Image Credit: Juan Carlos Martins

Australia’s gas market is broken. The cost of gas is rising, despite production reaching all-time highs, as supplies are sent offshore into an export market that now dictates terms.

It is being described as a crisis, yet it is a “crisis” that was entirely predictable and evolved so slowly and with so much warning, that industry and policymakers only have themselves to blame. 

It is worth explaining how it played out.

In the mid-2000s, the industry had faced a choice. On one hand, it could continue to supply gas to an established domestic market, and allow gas prices to remain at historical lows. The Australian east coast is well connected with gas pipelines and gas has often been touted as a transition fuel for cleaner electricity generation.

On the other, it could invest in export infrastructure, making the significant investments in terminals and liquification plants required to gain greater access to the Asian gas market. The reward for this investment would be international prices, many multiples of those accessible locally.

The trade-off of course would be that the domestic gas price would become tied to the international price. Local consumers would find themselves in competition for gas supplies with major industrial users in Japan and South Korea, necessitating that they match the export price or lose supply.

Both sides of politics have been enthusiastic supporters of the latter approach. Naturally, by supporting companies to access higher international prices, this would bring with it the benefits of regional investment and tax revenues.

“With long-term contracts locked in, this project will play a vital role in Queensland’s economic strength for decades to come.” Queensland Labor Premier Annastacia Palaszczuk said in a statement upon the completion of an export terminal in Gladstone, sending gas to South Korea.

The development of gas export infrastructure has proven be a significant undertaking. Three major projects established in Queensland highlight the scale of the work and the amount of cash that has been committed to open the Australian gas to the international market.

The Queensland Curtis LNG Project ($20 billion), the Gladstone LNG project ($18.5 billion) and the Australia Pacific LNG project ($24.7 billion) were all brought online within 12-months of each other.

Total investments of over $60 billion, ready to deliver revenues to bolster State and Federal Government budgets. Except when they’re aren’t.

The Asian energy market is a sophisticated beast, and contains some of the world’s largest consumers and producers of gas. The export market has long been dominated by countries like Qatar, economies that have been built from the riches brought in by State owned and controlled enterprises.

For the most part, Asian gas prices are pegged to regional crude oil prices. When the oil price crashed through 2014 and 2015, the Asian region’s gas prices plunged with it. By late 2015, the Japanese market price (the world’s largest natural gas importer) had halved and it has stayed there ever since.

The Australian gamble is therefore faltering. The promised revenues from the international market aren’t materialising because of low prices, while the domestic gas market struggles as gas production continue to be diverted off-shore to satisfy what are likely to be multi-year supply contracts with international users.

Australia has ended up with higher domestic prices and inescapably low export prices, an absolute worst case scenario and one that comes from the fundamental nature of our new market and not one what would be solved by fracking for gas in Western Victoria.

Energy Minister Josh Frydenberg, writing in The Australian, recently lamented the state of Australia’s domestic gas prices. In citing the constrained domestic market, Minister Frydenberg pointed the finger at State Governments and environmentalists for barriers to exploiting potential new supplies.

We should be opening more of Australia’s regional areas for gas exploration and extraction to increase supply, he reasoned.

The problem with Frydenberg’s argument is that the supply of gas isn’t the challenge. Australian gas production is at all-time highs.

In fact, Minister Frydenberg repeatedly celebrated the prospect of Australia becoming the world’s largest exporter of Liquefied Natural Gas (LNG) by the end of the decade. In achieving this aim, Governments have proactively supported the sector to massively build up its capacity to export gas and it has been this pursuit that has been the gas market’s undoing.

For what it’s worth, the world’s largest economy took the opposite path to that chosen by Australia. The United States has been flush with gas, as a result of the shale gas revolution.

A surge of gas extraction in the United States has suppressed the local price for gas, and has been a core driver of an American Renaissance in manufacturing. Access to cheap gas has supported recoveries in US steel and chemical production sectors.

It has had the additional effect of displacing coal from use in electricity generation, contributing to notable falls in greenhouse gas emissions in the United States electricity sector.

Our broken gas market is something we are going to have to learn to live with.

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Editor of RenewReporter.

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