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Pressure builds on gas strategy

By inviting a future in unconventional gas, successive Queensland governments have fuelled more than $60 billion of new investment that supports 30,000 jobs and $100 million worth of community programs.

In contrast, the failure of will and foresight in NSW, where arbitrary government regulation sends the signal that the state is closed for business, has left it exposed to supply-side risk while the state’s politically stunted coal seam extraction industry employs fewer than 300 people.

In Queensland, where the government has helped manufacture the base of community support so necessary to the extractive industries, the gas industry has signed over 4000 landholder agreements that support access and production.

In NSW, where the government has failed to assert similar leadership, community consensus appears a distant ambition and just 285 land access agreements have been signed.

This tale of the national economic tape is the most compelling cornerstone of the petroleum industry’s submission to the federal government’s attempt to better appreciate the current and future shape of Australia east-coast gas market.

The gas industry is under pressure to explain and justify the short and long-term impact on its domestic market of the construction of three LNG projects that will this year start exporting product from Queensland’s coal seams and the conventional and unconventional fields of South Australia’s Moomba and Cooper basins.

BRUTUL FACTS

The brutal facts are that wholesale and retail energy markets will come under pressure as the big chillers on Gladstone’s Curtis Island allow regional gas pricing to be imported into the domestic market place.

To a significant degree that process has already started happening, with some recent supply contracts being done on revised terms that include oil-linked pricing from some time near or after 2017. That, of course, is when gas demand from the Curtis Island exporters will really start ramping up.

For some time now Australia’s manufactures and gas-short energy companies have been concerned at the potential of a gas supply shortage to cause them real financial damage.

As a result, a few very high-profile names have been out and about suggesting the nation is blowing its great energy bounty for want of an energy policy that should include some form of formal reservation of resources for domestic customers.

More recently, the AiG offered a rather more thoughtful and interesting contribution to the debate in an offering to the government’s east-coast study. It included the idea that energy export projects must clear some kind of national interest test.

Not surprisingly, the APPEA submission delivered on Monday finds fault with that idea, claiming it would deter investment and put Australia in breach of obligations attached to various trade agreements.

“Market intervention in the form of domestic reservation is simply not the answer,” the APPEA submission warns. “As the WA experience demonstrates, it does not result in lower prices or the sort of open, transparent and predictable market that the simple would hope.”

RESERVATION POLICIES

Two Australian states have reservation policies, Western Australia and Queensland.

Western Australia requires nominated gas projects to deliver set volumes (rather than a percentage of production) into the domestic gas market over the project life. This regime does not appear to have resulted in lower gas prices nor long-term market certainty. In Queensland, the government has simply not enforced its option to reserve supply.

The reason export net-back pricing has arrived so much more quickly than gas customers anticipated is that there looms an obvious discontinuity between demand beyond 2017 and the industry’s ability to deliver.

Gas customers blame the producers, saying they have over-committed their resource base to the exports at the expense of domestic users and are leveraging that potential shortage into export parity pricing.

Not so, say the producers. The east coast’s problem is that one state has simply failed to appreciate the vulnerability of its supply-short position and, as a result, it has not been able to demonstrate the political will to tap its own obvious gas wealth.

GAS WEALTH

Which state? Well, the employment numbers we started with are instructive. So is an understanding of the approach Santos took to preparing the way for its leadership of but one of Gladstone’s three LNG projects. There were three interconnected elements to the Santos supply-side strategy.

First, the $US18 billion ($20.1 billion) investment in production and processing infrastructure – always the only way to afford to sustain development of Queensland coal seams. Then, with exports a live option, Santos invested in the recovery of its Moomba and Cooper production. Third, it added the $1 billion takeover of Eastern Star Gas to the $500 million it had already invested on a portfolio of unconventional gas plays in NSW.

The idea was that Gunnedah coal seam gas would replace the Moomba and Cooper volumes that Santos would redirect to Gladstone from NSW customers. Others like AGL and Metgasco had the same idea, pursuing CSG exploration option elsewhere across the state.

And it was their collective inability to get on with business that has left the east coast gas customers so exposed to net back pricing.

Please click on PDF above to view report.

Matthew Stevens, The Financial Review - 11 Feruary 2014

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