PM’s gas-fired Covid recovery
Two-year deal with large LNG exporters to offer uncontracted gas first to Australian companies keeping prices low.
Scott Morrison has struck a two-year deal with large east-coast LNG exporters to offer uncontracted gas first to Australian companies, in a bid to keep prices down and lower costs for manufacturers as part of the government’s COVID-19 recovery plan.
But the deal, signed on Wednesday night in Gladstone by the Prime Minister and Queensland’s three LNG producers, avoided formal price controls, which some big manufacturers had pushed for but were strenuously resisted by the LNG industry.
“Gas is critical to our economic recovery and this agreement ensures Australian businesses and families have the gas supply they need at the cheapest possible price,” Mr Morrison said. “This is about making Australia’s gas work for all Australians, while also supporting economic growth and backing important regional jobs in our expanding LNG sector.
“As part of our JobMaker plan we are delivering more Australian gas where it is needed at an internationally competitive price. This particularly includes manufacturing businesses who employ more than 850,000 Australians, many of which rely on gas to operate.”
The new agreement will lock in LNG exporters until 2023 and is an extension of the 2017 agreement struck between the Turnbull government and the industry aimed at heading off supply shortfalls in the domestic gas market which threatened to push up prices. The 2017 deal ensured LNG exporters offered uncontracted gas to the domestic market in the event of a shortfall, guaranteeing domestic users had access to enough gas for their own needs before supplies were shipped to Asian buyers.
The new pact commits LNG exporters to offer uncontracted gas to the domestic market first on competitive market terms before it is exported.
The renewal of the deal has taken on additional significance given the federal government’s hope that cheap gas will spur households and manufacturers to recover more quickly from the COVID-19 pandemic.
While the three LNG producers — the Santos-led GLNG project, Origin Energy‘s APLNG and Shell’s QCLNG — already comply with the new agreement, the Morrison government hopes the compromise will help ease tensions with manufacturers who complain they are still paying over the odds for gas. Resources Minister Keith Pitt said the government was working to achieve a balance between affordable gas for manufacturers and a price that encourages new gas development.
However, energy giants dodged the mooted introduction of formal price controls on supplies for the first time, despite sustained pressure from manufacturers for cuts to their gas costs.
Mr Morrison, in a September pledge, said the government would strengthen price commitments as part of plans to get more gas in the market and re-establish a strong economy, worrying producers that more government intervention would add fresh sovereign risk and lead to an investment strike.
The Australian understands there is neither a specified price nor an international benchmark referenced in the heads of agreement, easing fears among big gas suppliers the rules would be rewritten after they have sunk more than $70bn into building Queensland’s giant gas export industry. They have argued that, should the pricing option be introduced, it could effectively represent a rewrite of regulatory rules, hindering future investment and Australia’s international reputation.
The absence of a price mechanism may cloud a goal for cheaper gas costing $4 to $6 a gigajoule issued by former Dow boss Andrew Liveris, who advised the government’s National Covid Coordination Commission on how manufacturing could help lift the economy out of the pandemic.
Big energy users complain they can’t find gas on a contracted basis for less than $8 to $10 a gigajoule, more than double historic levels, which could force some facilities into importing products rather than producing Australian-made goods or even shutting their doors.
Major gas users including billionaire Anthony Pratt’s Visy Industries, Qenos, Incitec Pivot and Orica took part in a high-level meeting in November with Mr Pitt and Energy Minister Angus Taylor to put forward their case for the policy change. Still, Canberra says the industry is much healthier since it introduced the agreement four years ago.
“Since the government first acted in mid-2017 to ensure gas supplies for the domestic market through the introduction of the Australian Domestic Gas Security Mechanism and the first Heads of Agreement, the spot price for gas has dropped from $12.50 to $10.50/GJ to now be between $7 to $5/GJ,” it said.
Cheaper domestic gas prices in Australia are likely to change again after LNG prices in Asia soared to a record as traders scrambled to secure new supplies amid a prolonged cold snap that has depleted inventories and prompted warnings of power shortages across the region.
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