The recent release of the Deloitte report Gas Market Transformations – Economic Consequences for Manufacturing brings into sharp focus the unintended consequences of Australia’s success in exporting LNG.
The report suggests that there will be a loss of manufacturing output of $118 billion and the loss of 14,600 manufacturing jobs by 2021.
That is too high a price to pay for the hoarding of gas for export by the LNG industry.
How quickly things change.
Five or so years ago, requests for wholesale gas prices from Australian producers were met with suggestions that natural gas was headed towards a world pricing structure, and that the proxy for a ‘world price’ for gas was the price at the Henry Hub in Louisiana, United States of America (USA), which at that time was around $US12 p/GJ and rising.
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Natural gas in the USA was entering a period of relative scarcity, and coal seam and shale gas developments were in their infancy.
The same gas producers no longer quote the Henry Hub price as, with the advent of shale gas, it fell to a low point well below $US3 in 2011, only to steadily rise again to today’s trend line price of around $US4.50.
Gas futures for some years out are trading at not much above the marginal cost of production of shale gas (about $US6), and that is where the price is expected to settle as shale production techniques mature and production stabilises.
The value of any commodity is enhanced by delivering it into a receptive and active market and then assisting that market to grow.
Major oil producers have prided themselves on their free market values: as a result the world has been supplied for over a century with adequate supplies of this vital commodity, and oil producers have made a great deal of money.
There have been a couple of blips of cartel behaviour by Middle Eastern interests, but mostly it has worked.
Up until the late 1960s natural gas was considered by these same oil producers to have little value: it was extensively flared from oil fields to enhance the production of valuable liquids.
Oil companies fought long and hard for the right to flare gas.
By the time Australia’s conventional reserves were discovered, this practice was about to be outlawed in most developed economies.
Though wasteful and environmentally unsound, flaring was permitted in the early years of our oil and gas boom whilst gas markets had to be created in Australia to enable the enormously profitable oil and condensate production to be maximised.
As a result, during the initial two decades or so of the oil and gas development phase, Australia was very generous to oil and gas producers.
They enjoyed negotiating pricing in risk free, high volume, long term take or pay government backed contracts, with (mostly) state governments taking the entire market risk through government owned entities.
Famously, the Whitlam Labor Government nationalised the planned Moomba to Sydney Pipeline Project and entangled the Federal Government in the Rex Connor dream of a federally-owned national gas grid.
As an example of governmental largesse, the domestic price paid for gas by the Government of Western Australia (WA) was greater than the first net-back export price attained for North West Shelf gas, and the WA Government take-or-pay obligations produced an unsold but paid for gas overhang for the taxpayers of WA worth hundreds of millions over the first decade or so of the contract.
Furthermore, government-funded infrastructure such as transmission pipelines, distribution networks and gas fired generation provided a profitable domestic outlet for the producers’ gas when LNG technology was in its infancy, and most importantly allowed the associated and profitable condensates to flow.
Government funded pipelines built in the 1970s and 1980s were very optimistic about ‘build it and they will come’ exercises.
Today, as reflected in the Deloitte report, gas for the domestic market is increasingly in short supply to a market becoming very frustrated by shrinking availability and rising prices.
Australia is blessed with some hundreds of years of natural gas reserves, yet daily we read of industry leaders complaining they cannot get gas to run their furnaces or gas as feedstock for their process.
Repeatedly they threaten to close down in Australia and to re-open in countries where gas is available at true market prices, such as the USA.