I have just flown in here from Japan and as the old joke goes "boy am I tired". I got a bit of sleep but for the past few months what has genuinely kept me up at night is Australia's gas supply crisis.
There are many ways to define and describe this problem but given where I have just travelled from, it’s most apt to compare the Australian situation with Japan. In July last year, during a cold winter, the price of gas in Australia reached double digits and in Adelaide the price reached $14/GJ. While the spot price of gas in Japan in the last quarter was just over AUS $10/GJ.
We all know the story of how Gladstone is connected to world markets and this has linked the domestic price with the world price in theory ... in theory. In practice the world is not that continuous and long term commitments like contracts can prevent the normal process of arbitrage from equalising prices.
In a normal market lower prices overseas and higher prices in Australia would encourage more gas to be sold domestically and more gas projects to be developed in Australia.
Some factors are limiting the ability of the market to respond, however.
First, the high cost of transporting gas in Australia is limiting the ability of gas to flow to areas of high demand. As the ACCC analysis in its East Coast gas report shows, if there are shortages of gas in southern markets, then the price of gas in the south will be the price at Wallumbilla in Queensland plus the costs of transport to those southern markets. These costs can range from between $2 to $4 per GJ and hence are a major contributor to the higher gas prices we have seen recently.
If we can reduce the costs of transport that can help to act to bring down this price. That is why the government is progressing reforms to the regulation and transparency of pipeline markets through the Vertigan review. There is agreement from states and territories to introduce a common arbitration framework for pipeline disputes into the national gas law as recommended by Dr Vertigan.
Second, moratoria and bans that exist at the State and Territory level are preventing more supplies coming online.
The most severe ban has been implemented in Victoria. There, the Victorian Government has banned all forms of gas exploration and extraction, both conventional and unconventional. The Victorian Government has banned a form of gas development that has been safely practiced in Australia for more than 100 years.
In the last month, Geoscience Australia updated their estimates of the amount of gas that could be in Victoria. Our best estimate of the onshore gas resources in Victoria is more than 20 trillion cubic feet, or enough gas to fuel Australia’s East Coast domestic demand for almost 40 years. Victoria has traditionally had access to cheap electricity and gas but it won’t have that for much longer if it turns its back on developing its own resources.
The Australian Government has been opposed to these statewide bans and moratoria. The stark consequence of their impact was revealed in the Australian Energy Market Operator’s Gas Statement of Opportunities. AEMO's report pinpointed such moratoria as a key challenge to further gas extraction.
AEMO's report showed that significant deficiencies of gas for electricity generation could emerge from 2019 unless new domestic supplies are found or alternative forms of electricity generation are expanded.
Just a year ago the ACCC reported to the Australian Government on the state of the East Coast gas market. In that report the ACCC stated that "Sufficient gas production is currently forecast in the East Coast gas market to meet domestic demand and existing LNG export commitments until at least 2025, even without gas from the Arrow project." They went on to mention that this conclusion was dependent on undeveloped reserves coming into production. That has not happened and as Rod Sims pointed out this week, the Australian domestic gas market is in a worse state than it was a year ago.
Within a week of the AEMO report, and the Victorian Government's passing of legislation to ban gas development, the Australian Government has acted to convene a meeting of gas producers to work out how we can respond.
This is not a problem of the Australian Government's making. Onshore gas resources are owned by the states and they are responsible for their management. This is not a problem imposed by God, Australia has plenty of gas to meet our needs and to export to other countries. This is a man made problem and its solution therefore can be man made too.
Australia must maintain its domestic energy security, and we must protect the thousands of jobs that rely on access to reliable and affordable gas supplies.
The Australian Government is looking for solutions and we will be focused today on finding solutions and guaranteeing that proposals to deliver more gas to market will be followed up.
I have had many conversations with businesses in the industry over the past fortnight and have been heartened by the commitments to provide more domestic gas in response. We now need to see such commitments translate into action. I trust that the industry is good to its word, and I am a big Beatles fan, so I think we should "Give Peace a Chance".
Protecting our domestic energy security must be paramount. If change is not seen then other options will have to be considered to maintain our energy security.
One of the policies that is often mentioned is reservation. The Australian Government does not believe that reservation policies are the best option. Reservation policies can only hurt the economics of gas development by limiting the size of the market that Australian producers can sell to.
We need more gas development. The issues we face are not just short term ones. We will need greater gas development to guarantee gas supplies for the decades to come.
We don't have a reservation policy for our coal industry yet we have no problem getting supplies of coal for the domestic Australian market even though we export most of it.
Nonetheless, the government will have to consider other options if things do not improve. The best response would be for the commercial motives of gas suppliers to ensure that domestic gas is provided. The ball is in the industry's court.
A couple of weeks ago I travelled to regional Victoria to talk to dairy manufacturers, tomato processors, cereal makers and other heavy users of gas and electricity about their experiences. I am not going to sugar-coat it: these businesses face a dire situation on gas, and high gas prices – combined with a lack of security of supply – are putting at risk thousands of jobs in Australian manufacturing.
Most of these businesses say that they are struggling to buy gas contracts at prices less than $9 per gigajoule at the moment and that is up from the $4 to $5 per GJ range only a few years ago. These businesses have limited ability to pass on their costs, either because they are exporting into world markets or because they sell into concentrated domestic retail markets whose marketing slogans are dominated at the moment by the need to get prices down, down, down.
Some of them put to me very bluntly, why are we exporting gas to Japan when I don’t have enough gas to protect Australian jobs?
