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Thursday, February 27, 2014

AUSTRALIA'S wealth of natural gas is reserved for export


The result is steeply rising prices for household gas and power and a choking effect on an otherwise healthy domestic industry and jobs.

All this at a time when our Prime Minister aims to make Australia "the affordable energy capital of the world".

The International Energy Agency ranks Australia's gas resource among the world's most abundant. It is policy failures, laid out in detail back at least as far as 2002, that cause our volatile domestic energy market to be destructive of the national economic outlook.

According to the Queensland Competition Authority, electricity costs will rise in the next year "by around 29 per cent. This is driven by rising industrial demand associated with rapid development of the liquefied natural gas (LNG) export industry in Queensland and higher fuel prices (mainly gas)".

NSW's largest gas retailer, AGL, announced this month that it would hike household prices by 20.3 per cent in July. Again, the problem is a shortage of supply. Yet we know there is ample gas.

Effective public policy would have created a competitive local market for Australia's abundant gas. We would have stable prices and ample supply of a resource that is remarkably effective in attracting modern capital investment and industry. The fact we do not have that is due entirely to policy failure.

Serious flaws in Australia's gas market were laid out clearly in a COAG (Council of Australian Governments) review in 2002, which forecast supply problems and sharp price hikes. Yet even as the gas export industry expanded to be potentially the world's biggest, no action was taken to curb the exporters' tight reservation of Australian gas.

For some time now, Australians have been told that debate over domestic gas pricing is special pleading. Gas producers that have been allowed to reserve critical natural resources exclusively for export have painted any attempt to promote a functioning domestic market as protectionism.

The fact is producers like high natural gas prices because it is good for their bottom line; the impact on everyday Australians is far less meaningful to them. The effect of their success is now evident.

Dow laid out the failures of policy that have delivered soaring retail prices and increasing suppression of industry and investment in a paper last month for the Industry Minister. Dow cited work by the OECD and others to demonstrate that export pricing was irrelevant to Australia's domestic gas market. In fact, the current state of LNG projects and gas supply suggests that domestic gas users are subsidising flawed export projects. Specifically, the idea that Tokyo prices are somehow a benchmark for Sydney prices sits on matchstick foundations. Fundamentally, this is not a market. As the OECD observed in 2012: "These markets are far from being liberalised, characterised by a lack of competition both upstream (when relevant) and downstream."

Among a number of red herrings, producers have sought to portray delay in coal-seam gas development as the sole factor in shortages. This is not right. Any review of public estimates of Australian gas reserves will show that conventional gas reserves -- the sort found in natural reservoirs -- had already expanded massively well before the coal-seam technology revolution. Very large gas resources are held back -- hoarded -- for export sometime in the future. The impact of export reservation is becoming obvious as consumers face cost hikes for gas and power, and industries reliant on gas face steep price hikes -- at least double in most cases. Less obvious is the opportunity

Abundant gas offers Australia a rare opportunity. At a time when industries globally are in flux and traditional competitive factors come and go with unusual fluidity, gas offers a competitive certainty. As the Prime Minister has said, abundant gas should be a competitive jewel in the national crown.

Dow has sought to make investments based on Australian gas. On a number of occasions we were rebuffed. We told the minister in our submission that in these cases we did not get to discuss pricing as the producers simply refused supply.

In response, one of the companies we attempted to negotiate with has denied knowledge of any such discussions. I have since reminded them of the facts, advising the minister that we remain prepared to provide whatever detail is required.

Our submission to the minister cited commentary by global analysts at Credit Suisse, which pinpointed the exceptional factors at work in the Asian gas export market: "The cosy club of LNG developers, super-majors and a few 'specialists' have fully embraced the buyer's drivers, enjoying supernormal rent in good times and using crude price linkage to offset soaring unit development costs in recent years."

The current policy settings have produced a situation in which Australia's advantage in gas resources is allocated solely to the interests of those whose profit is maximised by maintaining the "cosy club". So long as market distortion is tolerated, Australians are denied the opportunities of a functioning domestic market for its abundant and valuable gas. We have instead a crude ratchet effect in which, from time to time, domestic prices are simply jacked up.

Craig Arnold is managing director of Dow Australia & New Zealand.