‘Hard to see how lower pricing will emerge’: Experts doubtful of Dutton’s gas plan

A shock new gas policy has been thrust to centre-stage of the Coalition’s election pitch as Opposition Leader Peter Dutton promises to set up an unprecedented scheme to keep more supplies of the fossil fuel in Australia in the hope of delivering cheaper bills for Australian consumers.

The Coalition’s so-called “Australian gas for Australians” scheme – a pitch to voters struggling with energy bills and other living costs – would curb exports of uncontracted gas from Queensland’s giant liquefied gas ventures and force additional supplies to be sold to local buyers at cheaper prices.

Election pitch: Opposition Leader Peter Dutton’s goal is to curb gas prices. Credit: Alex Ellinghausen

However, critical details are missing: the Coalition is yet to explain exactly how it would hold back exports, deliver the additional gas from Queensland into Victoria and NSW – given a lack of gas-storage and pipeline capacity – and achieve lower prices. The gas industry, meanwhile, has made clear that it was blindsided by the policy, raising speculation that it may have been rushed out.

Dutton’s goal to cut gas prices is “easy to say, and I suspect quite hard to do”, said Tony Wood, energy director at the Grattan Institute.

“Until we have seen how they will do that, it is very hard to assess if this is a realistic proposition or not.”

What is Peter Dutton’s gas policy?

While Australia exports liquefied natural gas (LNG) from Queensland, the Northern Territory and Western Australia, officials are sounding the alarm that consumers in the most populous south-eastern states are heading for a gas shortage in as little as three years as supplies from offshore fields in Bass Strait rapidly deplete.

Under the Coalition’s plan, Queensland’s LNG exporters would be forced to hold back a significant amount of their “uncontracted” gas volumes to shore up supplies for local homes and businesses, which use the fuel for cooking, heating, power generation and manufacturing.

Queensland’s LNG sector currently sells most of its LNG under long-term contracts to overseas buyers in Asia, while shipping some of its surplus gas as one-off LNG deliveries on the international spot market.

However, two of the state’s three LNG producers – Origin Energy’s Australia Pacific LNG joint venture and Shell’s QCLNG – are key supplies to Australian consumers, too, together accounting for more than 40 per cent of the domestic east-coast market.

The Coalition’s proposed gas-reserve scheme would require them to go further still, forcing them to hold back a specified amount of between 50 and 100 petajoules of their uncontracted gas each year – enough to meet an additional 20 per cent of the eastern seaboard’s demand.

Separately, the Coalition is also pledging to “rip up” as much red and green tape as possible to accelerate new gas-drilling projects and to tip $1 billion into new gas pipelines and gas storage infrastructure.

Would a national gas reservation reduce energy prices?

Dutton claimed his plan would deliver enough gas locally to swiftly cut the wholesale price of $14 a gigajoule to $10.

However, that promise may prove challenging, as the cost of producing gas in Australia has been steadily increasing over time as the lowest-cost sources have depleted. Gas could once be provided for $4 per gigajoule or less, but, today, eastern Australian gas fields will struggle to supply gas for less than double that amount.

In its latest report, the Australian Energy Market Operator said gas produced at new projects typically cost between $9.20 and $12.50 a gigajoule at the wellhead – and that’s before adding other significant costs, such as transporting the gas via pipeline to where it’s needed. “It’s hard to see how lower pricing will emerge,” Macquarie energy analyst Ian Myles said.

The logistics of any reservation scheme may also prove “very challenging”, added MST Marquee analyst Saul Kavonic, due to the unpredictability of production and domestic demand. “We doubt this has been thought through,” he said.

On top of lowering gas bills, Dutton declared the Coalition’s gas plan would lead to lower power bills, too, since gas is burnt to generate electricity at many power plants.

However, the focus on gas overlooks the fact that coal, still the dominant power source in the grid, is a more significant determining factor in wholesale prices, experts said. Power bills are also made up of other costs, such expenses for maintaining and upgrading the transmission network, and retailer margins.

What has the reaction been?

The proposed reservation scheme sparked an immediate backlash from the gas industry, which warned it could deter the very investments in new gas supplies that the Coalition says it is trying to encourage.

Australian Energy Producers, an industry group, called the proposal a “damaging market intervention” that would force a glut of domestic gas, undermine their ability to sanction new gas-drilling projects in Victoria and NSW, and threaten trading relationships with long-term LNG buyers.

Others in the sector privately described it as “overreach”, “populist politics” and a “Band-Aid solution” that would harm the functioning of the gas market and discourage LNG ventures from producing gas beyond their minimum contracted levels.

However, Dutton’s gas plan was welcomed by major gas users, including companies in the manufacturing sector, which need the fuel for energy or as a feedstock.

“Gas prices above $10 per gigajoule are simply untenable in a gas-rich country like Australia,” said Ben Eade of Manufacturing Australia, whose members include companies such as BlueScope Steel, Brickworks, Cement Australia and CSR. “We congratulate the opposition for committing to driving the gas price back below this level.”

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