The Queensland Government reaction to the Finkel Review of Australia’s energy policy was to assess it as putting the burden on Queensland – and that the sunshine and resources State was up to the challenge.
This may have been something more than political posturing, particularly in relation to the vital gas component of national energy needs in manufacturing, agribusiness, small business and consumer markets.
If this week’s energy outlook by the Australian Energy Market Operator turns out to be accurate, Queensland will be the only State or Territory to be adding new energy to the mix, and will, therefore, be doing more than any other to avoid the possible gas-supply crunch in eastern Australia.
The AEMO update upends its previous assessment (in March) which predicted an East Coast gas shortage in the next two years.
Now it seems increased production in Queensland, as well as reduced customer demand among manufacturers, may take the ‘crisis” out of the situation.
While this seems good news, there is a darker side. If the forecast fall in demand for gas is a result of demand destruction (rather than marginally reduced usage), then a consequence may be lost economic production and lost jobs.
This week’s announcement that methanol producer is closing its plant in Victoria, and moving instead to the USA, is a case in point.
This is demand destruction – where a business has closed because of supply and price uncertainty – as opposed to a number of businesses using marginally less gas for some business reason).
So the AEMO forecast is important as to the why it anticipates reduced demand.
It is also very important to Australia’s world- leading coal-seam gas to liquid natural gas (LNG) export industry, based in Gladstone, in northern Queensland.
After investing $70 billion and employing 40,000 people, the industry now faces Federal Government intervention to redirect its exports into the East Coast domestic market to address a future gas shortage forecast by AEMO in March.
This changing market demand assessment is of great importance, because it is the forecast on which the Federal Government has been relying to justify its planned and unprecedented intervention in (LNG) exports from Queensland.
The operating owners of the three LNG export plants are Shell, Origin and Santos.
This week Santos Chief Executive Kevin Gallagher went on the offensive, labelling the planned intervention as bad for business and unlikely to achieve its desired outcomes.
The revised AEMO forecast suggested it wasn’t needed at all, Mr Gallagher said.
However, if it was needed in the future, the proposed model needed a major overhaul, he said.
The planned mechanism aims to fill any domestic supply shortfall with exports redirected back into the domestic market.
The current proposal discriminated against the Santos export consortium because it had less source gas available to it than the other two projects.
Interfering with existing contracts to suppliers overseas was bad for the nation’ s international reputation and bad for its position as a reliable investment destination.
Sparking the export interference mechanism would do little to address the price of gas and could have some nasty unintended consequences, Mr Gallagher said.
He was referring in part to what has occurred in Argentina in the past decade, as we have previously explained here.
In Argentina, the Government intervened twice in a successful gas export market – once to control prices and a second time to cut exports. The result of the price control was reduced production, which lead to a supply shortfall. To try to ensure domestic supply, the Government cut exports. Both initiatives undermined investment and buyer confidence.
A decade after interfering, the country has changed from a successful producer and exporter to an importer of gas and LNG – at significant economic cost to the nation. An industry was ruined – and the Government had only itself to blame, Mr Gallagher said.
The Chief Executive of the Australian Petroleum Production and Exploration Association, Dr Malcolm Roberts, said the planned export intervention was unnecessary, and “…puts at risk Australia’s international reputation as a stable country with low sovereign risk”.
“Whether the mechanism is used or not, investors must now consider the prospect of the Commonwealth intervening in the market to force a project or projects to default on contracts,” he said.
“The (Australian Domestic Gas Security Mechanism) risks exacerbating the fundamental problem on the east coast it is intended to solve.”
Ironically, if this is the result, it will be Queensland which suffers most.
The latest Queensland Treasury estimates rightly identify LNG exports as the principal driver of overall exports growth for the State in the immediate future.
However, the size of the benefits the State receives through export royalties will be undermined if the Commonwealth intervenes to redirect exports to domestic consumption, primarily to manufacturers located in NSW and Victoria.
And as Mr Gallagher pointed out, it is NSW and Victoria which have helped create the supply crunch with their pro-green, anti-development policies, despite 100 years of safe and productive gas extraction. A situation which South Australian Senator Nick Xenophon described as “absurd”.