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.