Gas crisis: states need to see sense after long line of wonky policies

When I was growing up in Melbourne, we lived near a huge gasometer that was used to store imported gas. When oil and gas reserves were discovered in Bass Strait — and around Moomba in South Australia — it was a big deal. It ushered in an era of ­natural gas.

Victorians took to gas like ducks to water. Most homes soon had gas hot water systems and gas heating became common. Gas was cheap and reliable. Factories were set up to take advantage of the new fuel source which, as a direct burning fuel, has advantages over other fuel sources. It helped turn Victoria (and South Australia) into the manufacturing powerhouse of the time.

Fast forward several decades, and the situation in respect of gas could not be more different. The gas reserves in the Bass Strait and Moomba are running low while the rules and regulations affecting the gas industry have become hostile to its future development.

When thinking about fixing the crisis in the gas market, the first thing to note is that producing gas is not like producing widgets in a factory. It’s not a matter of ordering more gas production and the additional petajoules arrive in due course. Gas is subject to the uncertain vagaries of geology and variable well duration. It’s all very well for the federal government to declare we need more gas, but it is not just a matter of turning on a tap. A live example of this is the problems energy company Origin has encountered in the Bowen Basin in Queensland.

This week, the Australian Competition & Consumer Commission and the Australian Energy Market Operator released forecasts for the supply and demand for domestic gas this year and next. While the bands between the lowest and highest gaps between the two are laughably large — I guess these outfits don’t want to be wrong — there is no doubt there is an impending shortage of domestic gas.

But before you fall into the trap of blaming the gas companies for this state of affairs — mainly Santos, Shell and Origin, although there are various joint venture partners, too — bear in mind gas users may well be gaming the system by talking up the situation to secure better deals. It’s always wise to be sceptical about the posturings of all the parties, including the regulators.

(ACCC chairman Rod Sims, in particular, seems inclined to “ski off-piste” when it comes to the gas market. He probably has a point about the joint marketing arrange­ments that have been permitted, as well as some lack of transparency with the operation of pipelines. But to attempt to use cost benchmarks from the North West Shelf is bizarre; the geology and production conditions there are distinct from onshore gas produc­tion in the eastern states, particularly in respect of coal-seam gas.)

How did we get to this position of a looming domestic gas shortage and rising prices, and how do we resolve the situation?

The first thing to note is that this situation didn’t develop overnight. There were many years when gas was regulated at too low a price. Without the scope for export, a relatively recent phenomenon, the regulators opted for very low prices, which were good for consumers and businesses but not so good for gas companies or the exploration effort.

Another important juncture was the government’s response to limiting the growth of CO2 emissions in the name of doing something about climate change. The decision by the Howard government to introduce a renewable energy target that excluded gas and the ramping up of the RET by the Rudd Labor government meant gas as a transition fuel was dealt a serious blow. (By contrast, a well-designed carbon tax — not the one we had — would have encouraged the development of gas reserves for local purposes.)

A crossroad was created for the gas companies that sat on substantial reserves of unconventional gas: export at world parity prices or keep the gas in the ground. There was little incentive to open new fields only to serve the local market, particularly since renewable energy was being given the inside running in terms of electricity generation.

No doubt, the gas companies have made some mistakes. The infrastructure facilities built at Curtis Island in Gladstone ran overbudget, and it would have made more sense for the companies to share facilities rather than build them separately. Also, too many trains have probably been constructed. That the price of liquefied natural gas is tightly tied to the price of oil has meant the companies’ forecasts of the outlook for the profitability of these facilities has taken a serious blow as the oil price fell in 2014.

The geology also has disappointed, with many wells lasting for shorter periods than expected.

In the normal course of events, you would expect federal and state governments to be crowing about a major new export facility and to endorse world-parity pricing. To be sure, gas price arrangements are complex and include a mix of contract and spot prices. And the substantial processing and transport costs, both for overseas and local customers, have to be taken into account. This is why price comparisons need to be made in net-back terms.

It’s not clear whether local gas consumers are getting a worse deal than overseas consumers, but this notion no doubt works well politically, as well as playing into the hands of the big gas users.

But the real crunch for the domestic market came with the restrictions on gas exploration and exploitation imposed by the Victorian and NSW governments in response to a tiny number of activists and farmers. The fact is that South Australia — although not the state’s southeast — and Queensland have been open for business for gas forever, including for fracking. Victoria has a ban on conventional onshore gas, which beggars belief. The NSW government was ­offered domestic reservation in exchange for opening up substantial gas reserves for exploitation, but it has dragged the chain on making a decision. (NSW pro­duces virtually no gas but uses a great deal.)

The truth is we could have had it all, a flourishing export ­industry and a well-supplied domestic market, but wonky government policies have combined to arrive at what is close to a gas ­crisis.

The possible imposition of government restrictions on gas exports is a retrograde step, based on the expectation companies will not walk away from the expense of ongoing drilling and exploitation because of their investment, taken in good faith, in the LNG facilities in ­Gladstone.

Whether the latest government intervention will have the desired impact is unclear. Higher prices are here to stay, although hopefully at slightly lower levels than recent peaks. The real hope is Victoria, NSW and the Northern Territory can be made to see sense and there will be enough gas and more to go around.