US joint bidder behind Origin tilt says Canberra must honour gas contracts
Long-term contracts cannot be broken by the federal government if it intervenes in the domestic gas market, says MidOcean.
The US investor behind a joint $18.4bn takeover bid for Origin Energy said Labor must honour the sanctity of long-term LNG contracts if the federal government proceeds with a controversial intervention fix to cut domestic gas prices.
MidOcean Energy, a LNG company controlled by Origin bidder EIG, said Australia should never have been in its current crisis position given the nation’s vast gas reserves and said it was critical the sanctity of multi-decade long-term contracts struck by the Australia Pacific LNG export plant in Queensland were not tinkered with.
EIG is in line to take control of Origin’s 27.5 per cent stake in APLNG should it prevail with the deal. Its consortium partner, Brookfield, would control Origin’s energy markets business comprising electricity and gas retailing.
“It’s really important that we don’t lose sight on honouring the contracts that are in place. APLNG, of course, supplies 30 per cent of the gas in the east coast markets,” MidOcean chief executive De la Rey Venter told The Australian.
“And I think most of that gas is supplied under long-term contract with different pricing bases and pricing mechanisms.”
He said the federal government must keep producers on side by allowing more supply to be delivered to the market.
“Our only hope is that in acting on the short-term crisis, that we will also fix the long-term issue which is that there’s insufficient supply,” he said.
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When I read comments in the press from Resources Minister Madeleine King and from the Treasurer, I think these leaders are very much sensitive to the unintended consequences of short-term interventions.
“And so I would hope that along with any package, we also engage between government on the supply and demand side on how do you create a better supplied future for the east coast system.”
Federal cabinet is in the process of finalising the national response to skyrocketing electricity and gas prices ahead of a national cabinet meeting on Wednesday next week. A potential price cap of $11-$13 a gigajoule on domestic supplies would boost the risk of an electricity blackout in 2023, according to Credit Suisse.
“Any intervention to lower prices closer to this level could see gas demand for the power sector spike, drilling in Queensland reduce and see less flexible Bass Strait supply made available, raising the risk of a blackout next year,” Credit Suisse analyst Saul Kavonic said.
Mr Venter said Australia’s vast reserves of gas meant it should not be faced with the current crunch.
The situation “is avoidable if you have enough gas in the ground and capable competent upstream sector”, he said.
“And then with the right regulatory framework, and the right market mechanisms and incentive structures, there is really no need for a market like this to be — on balance — not well supplied with affordable gas and power.”
Government intervention may lead to short-term price relief but would ultimately exacerbate a domestic supply problem by damaging future output, MST Marquee analyst Mark Samter said.
“Putting price caps on doesn’t massively reduce supply today, but it irreversibly impacts future supply. Ironically, if I had to guess, I would think the chickens really come home to roost around the time of the next election – so this isn’t even good politics, let alone good policy,” Mr Samter said.
“Yes, it is a negative for some in the short term (and how it is structured will determine the magnitude of how bad), but it isn’t half as bad as it will be for manufacturers, generators and households when we learn in a few years what it is like to have shortages and high prices, not just high prices.”
The $9-a-share takeover play by EIG underscores its growing appetite for big gas deals after it was foiled in its attempt to buy a 10 per cent stake in APLNG last year with energy giant ConocoPhillips pre-empting the $2.1bn sale.
EIG — which operates in 38 countries — also failed to buy Santos in a $13bn-plus deal back in 2018.
However, MidOcean in October bought stakes in four of Australia’s largest LNG projects in a $US2.15bn ($3.4bn) deal, marking the latest shake up in the booming sector.
Mr Venter said it has big growth plans and wants to become a major player in LNG supply globally, noting it could build a long-lasting business in the fossil fuel over several decades rather than being hemmed in by short-term private equity style returns.
“We want to build a company to focus on LNG as opposed to invest through the funds because if you invest through the funds then by definition you have a limited lifespan,” he said. “If you create a company, you have a vehicle that in theory will last will last in perpetuity. And you’re not bound by having to sell your assets after 10-15 years and liquidate the play.”
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