Now the logical answer to that question is that we, as a country, should maximise the value of our resource. We should sell it to the highest bidder.
However, the reality is that, because energy security so directly impacts people’s jobs, it will become harder to sustain this logical argument.
The Australian Competition and Consumer Commission reported last year that Australian LNG producers have purchased around 2800 PJ of gas from domestic gas fields that previously fed domestic markets – mostly from the Cooper basin. These purchases equate to an average of 175 PJ of gas per year. In the context of a domestic gas market of around 600 PJ a year, that is a lot of gas.
That ACCC report was a very good piece of work. The government accepted its recommendations in full at the time and it still guides much of the government's thinking on the issue. To summarise and recap the ACCC's recommendations, the ACCC made three main observations in this report.
First, governments should consider adopting regulatory regimes to manage the risks of individual gas supply projects on a case by case basis rather than using blanket moratoria.
Second, the government should reform the regulatory test for gas pipelines to improve regulatory oversight. This recommendation has been agreed with the COAG Energy Council and is being progressed through the Vertigan review.
Third, there should be increased market transparency ACCC would continue to monitor the level of competition in gas marketing arrangements.
While the government has accepted all of these recommendations and, to the extent that the Commonwealth government can, has made progress on them over the past year, as a political observer I would like to add some perspectives on the difficulty in meeting the first recommendation against blanket moratoria.
There is just not much support in regional Australia for gas development; conventional or unconventional. Many of those of you in business would have shareholders that you have to please. I have shareholders too; they are called the voters.
In many parts of Australia, the gas industry is seen as one that tramples on property rights, takes all the wealth to the cities and, while it does provide jobs, it they often push up wages and costs for other industries, at least during the construction phase.
I am not saying all of this is true but, as someone who spends most of my time in the regions, that is what I hear.
I want Australia to develop its gas resources. I do not want us to lose thousands of jobs in manufacturing industries that rely on access to affordable gas. To sustainably develop our gas resources, we need to ensure that it benefits everyone involved in the industry: from landowner to community to gas companies and to the governments that benefit from the resource.
There has been a lot done in Queensland to improve relations between landowners, developers and government. I also recognise the efforts of the Queensland State Government to establish a Gasfields Commissioner and other reforms to improve landowners’ rights. At the Federal level, we have cooperated with the States to establish a Gas Supply Strategy that involves State and Federal officials working together to facilitate approvals and share best practices.
The Australian Government has also invested $4 million in the Gas Industry Social and Environmental Research Alliance. GISERA is led by the CSIRO and it researches a range of topics in Queensland and New South Wales, including surface and groundwater, agricultural land management, fugitive emissions, and terrestrial biodiversity.
This alliance with industry has resulted in over 20 Queensland-based projects and eight projects that are focused on the Narrabri region in New South Wales.
The Australian Government stands ready to cooperate with other States and Territories if there is a pathway towards future gas development in their states.
Notwithstanding all of these efforts, there is a lot more to do. Many farmer organisations and rural communities remain unconvinced.
Too often, I think we take a highly legalistic view of gas development. People have certain “rights” to develop a resource that they will not brook any change to. Some even claim that these rights are “constitutional”, which is complete rubbish. All State Governments in Australia progressively took coal, petroleum and mineral rights off landowners over the past 150 years, often with no compensation. Under English common law, only gold and silver are reserved to the crown. Even there the NSW Government had the good sense to establish a licence system, so that gold prospectors could share the wealth with the government, when Edward Hargreaves first found gold at Ophir.
We must be willing to take a commercial outlook to the development of our resources. That means seeking to share the value of the resource between landowners, communities, governments and industry so that everyone can benefit. A good business will ensure that its suppliers and customers all benefit from its business and industry, along with itself. That is the only sustainable model of economic development.
In that context I welcome the South Australian government's decision to share some of the royalties with landowners to encourage development. This is surely the way forward.
South Australia's broader approach yesterday shows clearly that despite all the rhetoric, fossil fuels are here to stay. The South Australian government has realised, albeit belatedly, that they must have a minimum level of fossil fuels to keep the lights on.
Now they have chosen gas and good luck to them. The reality, however, is that there is no way that gas is a nationwide solution to our electricity issues given the high price of gas at the moment. Australia will continue to rely on coal for many years to come to provide affordable and reliable power.
The last few days has confirmed to me the sense in such a balanced approach to our energy needs. Japan is home to some of the world's most advanced clean coal fired power plants.
Yesterday I was at the Isogo ultra-supercritical clean coal power plant. Some people get really upset when I use the words clean coal; well before you criticise take a look at what Isogo has achieved.
When I was there in the control room, they were not even registering dust matter to one decimal point of a part per million of air. Their nitrous oxide result was 0.06 grams per kilowatt hour (and sulphur oxide levels were 0.01 grams per kilowatt. Their plant is located within clear sight of residential homes including luxury apartments.
Isogo has achieved all of this while cutting its carbon emissions by 17 per cent, and the carbon emission reductions would be even greater in Australia on some of our older coal fired power plants. There is a keen interest in Japan to bring their coal fired power technology to Australia and to spread it further through our region. There are already more than 700 high efficiency, low emission coal fired power plants being built in the world, most in our region.
This is great news for Australia because our high quality coal is well suited for use in these advanced plants.
To maintain the affordability and reliability of our power supplies we will need a mix coal, gas, hydro and renewable energy sources. When it comes to energy we need a balanced diet.
Gas is an essential element of that diet but we have much more work to do to guarantee our domestic gas security and build public support for the industry.