Gas crisis: a crisis of guile and greed

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It is bizarre that gas customers in Japan buy Australian gas more cheaply than Australians. Some of this gas is drilled in the Bass Strait, piped to Queensland, turned into liquid and shipped 6,700 kilometres to Japan … but the Japanese still pay less than Victorians.

When Prime Minister Malcolm Turnbull meets gas industry bosses in Canberra tomorrow he will be regaled with tales of looming blackouts, spiralling prices and the stubborn refusal of state governments to open up coal seam gas fields to assuage the impending supply crisis.

Turnbull will be fervently advised to avoid a domestic reservation policy to earmark gas supplies for Australian consumers and businesses, though they have one in Western Australia. He will be implored not to tamper with the “market”.

There is no market though, only a cartel, a cabal of six big players who control the price: Santos, Exxon, BHP, Origin, Arrow Energy and Shell. Markets have visible prices and quantities on the bid and offer. The cartel even hides information about its gas reserves from government.

Why gas prices are through the roof

As the price of gas has shot up threefold, as high prices exact a drag on the entire economy, and as the government confronts its challenge of energy security, it is worth considering the global gas glut.

Tonight in Columbia Law School in New York, Bruce Robertson, an analyst with the Institute for Energy Economics and Financial Analysis (IEEFA), will hand down a paper describing how this gas glut will only get worse, how excess supply and faltering demand are leading to a breakdown the the contract pricing mechanism.

Australia now exports 12 per cent of the world’s gas, and with production rapidly on the rise, will become the world’s premier exporter.

Incidentally, Qatar, now the world’s biggest exporter with 32 per cent of the market, raises three times the amount in royalities as Australia for selling the same amount of gas. But that’s another story, another story of Australia’s broken energy policy.

Japan, which is comfortably the world’s largest importer of gas at 34 per cent of the global market, showed a two per cent drop in imports last year just as the three LNG plants in Gladstone, Queensland, were ramping up production.

Japan has now begun re-exporting LNG, says Bruce Robertson. Its Ministry of Economy, Trade and Industry estimates LNG demand will fall about 30 per cent to 62 million tonnes by 2030.

It’s a gas! Australian gas is a bargain … if you’re Japanese

The global gas industry closed out 2015 already in glut with total nameplate liquefaction capacity of 308 million tonnes (mt) surpassing demand for LNG imports of 245mt, by 26 per cent.

While demand recedes across the world, the supply side looks ominous. By 2020, says Robertson, global LNG capacity is tipped to reach 400mt a year, up 30 per cent on 2015. Some 92mt a year of new capacity will hit the global market between 2015 and 2020.

Meanwhile, Australia’s Office of the Chief Economist is predicting this: “Global LNG demand is expected to grow strongly to 2020 to approximately 457bcm (336 Mt), an annual increase of 5.9 per cent from 2014. … This growth is led by China, the rest of Asia and Europe, offset by falling demand in Japan. Demand growth has softened recently but the prospects remain positive overall.”

The reality is that LNG trade grew by 2.5 per cent in 2015, less than half the annual growth rate projected out to 2020 by the Office of the Chief Economist. Moreover, the key markets for Australian LNG producers are in North Asia. And in 2015, LNG demand in North Asia contracted by 1.7 per cent.

It seems that, in gas as in electricity (via the power networks operator AEMO), over-cooked forecasts for demand have justified excess spending by the networks and therefore ensured higher prices. This is precisely what the gas cartel wants: the spectre of shortages whipping up prices. They have been doing it for years.

No need to fear AGL’s gas supply ‘cliff’

While AGL was earnestly talking up gas shortages in 2014, BHP Petroleum chief Mike Yeager, let slip to journalists: “We want to make sure that the market knows that the Bass Strait field still has a large amount of gas that’s undeveloped … We have a lot of gas in eastern Australia that’s available. It’s more important to let the citizens of Victoria and New South Wales, and to some degree, you know, even Queensland … there’s plenty of gas to supply those provinces for – you know, indefinitely.

AGL later quietly issued a release to the ASX conceding it had plenty of gas supply.

