Peter Reith’s Gas Market Taskforce report for the Victorian Government came with high expectations. Victoria has the nation’s highest rate of gas usage, is home to one of Australia’s largest gas fields and effectively has a moratorium on coal seam gas extraction.
So industry and consumers expected that where Victoria aimed its gas policy might be where the East Coast gas market headed in the coming years. The report rightly says that government policy on coal seam gas should be founded on science, not by lobbyists. Yet the report failed to resolve the real issue; the soaring price of domestic natural gas and the effect on Australian manufacturers.
Wholesale gas prices have spiralled from $2 - $3 per gigajoule three years ago and are expected by some to reach $12 per gigajoule in 2015. These price hikes are contrary to the behaviour of a balanced market, since gas production has also been increasing, with the Bureau of Resources & Energy Economics’ Australian Energy Projections 2011 finding that Australian gas production will increase fourfold to 2035.
The Victorian Taskforce on gas says the market will sort out this paradox. However, Australian households and industry do not buy through a market mechanism. They pay according to the long-term supply contract price set by our LNG exports to Korea, China and Japan. This is more like export parity pricing than a ‘market’.
This reliance on export pricing rather than a market means many large chemicals companies are unable to secure gas supply beyond 2016. And it’s not hard to see why: the three LNG plants being built in Queensland will export about 1,300 petajoules of gas annually to Asia, roughly the annual amount used by the whole east coast gas market.
The Reith Taskforce report does acknowledge that rising gas prices will negatively impact manufacturing, jobs, investment and costs of living and it does call for the ACCC to be allowed to investigate the gas producers’ joint marketing arrangements. But it dances around the crucial question: should Australian natural gas be an integral part of a robust industrial base?
This is actually one of the pivotal questions that any government should be asking itself. We thought we’d had our answer to the question as far back as 2002 when the then-Federal government responded to the Chemicals and Plastics Action Agenda. The Coalition government then acknowledged that industry was integral to the Australian economy and that mechanisms to address feedstock cost and price impediments should be considered.
What, if anything, has changed?
Australians should understand that natural gas is not just for heating and power-generation: it is transformed into everyday goods with very smart technologies. Items such as water pipes, plastic milk containers and fertiliser all come from transforming natural gas with the power of chemistry.
We need two kinds of capital to make these transformational industries operate. We need human capital: we need smart science and engineering graduates coming through our tertiary system, and they won’t stick with difficult degrees if they don’t see high-level jobs and projects waiting for them in the industrial sector.
We also need financial capital to sustain our vital industries. We have already lost the Incitec Pivot project to Louisiana: the ammonia plant planned for Koorangang Island in Newcastle found it could buy $4 per gigajoule gas in the US compared with gas at around twice the price in Australia. Also, Coogee Chemicals is on the record as being keen to invest $1 billion in Victoria to build a Methanol plant and create 200 direct jobs. But it and other multinational chemical companies wait in the wings to see where the Australian gas debate goes and what the policy settings will be.
For the production of fertiliser, plastics, industrial chemicals, explosives and packaging, Australia has the most vital component required to be competitive: a stable supply of affordable natural gas. And there’s enough for both energy export and a strong domestic manufacturing industry.
However, we need policies which help bring on new supplies and also achieve equilibrium between the export value of gas and its broader economic benefit through manufacturing.
Peter Bury is the Director of Strategy and Innovation at the Plastics & Chemicals Industry Association (PACIA)