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:

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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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