Far from free, gas is becoming the ‘risible’ market – all the way to the bank

In September last year, Japan’s energy minister said imports of LNG would continue to fall. They fell by 4.7 per cent in 2015 and another 2 per cent in 2016 amid a rising commitment to renewables and the rebooting of nuclear reactors in the wake of the Fukushima disaster.

They have also been falling in other parts of North Asia, down 9 per cent year on year in the world’s second largest import market, Korea.

Then there is China, which unlike Australia, is pursuing an aggressive transition towards renewable energy while growing domestic gas capacity. The big swing factor here is the forecast 50mtpa of supply to come from Russia via two new Siberian pipelines.

Asian LNG imports peaked in 2014 and have been falling since but what of emerging markets taking up the slack?

There is simply too much supply coming on line, says Bruce Robertson. While demand falls, global LNG capacity is tipped to rise by 30 per cent between 2015 and 2020.

Contract defaults are already afoot. India’s Petronet has renegotiated its LNG contract with Qatar’s Rasgas, cutting the price in half over the 25 year term of the deal.

Meanwhile, the energy adviser to the OECD, International Energy Agency (IEA), has pulled back its forecasts for gas demand for four years on the trot. IEA estimates growth in gas consumption will decelerate to 1.5 per cent a year between 2015 and 2021.

Ironically, the very fact of a thermal coal market in structural decline and a global glut in gas conspire to push down fossil fuel prices and delay the transition to renewable energy. Although, the gas cartel, by its actions in restricting domestic supply, is deliberately keeping prices high.

For its part, the government has been faithfully trotting out the cartel line that the states must bring new unconventional gas online, coal seam gas. This is not only expensive to produce but it poses inestimable environmental risks to farmland thanks to the fracking process.

Enronesque, the cartel has manufactured a fake gas crisis. Australia is soaking in gas. The answer is a domestic reservation policy starting now.

This column, co-published by The Conversation with www.michaelwest.com.au, is part of the Democracy Futures series, a joint global initiative with www.sydneydemocracynetwork.org. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.

  • slorter

    Neoliberals will make us all pay if governments do not take back control!

  • MaudeLynne

    Thanks Michael. Yours is the only column I have seen that dares speak of a cartel controlling supply and price. Our federal government serves them.

    Funny how RW press in WA asked McGowan if he is beholden to the union movement yet never ask Turnbull about being beholden to the coal and gas industry.

    • Michael West

      Hi Lynne, yes, the timidity of government is incredible in that they don’t even demand to know contracted sales or reserves. The most basic information

  • Dismayed

    Good work Westy please keep it going

  • Gary_Storm

    Have you informed the SA govt of your findings? Is it worth them building their own gas plant??

    • Dudley Hunter

      SA already have an efficient CCGT plant (Pelican Point). They just need to leave it on.
      The new gas plant is going to be open cycle and high emissions.
      They are also getting diesel generators in.
      Their plan is absurd and terrible.
      What they need is more CCGT. But the wind industry oppose that.

  • David Hurburgh

    Something doesn’t quite gel with this article

    Wests’ thesis is: There is a gas cartel inflating prices,

    And then he goes onto say there is a glut – and Australian LNG producers are selling into a weak, over-supplied market….

    This is more than a non-sequitur – it is a blatant contradiction !

    • Dudley Hunter

      He is preaching to the ‘anti-corporate’ captive audience. He doesnt have to make any sense. He just has to appeal to the emotional biases and pre conceptions of his readership. This is the aussie way.
      The whole idea of a cartel is to keep the global price high – e.g. OPEC.
      So West’s thesis is nonsense by its own evidence.
      There is no cartel in gas.
      The problem in Australia is State government moratoriums and the lack of political will to put in a domestic reservation policy at a national level (WA has had one since 2006).
      In fact the real story is that the coal lobby and renewable energy lobby are acting in concert to keep the gas electricity business out of Australia – and keep the superior CCGT technology from getting a look in here.
      That is the actual cartel. The unholy alliance between coal and renewables.
      Have you ever wondered why we dont have an emissions trading scheme or a carbon tax? Because both coal AND wind companies oppose them.

