The Prime Minister has handled the “gas crisis” exactly right. Six weeks ago, he warned gas exporters to sort out domestic supply or he would do it for — and to — them. They haven’t, so today he will, via a “Australian Domestic Gas Security Mechanism”, which will halt exports if needed for domestic consumption.
In other circumstances — and certainly if a Labor government made the same move — this would be decried with the wildly overused phrase “sovereign risk”. But Turnbull has prepared the ground. He met again with gas industry executives last week and left the meeting saying they still hadn’t explained how they would guarantee domestic supplies. The government could not have been clearer to gas exporters that they had to produce a viable plan or face intervention.
Santos, which has spectacularly bungled its GLNG investment and supply strategy, has been the primary problem and, along with its GLNG partners, will be the primary target of the DGSM. Santos is the company draining domestic supplies of other suppliers to meet its export contracts while the two other Gladstone-based exporters use their own gas; it was Santos that refused to sign up to an agreement with Turnbull in March that gas exporters would be “net domestic gas contributors” — it took that “on notice”.
What a distance we’ve traveled from 2014, when the Abbott government savaged Australian National University for divesting in Santos and the Australian Financial Review ran a hysterical campaign against the university for doing so. Just days after that, Santos’ share price fell by over 40% and has kept falling since — it currently sits at just over a quarter of the level it was when the Coalition and the AFR demanded ANU invest in it, and the company has written off well over $5 billion and racked up consecutive billion dollar losses.
Turnbull, too has come some distance, from seeing energy policy as an opportunity to demonise Labor and renewable energy to accepting the grim reality that the east coast energy market has become dysfunctional due to lack of investor certainty on climate policy, rapacious pipeline owners, the age of coal-fired power plants and the commencement of east coast LNG exports — and no amount of stunts timed to affect Newspoll, like Snowy Hydro 2, would fix it.
Any cries of “sovereign risk” would be further muted by the extent to which gas companies and pipeline owners have brought this on themselves. The ACCC savaged both industries almost exactly a year ago, calling them out for monopoly pricing. “Pricing based on significant pipeline market power is prevalent,” the ACCC reported. “The regime regulating gas pipelines is not fit for purpose and pipeline pricing is largely unconstrained by either the threat of regulation or effective competition.” The whole east coast gas market was “opaque and illiquid”. Gas suppliers were using opacity to jack up prices. “Some suppliers have taken advantage of this supply uncertainty and potential shortfalls to increase prices and implement more restrictive non-price terms and conditions.”
Indeed, Turnbull might do well to threaten pipeline owners with similar intervention to that which he is now imposing on gas suppliers.
A while back I suggested Turnbull had been “mugged by reality” on energy policy. But he’s far from the only one. All of us who have advocated free markets and the primacy of the private sector in delivering essential services have copped the same mugging; now we need to accept that liberalisation has dramatically failed in energy. A mystifyingly complex market was designed for private sector operators with the intent of freeing up government capital and driving greater efficiency. And while the Coalition’s climate denialism created investor uncertainty that proved a key factor in the crisis, it’s the relentless opportunism of industry players to game the system and exploit every opportunity to jack up prices, and Santos’ truly spectacular bungling, that has led to this. As you sow, so shall you reap. Back to hardline regulation.