Queensland’s power company Stanwell declared last week it would mothball the biggest gas-fired power station in the state. Rather than using its gas to make electricity, Stanwell is better off simply selling its gas and booting up its old coal-fired facility again.
It is a bizarre turn of events, although now quite plausible, that operators such as Stanwell may sell their gas back to the suppliers themselves; the likes of Origin and Santos. Anybody with long-term gas supply contracts is sitting quite pretty.
For manufacturers and consumers alike, however, the soaring price of gas is disturbing.
The rush to export LNG to China has thrown up a massive distortion in the market. It is worth more to the big suppliers to export LNG than sell gas locally. As a result, Australia, one of the world’s foremost gas producers, faces a shortage. Panic is afoot, prices are spiralling out of control. The key players are all scrambling to lock in supply.
Despite this impending train wreck – rampaging prices will have a pronounced effect on all businesses and consumers – there is yet to be a serious debate about a domestic gas reservation policy.
Western Australia has one – a policy, that is, of setting aside enough gas to serve the domestic market first. Other countries have them. Low energy prices are critical to economic growth. Yet the major political parties refuse to embrace the issue.
Sadly, the debate has been hijacked by ideologists and the gas lobby. Indeed, upon announcing its decision last week, Stanwell’s chief was critical of the carbon tax and renewable energy policy as the culprits behind his company’s exit from gas-fired power generation.
The carbon tax has been a contributor to rising costs of power generation, albeit a minor one. Network costs are the biggie, accounting for almost half of the power rises in recent years.
Stanwell’s decision to mothball its plant – something which should have incited debate over a gas reservation policy – has instead been hijacked as a political truncheon by the government to slug the opposition and repeal the carbon tax.
Worse, the more dangerous market distortion is the push into coal seam gas. Good farmland and river systems are under threat by the CSG menace but production is still predicted to fall short of the demand from Asia for LNG.
Meanwhile, Santos indicated – in its submission to a NSW parliamentary inquiry last year – that it might strip 30 per cent of its conventional gas supply out of the NSW market and pipe it to Queensland this year.
This is shaping up as a big state of origin battle. Ironically, Santos and the CSG players reckon they can fill the looming supply gap with CSG but the earliest Santos could reasonably expect to get its Pilliga Forest operations on stream to provide gas to the Sydney market is probably 2018.
That is assuming they can overcome community opposition. This reporter, for one, had been told by a farmer he would literally be warning the CSG miners away with a rifle. Opposition to AGL’s controversial Gloucester project is similarly entrenched.
Even assuming CSG runs to the timetable – and that seems an unlikely proposition – it simply cannot hope to fill the insatiable appetite of the Queensland LNG trains which are looking to export 2400 petajoules. The east coast doesn’t produce half of that at the moment.
The paradox of the gas shortage is that it is a mess created by the industry itself. The triplication of infrastructure in Queensland has blown up billions in shareholders’ wealth and the upshot of poor policy is now both in the highly fraught rush to coal seam gas and also – as evinced by the Stanwell decision last week – something of a return to the dirtier coal-fired power generation.
As gas prices continue to rise we can probably expect more players to simply sell their gas rather than use it for electricity. The price of electricity has run so high in recent years – mostly thanks to rising network costs – that now consumption is in retreat.
Unfortunately, prices won’t be in retreat too. The networks will still want their high returns. The upshot for business is a double whammy effectively. While electricity prices will remain high, gas prices are going through the roof.
The plight of SPC Ardmona may well be replicated elsewhere. Australia’s shrinking manufacturing base can ill-afford a further escalation in gas prices. It would appear inevitable though as LNG production ramps up and suppliers pipe more gas to service the lucrative Asian export market.