Cheap gas promise finally mugged by reality

The Federal Government’s long awaited promise to deliver cheap gas as part of its recovery plan revitalise a domestic manufacturing has finally been released, without the cheap gas.

Industrial customers have expressed outrage that there was no attempt to at least try and link domestic gas prices to some sort of global benchmark, even if the cost of supply, and therefore the price of LNG, varies significantly in different parts of the world.

The Morrison Governments pandemic recession busting National Co-ordination Commission promised $4 per GJ gas, strong-armed by former Dow Chemicals CEO Andrew Liveris. Which seemed odd to many, given the cost of extracting unconventional gas along Australia’s east coast is around $6 per GJ.

Those big promises appear to have been as empty as they sounded back in May last year, with the Federal Government announcing a new deal with LNG exporters this week committing more gas into the domestic market, but without any commitment on price.

The new deal which will operate until 2023 will see gas exporters offering un-contracted gas to the domestic market, which is more or less what they did anyway.

LNG prices collapsed last year tracking oil markets which were smashed by a global pandemic restricting movement and therefore demand for aviation and vehicle fuels. Oil and gas prices have slowly recovered since March, but are still well below their pre-COVID price levels.

The Federal Government has been keen to highlight 2020 easing of gas market prices which reflect the global tightrope-walk of oil cartels trying to control (short) supply to push prices up and increased volatility in global demand.

Markets ultimately tend to be self-correcting. Sustained low prices would eventually drive higher cost LNG producers to close operations, reducing supply and pushing prices up again.

The long term sustainable market position of LNG in Australia is framed by the long term impacts of these global shocks and the potential risk of supply side shortages later this decade.

The risk is that supplies from mature southern gas fields continue to decline and the development of new  “2P” reserves risk being slower than anticipated, resulting in potential supply shortages. According to AEMO’s 2020 Gas Statement of Opportunities, this would be noticed first as winter supply shortages in Victoria. Separately companies like AGL and Fortescue continue to explore feasibility for LNG import terminals in Victoria and NSW respectively if they see a sustained commercial case for additional supplies of gas.

Gas supply conditions remain challenging for industrial customers on the east coast of Australia. The cost of gas remains higher in Australia than parts of the US because supply conditions are different. US shale gas is a by-product of oil production, reducing extraction costs. Australian gas fields are dry.

Gas will continue to play an important role in Australia’s economic fortunes and domestic energy markets, but it won’t get down to the promised land of super-cheap supply unless a government is willing to stand in the market and underwrite discounts on price. That will cost billions without inciting the kind of investment confidence required for jobs growth.