In the 1950s, the Australian Government decided that we had to reduce our reliance on imported oil because the cost was making it difficult to keep the Australian dollar fixed to the pound. So the Menzies government passed the Petroleum Search Subsidy Act 1957 and encouraged the major resource companies to look for oil in Australia.
In 1960, Sir Ian McLennan, General Manager of BHP at the time, had lunch with a renowned US geologist, Lewis Weeks. McLennan asked Weeks where in Australia should BHP search for oil. Without hesitation, Weeks responded: the Bass Strait. BHP secured the leases over the Bass Strait, partnered with Esso, took the government subsidies, and developed the greatest oil and gas field in Australia at the time.
The Bass Strait has been a boon to the Australian economy ever since. It provided cheaper oil to Australia through the oil crises of the 1970s. Gas was originally a by-product, so it was sold cheap and that helped spur a heavy manufacturing industry in Victoria and South Australia. More recently, it has become Australia's most important domestic gas source.
About 209,000 people work in manufacturing sectors that rely heavily on gas, and the Australian oil and gas industry directly employs more than 26,000 people.
The Bass Strait is declining as a supplier of cheap and affordable gas. Production from the Bass Strait is predicted to fall by one fifth this year, and the gas that remains is more costly to extract.
We have been fortunate that gas production has increased in other parts of Australia, like the coal seam gas fields of Queensland. The development of these fields will see Australia become the biggest exporter of gas in the world by the end of this decade. The Queensland coal seam gas fields are the only reason that we can respond to the falling production in the Bass Strait.
However, this time last year, Australian gas prices shot through the roof. Gas prices for large commercial and industrial consumers peaked at around $16 per gigajoule (GJ) in early 2017, more than three times their historic levels, and some companies were being quoted prices of up to $20 per GJ. These prices were higher than the landed price paid for gas in our major export markets in North Asia.
These high energy prices put at risk thousands of Australian jobs so the government acted to ensure that sufficient gas would remain in Australia at a reasonable price. We introduced the Australian Domestic Gas Security Mechanism so that an Australian Government for the first time had the legislative ability to restrict gas exports in the national interest.
Fortunately, the Australian Government has not had to resort to formal gas export restrictions. We have instead reached agreement with the gas industry that sufficient gas would be made available at reasonable prices. Since signing the Heads of Agreement in October last year, LNG exporters have announced contracts to provide substantial volumes of additional gas to domestic buyers in 2018.
Already, the gas price for large commercial and industrial consumers in Australia has fallen to around an $8-$12 per GJ range since July 2017. That price is still above the historic price of gas in Australia for two reasons.
First, coal seam gas is more expensive than gas produced in the Bass Strait. There is no associated oil with coal seam gas and more wells need to be drilled for the same amount of gas compared with the shale gases of the United States.
Second, gas from Queensland must travel thousands of kilometres to existing customers in southern Australia. This can easily add $2 per GJ to the cost, and sometimes more.
No amount of export controls can force the price down below the cost of production. To get further reductions in gas prices, we need to discover more productive gas fields, just as we did in the 1960s.
That is why the Government has established the Gas Acceleration Program, which opened for applications in January. It will provide matched grants for gas producers to drill in new areas. The Government is also funding new geological and bioregional assessments in the Cooper Basin and Isa Super-Basin areas to help facilitate the approval of new gas production areas if they prove prospective.
There are prospects right round Australia. Recently, the Victorian government released a ‘working estimate’ of 110 petajoules for onshore conventional gas resources in the area around Port Campbell. In the Northern Territory, there is great excitement about their potential shale gas resources that could deliver affordable oil and gas.
In both of these areas, however, State and Territory governments restrict the development of these resources. In the Northern Territory, the government has placed a moratorium while it conducts the fifth review of gas in the NT in just seven years -- all of the previous reviews found gas could be developed with appropriate regulations. In Victoria, a ban has been put in place without any scientific justification.
These actions risk keeping gas prices higher and put at risk thousands of jobs. The Australian Government will continue to fight to protect these jobs.
Matt Canavan is the Minister for Resources and Northern Australia