Finding gas for tomorrow counts

Anthony Albanese has been quick to claim that capping the price of gas has played its part in fuelling expectations of lower prices on the domestic market. In doing so he has shown a misunderstanding of what is happening on global markets and risks underestimating the long-term dangers of using price regulation to force his way. Australia will continue to need gas for many decades to come and government actions should be directed towards making sure it is produced here rather than imported from elsewhere, as has been the case with oil and refined transport fuels. The challenge for government is to maintain a long-term view and understand a quick-fix can do lasting damage, something the federal government now risks as it extends the short-term price cap to a requirement gas producers be forced to sell their wares at a “reasonable” price.

Perspective is everything. When the price of LNG slumped below $5 a gigajoule in May 2016, there were no calls for government intervention to prop up producers that had just spent more than $30bn building the recently opened export terminals in Gladstone and were bleeding out on the sharemarket. It was the same in July 2020, when the pandemic hit and gas prices slumped to a low of $2.29 as global industrial production shut down because of the pandemic. Tracking of the global netback gas price by the Australian Competition & Consumer Commission, the export equivalent price for domestic gas sellers, shows it has averaged below $10 a gigajoule since LNG exports started in 2105. But the price spiked dramatically last year due to a combination of weather-driven demand in Europe, geopolitical interference by Russia and a bounce-back in post-pandemic industrial demand in Asia. Prices rose to a peak of $66.99 a gigajoule in October before starting to fall. The ACCC expectation now is that the netback price will be at $33.42 by February and back to around $24.34 by May. Looking forward to 2028, the price is tipped to quickly return to its long-run netback average of around $10. Like the rise in prices, the fall reflects what is happening on global markets. Energy market publications report that exceptionally mild weather has boosted stockpiles and European futures prices for gas deliveries in March 2023 have halved from their December level, and by three-quarters from their peak.

The big lesson is that gas producers operate in a highly volatile market that requires billions of dollars to be invested at substantial risk over long periods of time. And the industry is warning that attempts to regulate the market with price caps and other measures will change the equation about how willing they will be to invest in Australia. The industry was caught by surprise by the government’s decision to cap the price of domestic gas at $12 a gigajoule for 12 months. But it is more concerned about a mandatory code of conduct and “reasonable” price mandate. Consultation on the code of conduct wraps up on February 7. The message from peak gas group APPEA is that poorly conceived interventions are creating uncertainties, and the government should take note of the unintended consequences as it seeks to permanently regulate gas prices.

Market intervention and a lack of will to promote gas production by state governments in Victoria and NSW have already limited our options for future energy security. Lack of supply in these markets is responsible for the high prices being offered to industrial users on the eastern seaboard. Bad decisions by the commonwealth will only make things worse.