Anybody who has been listening to AGL or the media coverage it has received this week will have heard the message loud and clear: we are heading for a cliff.
AGL has unleashed Phase II of its scare campaign with a study called “Solving for X – the NSW Gas Supply Cliff”.
The findings of this inordinately complicated bit of research can be boiled down to this: in two years there will be terrible gas shortages. Unless the state ramps up its coal seam gas projects immediately, we are in strife.
Phase I of the gas industry’s scare campaign was about jobs.
”The natural gas industry was responsible for an estimated 100,000 Australian jobs last year” is the mystical claim.
For this to be true, the gas industry must have been responsible for 58 per cent of all job creation. A stretch, to put it mildly.
They are yet to resile from this implausible claim. As somebody pointed out, the other day the gas industry actually employs fewer people than Bunnings.
Facing ‘the cilff’
Yet now we face the unnerving spectre of “the cliff”.
Reading “the cliff” report is every bit as harrowing as contemplating a family frozen in the dead of night thanks to impending gas shortages:
Take this line, for example: “In this article, we present our dynamic partial equilibrium model of the interconnected gas system and produce forecasts with daily resolution”.
And this: “We find that absent additional supply-side development, unserved load events will remain more than a theoretical possibility due to inter-temporal spatial constraints.”
That’s enough to frighten anybody but if you look at Figure 7 in the AGL study, Solving for X, you will discover – with the help of a magnifying glass – that the dreaded “x” on the final column of the bar chart is but a tiny fraction of gas supply, and a tinier fraction of LNG supply contracts.
Indeed the AGL research is useful in depicting the real rub with gas, that it is far more profitable to export the stuff rather than sell it in Australia. So the industry has been feverishly contracting to send it to Queensland, turn it into LNG and flog it in Asia.
Meanwhile, in order to meet this demand, it is looking to deliver the extra supply by booting up coal seam gas projects. For Santos, it is the Pilliga project and for AGL it is the Gloucester project. Both have local communities up in arms. Santos is embroiled in a public relations disaster in the wake of news of uranium leaks from a pond into a natural acquifier.
For AGL, it is yet to explain how it can responsibly dispose of 30,000 tonnes of salt. Spraying it onto surrounding farmland is the plan.
Quantifying the risks
The fact is, when it comes to fracking and CSG, the science is out. Independent mining engineers and water experts are, for the most part, leery. While the rewards of CSG can be quantified, the risks cannot.
Thankfully, somebody has actually taken the trouble to analyse this latest research by AGL.
Economists at The Australia Institute say AGL has used complicated modelling to conceal a simple truth.
“The gas industry in Australia has overinvested in liquefaction and export capacity at Gladstone and, as a result, it is desperate to export as much gas as it can, as quickly as it can, especially as the industry fears that if the US begins to export gas the world price will fall and the returns on their investments in Gladstone will be even lower than originally promised.”
“We find that there is no prospect of households or small businesses running out of gas, however the idea that some industrial gas users will have to use less gas or pay a lot for it remains ‘more than a theoretical possibility’.”
This TAI response takes issue with a range of AGL’s assumptions, but the nub of it is that The Cliff has conveniently ignored the effect of rising prices on demand.
As has been the case with electricity, once prices rise too much, demand falls. Consumers use less, they substitute for other forms of energy, and (for gas) further supply comes on stream in offshore markets.
“Rather than discuss the economic impact of the tripling of the wholesale price of gas that is associated with the plans to export huge quantities of gas the (AGL) paper focuses instead on the risk that some gas users may experience difficulty buying gas on some days due to the industry’s determination to export as much gas as possible,” says TAI.
For those who have no fear of a ‘dynamic partial equilibrium model’, the rebuttal is worth a read in conjunction with the AGL paper.
They don’t pull any punches:
“Bizarrely, the paper argues that gas price increases will be bad for employment when the whole premise of the paper is that gas impacts of the gas supply ‘cliff’, but are silent on the long term impact of tripled gas prices.”
Despite warning against alarmism, AGL still deploys some alarming estimates on job losses.
To their credit, the AGL authors do concede that the problem has been caused by the industry’s excessive investment in LNG. Further they concede they failed to anticipate the savagery of the community backlash against coal seam gas.
And in the small print, if you wade through the algebra and other bamboozling stuff in The Cliff, there is this on page 30:
“Our model results do not envisage households or small businesses experiencing energy shortages in any region at any time.
“The burden of unserved load events could, in theory, fall entirely on the LNG producers. But in our view this is unlikely. Putting to one side LNG commissioning commitments, LNG plant minimum load constraints, LNG contract obligations, the imperfect substitutability of physical and financial LNG cargo delivery and the fact that two of the three Gladstone producers (GLNG and APLNG) will be keen to establish their credentials as reliable LNG suppliers.”
As is de rigeur in the land of public relations however, they cherry-picked a gruesome number – 300 per cent price rises – ignored a few things for the sake of convenience, and chucked a cliff on the front page.
Those who fear heights however have little to worry about. In the words of Gerard Manly Hopkins, the AGL cliff is a cliff of the mind:
O the mind, mind has mountains; cliffs of fall,
Frightful sheer, no-man-fathomed.
Hold them cheap they
who ne’er hung there.