Feb 28, 2014

‘Hope is not a strategy’: time for gas market reform

"Hoping to be able to meet overseas demands is not a strategy," the NSW Energy Minister says. The gas market is distorted and in desperate need of reform. Crikey concludes its special investigation.

Paddy Manning

Crikey business editor

The unwelcome report was held up and wheeled out on January 3, and it got very little coverage. People suspect that was just what the Prime Minister's office intended, because the conservative Bureau of Resources and Energy Economics had gone off-script. BREE's racily titled Eastern Australia Domestic Gas Market study had put up in headlights the rather controversial idea that the gas market was opaque and anti-competitive, and it needed reform. As expected BREE took a non-intervenionist approach, deftly rejecting calls for reservation of gas for domestic use -- a policy that has been implemented successfully in Western Australia without any impact on investment, was recommended by a New South Wales parliamentary inquiry, and exists among many gas exporters overseas, including the United States and Canada. Then BREE provided an alternative:
"Building confidence in, and oversight of, the market as described in this report is a more appropriate response to the challenge, particularly in the current environment in which there is a lack of sufficient information for the market and governments."
The past 20 years of reform establishing the eastern states gas market had concentrated on the downstream sector (transmission and distribution), while the upstream sector (exploration and production) developed without intervention. The report outlined six areas needing an overhaul: gas market reform, supply competition, data and transparency, infrastructure, non-market interventions and governance. Between the dusty lines, BREE was clearly saying the $70 billion development of three coal seam gas to liquefied natural gas projects in Queensland, which has exposed domestic, commercial and industrial gas users to international, oil-linked pricing, was putting the market and its governance under severe strain:
  • Accurately forecasting supply and demand was impossible, with profound gaps in data provided on gas resources and production and infrastructure capacity and utilisation kept secret;
  • Pricing was determined overwhelmingly through bilateral contracts that were commercial in confidence, kept even from regulators, with industry resistance meaning there were no viable gas price indices, a liquid spot market or forward pricing through futures contracts; and
  • Joint development and marketing of upstream gas raised competition concerns that major users, unhappy at gas prices doubling and tripling, could no longer tolerate.
Among many suggested reforms, BREE called on the intergovernmental Standing Committee on Energy and Resources to commission a comprehensive investigation of the upstream gas market, including the high barriers to entry and potential for anti-competitive conduct and misuse of market power, and consideration of policy options including strengthening the roles of the Australian Energy Regulator, the Australian Competition and Consumer Commission. In a sign of how serious the problem is getting, BREE also canvassed the adequacy of cross-jurisdictional regulatory arrangements in the event of a gas shortage. At the moment those are governed by emergency response provisions, legacy of outages like the catastrophic explosions at Esso's Longford plant in 2000 and Santos' Moomba plant in 2004. The interconnected nature of the eastern states gas market was no cause for complacency, BREE warned. It would be prudent to consider how well those arrangements might cope with a predicted, rather than accidental shortage. The Australian Petroleum Production and Exploration Association (APPEA), the gas industry's peak body, breezily welcomed the BREE report, particularly the emphasis on removing regulatory impediments to new supply and the rejection of calls for national reservation, and saying it confirmed the "market is indeed working". APPEA ignored the governance and competition issues raised by BREE, but pointed to nine publicly announced (but confidential) wholesale gas contracts to argue there was already "abundant information" in the market, and it focused instead on the need to quickly bring on new supply. APPEA chief executive David Byeer followed up with an op-ed in The Australian Financial Review. The Australian Industry Group, representing industrial and commercial gas users, took a very different view of the BREE report, which had cited AIG's own "Gas Crunch" report, on the difficulty business was having getting affordable, long-term gas contracts. AIG wanted a three-pronged approach, including market reform, encouragement of new gas supply and a national interest test to ensure the domestic market impact was taken into account before any new LNG approvals were given on the east coast. In a letter to the AFR, AIG chief Innes Willox rebutted APPEA and argued the "furphies of reservation" should not distract from the need for "tough reform", insisting the BREE report showed "all is not well in the gas market, where 'long-run contracting, the potential for exercise of market power and a lack of transparency' may combine with tight supply to raise gas prices above international parity". There is an awkward dilemma here. Industry sources say it is never in the interest of oil and gas companies to come out and say they have plenty of gas. Reserves are always downplayed; it is a bargaining tactic. While it is clearly in the interests of, for example, Esso and BHP to sit back and let the new export pricing boost the value of their reserves in Bass Strait, is it in the public interest? The government doesn't even get to find out how much gas Esso and BHP think there is left down there.
