding supply to our manufactures and asking them to pay $7.50-$10/GJ to secure long-term contracts. Tired of suffering at the mercy of the gas cartel, and of its opaque and anecdotal market data, Manufacturing Australia has called for reforms for the east coast gas market.

This is a good thing, but it doesn’t go nearly far enough. Reforms should indeed be struck to free up markets, as Manufacturing Australia suggests. This is not a market however, it is a cartel. Free markets exhibit visibility of supply and demand. This is the terrain of competition policy.