      • michael

        Hi Dudley,

        please see my response to David Hurburgh. Thanks

    • caffdan

      The numbers on supply and demand quoted in the article speak for themselves. There is a looming glut of LPG and natural gas and Australian producers are getting the lowest return because of the expensive way they extract it. Their answer is to sell more of it to try to make those liquefaction plants in QL pay for themselves. They are literally dumping it to secure market share. Australians are being dudded by this. It is totally a scare campaign from the gas industry who are performing a con job on Turnbull and his merry bunch of parliamentarian capitalists. We need to get greed out of politics and get the cartels out of the parliamentarians ears.

    • michael

      As you know David, a lot of the LNG contracts where struck when the price was higher. You also should know unconventional gas is mostly expensive to extract. Then there is the cartel: As BHP and Esso have joint marketing arrangements, and as Shell now owns Arrow, there are effectively four players who dominate. There is no public price information about LNG sales, nor – and this is worse – is there any disclosure to government about gas reserves. Ergo cartel.

      On another issue, I appreciate debate and feedback. It would be good if you, and particularly Dudley, could dial the ad hominem attacks down a touch.

  • Dudley Hunter

    Does the author have any idea how many new CCGT power plants are currently under construction in the US? About 25GW of capacity is being constructed.
    The US have managed to keep electricity prices very low while cutting carbon emissions by 50% in five years.
    This is a huge success story but I guess the whiners dont want to face this inconvenient truth?
    While Australia is dominated by partisan hacks, posers and tribal politics – the US is forging ahead with cheap, low emissions electricity that leaves us in the dark ages. All thanks to the cheap gas supply and the new Siemens and GE CCGT technology.
    But I guess noone wants to hear this?

    • caffdan

      So Dudley. Do the Americans reserve their gas or not? Isn’t SA putting in a CCGT plant? Do you expect the USA to still reduce their carbon emissions when there is a gas pipeline in Cook Sound in Alaska that has been leaking millions of tonnes of gas into the sea for at least three months. Fugitive emissions undo all the good work that gas potentially could do to reduce emissions as opposed to coal.

      • Dudley Hunter

        1). the US have 50% less carbon emissions per capita than we do and they are driving this down quicker than we are.
        2) your information on fugitive emissions is old and does not apply to Australia. Unless you know more on the topic than CSIRO? Yes?
        Here you go:
        https://www.csiro.au/en/Research/EF/Areas/Oil-gas-and-fuels/Onshore-gas/Coal-seam-gas-fugitives

        • caffdan

          Thanks Dudley. From what would appear to be a less than well resourced investigation, 43 wells tested in QLD, 6 in NSW. Only 3 did not have leaks. Admittedly most were small. But it proves the point that this industry is helping drive global warming and if these new wells and infrastructure are already leaking, they are not going to improve as years go by. Can you see the point of all this investment for a industry which pollutes as much as this and which diverts funds away from investment in renewable technologies with storage?

          • Dudley Hunter

            And your opinion is based on what alternative research? Watching the movie ‘Gaslands’ five years ago?
            I thought so.
            You think there is a lack of investment in renewables and storage? I guess you dont get out much? Have you ever left Australia because you seem to to nothing about the industry or this topic. Dont engage me in the conversation because I am an expert in renewable energy. I wrote the fucking RET.
            Now fuck off back to your shit little community environment group and try and get a root of some pretend hippy divorcee.

          • caffdan

            Thanks for that Dud. Judging by your excellent use of the English language, I can see that you wrote the Dictionary as well.

          • Dudley Hunter

            Yes. Because there is so much to be gained from online discussions with people who have no idea what they are talking about but want to signal their virtue – probably in hope of having sex with a divorced lady who goes to the same yoga class.

          • John Koch

            Judging by your comments,it would seem you are the one that just might be in need of sex with a divorcee!

  • Paul Dawson

    Well, the answer is to take over the industry – or at least have the government exert proper control , i.e. regulate prices and production to ensure adequate supplies for the country now and into the future. If the cartel doesn’t like it – then tell them to go elsewhere. But where in the world will one find such vast reserves in a stable democratic economy? OH yes they’ll moan and threaten and shout foul etc., etc. – but if they want to stay in business they’ll toe the line. When will this country ever develop a long term view about resources, climate etc. Well not while you’ve got a Goldman Sachs graduate pulling the strings.