"My big concern is around the forecasts for how much gas is required to meet demands overseas ... Hoping to be able to meet overseas demands is not a strategy."
Is it right that not even the Australian Energy Market Operator sees the bilateral gas contracts that determine the price and availability of gas in the eastern states? What about contracts for pipeline capacity? Should the gas supply to the country's largest capital be so dependent on the terms of a private, undisclosed contract between AGL and Santos, operator of the Moomba? Aren't the myriad joint ventures -- the farm-ins and farm-outs -- through which oil and gas companies explore for and produce gas, intrinsically clubby, if not downright conducive to formation of cartels? Fears of a gas shortage in NSW are bringing these questions to a head. NSW Energy Minister Anthony Roberts is in the hot seat and must determine the fate of the two key coal seam gas projects 00 Santos' Narrabri project, and AGL's Gloucester project -- meant to secure the state's energy supply. Roberts told Crikey it was "a serious conversation that not just the states, but also the Commonwealth, and our communities need to have. In Australia, for far too long, we've taken the whole issue of energy reliability for granted. "You can't manage unless you measure. We need to have that whole-of-country approach, just as we've seen with electricity, where if we've got a shortage in NSW or Victoria -- as we had recently -- we're able to apply the electricity resources of other states to meet those peaks in demand. My big concern is around the forecasts for how much gas is required to meet demands overseas, particularly with firms now entering into 20-year contracts. Hoping to be able to meet overseas demands is not a strategy." Roberts told Crikey that SCER definitely had the appetite for gas market reform: "[Federal Industry Minister] Ian Macfarlane is providing a great deal of leadership and co-ordination. I don't think we've seen such a level of leadership before. Ian and I have robust conversations, but I highly respect him. He understands this has got to be managed in a co-ordinated way." Roberts rejects any suggestion that NSW regulation of CSG have led to the present situation. "If anyone's to blame for the issues surrounding coal seam gas it's the industry's inability to prosecute their case," he said. Roberts is nevertheless keen to increase gas supply in NSW: "To have NSW in a position in the future to be able to not so reliant on other states or external factors is critical. "The beauty about the Pilliga is that Santos have told the government it is gas that will be for the NSW market and are building the pipeline into NSW." At the same time, Roberts, a former army reservist once deployed to Bougainville, says he "can not be bullied". "I've learned first hand what happens when a mining company doesn't take the community with them," he said. Roberts dismisses calls for reservation, but if the industry resists gas market reform, it could fuel the likes of NSW Greens anti-CSG campaigner MP Jeremy Buckingham, who was deputy chair of the NSW parliamentary inquiry and is pushing hard for a reservation policy (as part of a transition to renewable energy). Buckingham says BREE's reform proposal "is not going to solve the underlying problem: all the supply has been sucked up to Gladstone. The transparency it will bring to pricing is worthwhile, but the only real way you're to fix the underlying problem is to either limit exports or reserve some conventional gas for domestic use." The oil and gas industry wants trust but has already got it wrong, and not in a small way. Considered as a whole, the CSG-LNG projects have turned out to be short of gas. With wonderful exuberance, just five years ago the industry was looking at a 12- or even 16-train LNG industry at Gladstone. At this rate we are stretching to fill six trains. Constant attempts by APPEA and its cronies to blame red tape and extreme greenies are predictable but ludicrous: Santos is encountering slower-than-expected reserve growth at one of the best CSG fields in the country, Fairview, where access is no problem and the wells are highly productive. A shift towards LNG netback pricing among the eastern states is an inevitable consequence of this new industry, which has huge economic benefits to Australia and may help combat climate change. But the negative side effects are greatly exacerbated by the fact that the CSG-LNG projects have been forced to draw on conventional gas reserves that fuel the domestic market. That was not the plan. Where BREE was diplomatic, we can be blunt. Consider this frightening possibility: a powerful industry cartel which sends a majority of its profits offshore holds Australia to ransom, forcing important decisions in the public interest -- trade-offs between gas development and farming, gas exports and manufacturing, gas versus renewable energy, gas versus conservation and amenity -- to be made in the dark, without access even to adequate information about gas resources (which are in the end owned by the people) or prices (without which a cost-benefit analysis is impossible), and all the while crying sovereign risk if governments move to reserve some gas for domestic use. Look through the oil and gas industry's PR campaign, and that possibility seems quite real. Related stories:

