Australians short-changed on gas supply

AS the only country in the world that allows international oil companies to access and export natural gas without prioritising a local supply, Australia is experiencing serious gas shortages and sharply rising prices.
This is according to Dom Gas Alliance’s Australia’s Domestic Gas Security Report 2012, which claims that as most of Australia’s gas resources are controlled by large oil and gas companies that prefer multi-billion dollar contracts with overseas customers rather than smaller Australian companies, government action is required to address a market failure that is seeing Australians pay more for an increasingly insecure gas supply.
DomGas is a WA association that represents natural gas users, infrastructure investors and prospective domestic gas producers while also promoting the security and affordability of gas supply.
According to the report, which was released in early June, Australia is the only gas exporting country experiencing significant gas shortages and severe rising prices. It states that since 2005, the gas price in WA has tripled while in Queensland the price has doubled, and claims that future price rises could equate to an extra $597 million in annual gas bills in Queensland, an extra $477 million in NSW, an extra $399 million in South Australia and an extra $3.1 billion in WA (Australia’s most gas-dependent state). Natural gas is a critical resource in Australia: fuelling 23 per cent of the country’s primary energy and 15 per cent of its electricity generation. WA is even more reliant on natural gas as it fuels 55 per cent of the state’s primary energy and 73 per cent of its electricity generation. Since 2005, WA’s gas prices have risen from about $2.50 per gigajoule to $8 to $9/GJ.
The country’s demand for natural gas has increased by more than 30 per cent in the five-year period from 2004-2005 to 2009-2010, climbing from 1052 petajoules to 1371PJ. “Despite Australia’s substantial gas resources, local industry is experiencing serious gas shortages and sharply rising prices,” the report stated.
“Major gas producers are focussed on maximising LNG exports and signing 25-year contracts to supply gas to customers in China, Japan, Korea and India.
“Australia is the only country where a massive expansion in production has led to serious gas shortages and sharply higher prices for consumers. Even higher prices are projected for the future.”
These higher prices are set to impact on more than just household budgets, with the report warning of consequences that could be felt by the Australian manufacturing industry. “Industry cannot secure affordable long-term gas contracts…that could support new investment in manufacturing or power generation,” DomGas’s website stated.
“Jobs and investment are being lost interstate and overseas because of the state’s [WA] gas shortage and prices.”
According to the report: the US-based multinational Dow Chemical Company said that Australian gas prices made it uneconomic for new chemical manufacturing investments; Rio Tinto stated that it was unable to secure long-term gas supply for its Queensland operations; the National Generators Forum (representing Australia’s electricity generators) reported that power generators were unable to secure long-term gas contracts; and international fertiliser and explosives producer Incitec Pivot said that gas prices made the US a more attractive location than Australia in which to invest $700 million
for an ammonia plant.
Dow chief executive and chairman Andrew Liveris told media it was a “travesty” that overseas gas companies were dictating gas prices in Australia.
“This is not a free market: this is an unfair market,” he said. Meanwhile, Incitec Pivot chief executive James Fazzino explained to reporters why he believed Australia’s natural resources were more likely to be exported.
“If you take gas and you export it via LNG, you create about three times value-add. If you take that same molecule of gas and produce, say, an explosive emulsion, one of our high-tech explosives, you increase its value by 20 times,” he said.
The report cited further indications of uncertainty regarding gas security in Australia: Alcoa suspended a multi-billion dollar expansion of its Wagerup alumina refinery, highlighting lack of certainty around long-term gas supply as a key factor; Wesfarmers Chemicals reported that gas prices made it completely uneconomic to expand its ammonia production or invest in new value-adding chemical processing systems despite significant market demand; Cement Australia’s Gladstone operations were unable to secure a gas supply contract and make the switch from coal to gas; Burrup Fertilisers failed to secure competitively-priced gas from the Gorgon project to underpin investment in a new urea plant; and ERM Power and Griffin Power were unable to source gas for proposed new gas power station developments.
“Most countries recognise that energy resources are owned or regulated by the nation. Major gas producers can access and export resources only to the extent that they do so in a safe, reasonable and prudent manner that benefits all of the stakeholders of the host country,” the report stated.
As examples, the report cited: Canada, which undertakes export tests and has government mandates for export permits; and the US, where LNG exports are conditional on producers prioritising the local economy and ensuring affordable supply to US industry.
Indeed, the world’s largest LNG exporting country Qatar, which has about eight times more natural gas reserves than Australia, has a moratorium on further expansion of LNG exports until 2013 due to the uncertainty of gas supply.
“Unless Australia acts to secure domestic supply and prioritise the needs of local industry and households, the ‘era of cheap energy’ will be over,” the report stated.
The solution presented by DomGas in the report is a domestic gas reservation policy that would ensure supply and put downward pressure on prices for manufacturing, value adding and jobs. It added that reservation was a practice that had been shown to work without discouraging new gas developments.
Meanwhile, the Queensland Government’s consultation draft for the 2012 Gas Market Review reiterated the concerns for the domestic market outlined in the DomGas report.
Queensland gas market advisor Kay Gardiner cautioned that if the domestic gas supply situation did not improve within the next year, “there could be insufficient time for development, consideration, consultation and implementation of measures that could be implemented by the government to address a domestic supply constraint in the period 2015 to 2020”.
“There are a range of potential options, ranging from regulatory invention to market facilitation, that could encourage market participants to achieve balanced export/ domestic market outcomes and a wider, more informed debate is desirable,” Ms Gardiner said.

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