In the wake of the AFR National Energy Summit in Sydney, investment analyst Bruce Robertson joins Shell Australia’s Zoe Yujnovich in debunking a few gas myths — specifically those of Shell Australia.

PLAYING THE public for mugs is standard practice for Australia’s gas cartel in any discussion on the gas crisis which grips this country. In an article in the Australian Financial Review ahead of the summit on Monday, Shell’s new boss Zoe Yujnovich took aim at ‘gas myths’. Yujnovic plucked a longbow from Shell’s arsenal of spin and took aim:

Shell Australia’s Zoe Yujnovich

“Allow me to be absolutely clear on this point – Australian gas is never cheaper for manufacturers in Japan than it is for Australian factories.

“To suggest otherwise is a classic example of a disingenuous comparison, or shenanigan, designed to diminish public support for an export industry.”

That night on ABC’s Lateline, host Emma Alberici raised the question with the Minister for Energy and Environment Josh Frydenberg:

“Daniel Andrews on the weekend says Australians are fair to ask why Australian gas is so much cheaper to buy in Tokyo than it is here?”

Frydenberg:

“Well, the answer is: it’s not. And the head of Shell has made that very clear at the conference today”.

Yujnovich is right about one thing: there has indeed been “a selective and intentionally misleading” reading of the situation. Macrobusiness lobbed the first grenade with this headline:

and opening with:

“The gas cartel straight up lied to your face yesterday at the AFR.”

We’d to join the fray and debunk a few myths of our own starting with the fact that, recently, offshore gas from Victoria has been doing the heavy lifting in the domestic east coast gas market. Gas from Victoria is supplying NSW, SA, Tasmania and gas for export as well as Victoria.

This is contrary to the false narrative run by the mining industry that southern states are not pulling their weight. It is the gas exporting companies themselves who aren’t pulling their weight. In its Environment Impact Statement (EIS), Santos stated that it would be supplying its plants from new gas fields. Yet they have not invested to do this as it is not economic. Onshore CSG in Australia is expensive. It is not competitive on a global market where gas prices are low.

Gas markets are divided up into two markets: the wholesale spot market (for short-term supply) and contract markets (for long-term supply) which cater for industry and domestic consumers.

Fact One

For most of the 2017 year, spot prices in Australia were substantially more than those in Japan. Only very recently, under intense political pressure and jawboning from Prime Minister Malcolm Turnbull, has the Australian spot market been better supplied.

The current average wholesale spot price for gas in Australia is $6.73/GJ as of October 10, 2017. This is approximately the same price that the Japanese pay for spot gas on their wholesale market at $A6.84/GJ. (Source: METI for August, the most recent month.)

While the spot prices are now broadly similar in Australia to Japan – they were, incredible as it sounds, lower in Japan –  one of the most expensive gas markets in the world, the ACCC considers that we should be paying at least $A1.30 less, accounting for the costs of liquefying the gas and shipping it to Japan. (This is called the netback price and the ACCC calculates it only on the direct costs of fuel for liquefaction and transport and does not assume any costs of the plant itself, that is, no capital costs only operating costs.)

“The ACCC has estimated LNG contract and spot netbacks for 2018. Current market expectations are that 2018–19 Asian LNG spot prices will average by the ACCC based on aggregated information obtained from the three Queensland LNG projects) gives an LNG spot netback of $A5.87/GJ. “

Source: page 66, ACCC report.

Fact Two: Some global comparisons — spot prices

Comparing our spot prices to those in the US rather than cherry-picking one of the most expensive gas markets in the world in Japan, we see that currently Australian spot consumers of gas are paying 87 per cent more than the US at the wholesale level. (Current Henry Hub gas price is $US2.94/mmbtu as of 2-6 October, equivalent to $A3.59/GJ.)

We are constantly told that we must compete as an efficient economy with the most efficient global players however, when it comes to energy, Shell Australia apparently considers that being the most inefficient is good enough.

Fact Three

Neither does the ACCC concur with Shell – contract prices (Page 19 ACCC gas inquiry first interim report):

“Prices being offered are considerably higher than past levels, generally ranging from $10–$16/GJ over the first half of 2017. These price offers are well in excess of competitive prices and a substantial amount of this demand appears to be currently uncontracted.”

Note that the ACCC says “These price offers are well in excess of competitive prices”. There is no mention 0f the  C word – C for cartel – but they do suggest some level of price manipulation.

Fact Four

Contract gas in WA for commercial and industrial customers is $A6 or lower compared to $10-$16/GJ in the east of the country. WA and eastern Australia are both large exporters of gas. WA is a substantially larger exporter of gas than the eastern states. The difference is WA has a domestic gas reservation policy whereas the east does not. Why should some Australians pay so much more for gas than others?

“WA is expected to be well supplied in the short to medium term, with industry commentary describing the domestic market as having ‘plentiful supply and prices half those in the east’, with five suppliers serving C&I users from a range of sources of supply. “

Source: page 13 ACCC report:
“On the west coast, five suppliers are securing Commercial and Industrial (C&I) customers at prices of $6gj or lower. On the east coast C&I customers seeking offers in 2017 are usually finding only one supplier, with take-it-or-leave-it terms, and offers are generally in the range of $10-$16gj for supply in 2018.
Source: Rod Sims’ National Press Club address.
Please note I have long said that the price of gas for Australian domestic consumers should be $A5-6/GJ based on netback prices. It already is this price in WA.  The ACCC has finally concurred with my work.
It is interesting to note Shell’s comments about protectionism. They have been happy to invest billions of dollars into WA (the Prelude project ) which already has a domestic gas reservation policy. They have not been alone with a boom in investment in WA offshore gas with the recent construction of the Gorgon and Wheatstone projects.

Bruce Robertson is an IEEFA energy analyst and has been a fund manager and professional investor for over 32 years. He has worked with Perpetual Trustees, UBS, Nippon Life Insurance and BT and is an active participant in the national debate on energy issues in Australia.

You can follow Bruce on Twitter @barobertson111.

Editor’s note: Shell, stop propagating myths and pay your tax!

Shell: tax ripped out as in-house deals double