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10 thoughts on “‘Hope is not a strategy’: time for gas market reform

  1. paddy

    Good stuff Paddy. That’s the clearest thing I’ve read on the gas market for ages. Such a fertile field for cartels, especially with all those opaque contracts and the hidden data on reserves.
    It would be nice to think that Ian Macfarlane might actually push for some real reform, but I suspect he’ll struggle getting anything vaguely difficult past Credlin and Abbott.

  2. Kelly Goldacre

    Is the ‘trade-off between gas development and farming’ really such a big issue, given even the most intensive gas development and associated infrastructure occupies less than 5% of the land? Rumours of apocalyptic aquifer destruction (noting ‘effect’ does not equate to ‘destroy’, and in the vast majority of cases there will be no effects at all) appear greatly exaggerated, with no scientific basis:;db=COMMITTEES;id=committees%2Festimate%2F36e0e09a-5576-4494-97a2-a1f1ed49d308%2F0006;query=Id%3A%22committees%2Festimate%2F36e0e09a-5576-4494-97a2-a1f1ed49d308%2F0000%22

    Surely co-existence is achievable.

    ‘Gas versus renewables’ is also a mischaracterisation; if anything the latter relies on the former:

    A pity these subtleties were not addressed in this series; hopefully the book does them justice.

  3. JohnB

    Once upon a time, governments had balls. Systemic threats to essential services would have resulted in nationalisation of some or all of the industry, reservation for community benefit some or all of the key resources and production capacity, or creation of state-owned corporations set up to fix the defect in the markets and to provide stability and confidence.

    Nowadays, politicians no longer have the intestinal fortitude to make a plan and to see it through.

    Like Marn Ferguson, they are one colour when behins a ministerial desk and, as soon as they leave office, go to the dark side then kick their former factional partners in the teeth. “Comrades”, I believe the term for partners or associates is for Marn’s particular faction.

    The result is, as in this case, that the resources are now owned by foreign corporations, the profits are sent overseas and the decisions are made overseas.

    Even the basic data, such as reserves in Bass Straight and real contract prices are hidden from the government and its regulator.

    It is clear that the markets for gas in Australia have very few of the features of economists’ competitive marketplaces, such as free flow of information and low barriers to entry and exit exist now, if ever they did.

    Thanks, Paddy, for identifying the problem.

    What is the solution?

  4. Roy Inglis

    Once upon a time JohnB, governments were not so beholden to companies for their campaign and operational funds either.

    Part of a response to de-influence Australian politics from rich companies is to only allow parties and politicians to accept donations from people on the Australian electoral role.

    To encourage politicians to look after the people they represent more is to tie their slary increases to movements in the average of the median and mean Australian taxable income.

  5. JohnB

    Roy, your suggestion that political parties should only be funded by real, live electors is excellent.

    It is fair and democratic.

    It is easy to understand, to comply with and to verify.

    It would end the arguments about corporate and trade union influence.

    It also, due to the above three sentences, has no chance of being adopted.

  6. AR

    JohnB – your last sentence sez it all!

  7. ian kemp

    “Reserves are always downplayed” well actually the published reserves data have little relation to reality; but that is due to US government regulation which won’t permit us to quote reserves unless they are demonstrated by drilling & have an approved path to market. Very sensible in protecting stockholders but it does not allow us to publish the full extent of discoveries. A lot of the ‘peak oil’ calculations are nonsense because they are based on the publicly disclosable reserves which are a small fraction of the real reserves – but this is due to govt regulation, not due to the majors trying to hide something.

    On a different subject, domestic gas supply as compared to Australia’s approved export LNG projects, is a flea on an elephant. Really we should be aiming higher, the gas producers could provide domestic gas for FREE for all households in Australia and they would still have a very profitable business exporting gas to Japan & Korea. I propose we start the campaign for free gas for everyone as the condition for a production licence 🙂

  8. Liamj

    Great series, thanks Paddy Manning & Crikey.
    I don’t see much likelyhood of democratic reform reducing mining industry power or reserving gas, so the LNG investment bubble will become a household problem as industry exports every cu.m they can. Have to be a good thing for renewables sector.

    @ ian kemp – eh? How does US corp law affect declared oil reserves in the rest of the world? Listed oil corps (US or anywhere) aren’t the biggest oil producers, haven’t been for over a decade, national oil co’s are. And how do you explain the coincidental massive reserve revisions/’discoveries’ of OPEC nations during 80’s quota wars, and that many of their exports are declining regardless? And if theres so much undeclared oil, how come extraction of conventional oil has declined since 2005 despite rising prices?

  9. R. Ambrose Raven

    Naturally governments will protect Big Energy. In reply to questions regarding fracking, the Queensland Department of Environment and Resource Management downplayed concerns, telling The Australian that just 5% of CSG wells in operation were subject to the process. When asked why the practice was not banned if it involved such low levels of exploration but carried such risks it declined to comment.

    Ex-“Labor” pollie Martin Ferguson’s openly stated intent to use his governmental knowledge to facilitate Big Energy rent-seeking was emphasised by the APPEA’s chairman, David Knox: “There are few people in Australia with such a comprehensive understanding of Australia’s oil and gas industry … as chairman of the advisory board, Mr Ferguson will be responsible for “providing strategic advice” to the chair, board and chief executive of the association.

  10. R. Ambrose Raven

    No, wrong, wrong, wrong! This new industry does NOT have huge economic benefits to Australia, it imposes huge economic costs. No, it will not help combat climate change, it will help worsen climate change.

    Export parity pricing is far the biggest cause of rising gas prices in the Eastern States. Big Energy’s arrogant export demand that it be allowed open slather to build export LNG plants meant that gas sellers would no longer bound by the domestic market, but could charge world market prices since export allowed them to sell to the world.

    Laberal politicians have thus through their own incompetence, negligence and contempt for the public interest (such as not imposing any gas reserve for domestic use) greatly increased the well-head cost of gas – probably with a gas shortage as well.

    Public opposition to limit the environmental destruction that is CSG can make no difference to price. Exporters can get world market prices, so importers have to pay world market prices.

    Big Energy and the politicians it owns are nevertheless exploiting the problems they’ve created in the Eastern States to their and Big Energy’s advantage. They’re using the claim of a resulting shortage of gas to insist that “we” need open-slather on CSG for domestic supply. Thus the politicians not only get the graft from transnational energy exploiters for selling out, but also blackmail us into measures (i.e. open-slather CSG extraction) that are environmentally damaging, reward Big Energy’s disdain, and may be socially and industrially damaging (note the certainty of price increases).

    Who benefits most? Big Energy’s profits! Gillard Labor’s carbon tax had compensation; those LNG transnationals will pay no compensation at all to five million or so Eastern States households for the much higher prices they too will pay.

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