Gas suppliers failing to play by Abbott’s script

According to Tony Abbott, axing the carbon tax was all about Australia regaining it’s place as a ‘cheap energy superpower’, as he put it.

It’s a shame gas producers don’t seem to share his plans.

An alliance of industry associations – largely in the manufacturing sector – have released a report today by Deloitte Access Economics outlining that soaring gas prices will curtail output in manufacturing and mining sectors by levels which this industry alliance claim are “significantly larger than those associated with repeal of the carbon tax”.

The group – involving a coalition of the Australian Industry Group, the Aluminium Council, the Energy Users Association, Plastics and Chemicals, Food and Grocery Council and the Steel Institute – point out that the expected rise in gas prices as part of LNG exports will have the following impacts:

– Australia's manufacturing output will contract by $118 billion over the next seven years;

– The mining sector will contract by $34 billion and the agriculture sector by $4.5 billion; and

– 14,600 manufacturing jobs will be lost.

The chart below illustrates the impact of the carbon tax (in blue) on the economic output of three key trade exposed sectors in Australia – manufacturing, mining and agriculture. It then compares that to the impact estimated by this Deloitte report of gas prices rising on the back of LNG exports (in red).

Percentage change in economic output as a result of carbon price (in 2020) versus LNG export linked gas pricing (in 2021)

Graph for Gas suppliers failing to play by Abbott’s script

Sources: Page 86 from the regulatory impact statement contained in explanatory memorandum for Clean Energy Legislation (Carbon tax repeal) Bill 2013; and Deloitte Access Economics (2014) Gas market transformations – Economic consequences for the manufacturing sector

Contrary to Abbott’s assertions of an economic wrecking ball, the regulatory impact statement which accompanied his own carbon price repeal bill outlined that manufacturing and agricultural economic output would expand by more with the carbon price left in place rather than repealed. However, this would come at the expense of mining and, in particular, mining of coal, gas and non-ferrous ore.

Unfortunately for manufacturing, because so-called representatives of industry have been so keen to engage in ideological political battles over carbon pricing, they’ve spectacularly failed to protect their members from the huge rises in electricity network charges and now huge rises in gas prices.

According to Phil Barresi, chief executive of the Energy Users Association of Australia:

“Australian companies seeking to renew or establish gas supply contracts for domestic operations are already facing an escalation in prices, uncertainty of supply and an inability to lock in long-term supply contracts.”

The problem confronting these industry associations is that these complaints all come rather too late to make a major difference to the plight of their members.

Gas prices were going to rise and rise significantly no matter what because of the emergence of LNG export facilities, and overall this should be a good thing for the Australian economy.

However, we’ve got ourselves into a spot of additional bother because the gas market is not as transparent and competitive as it ideally should be. Unlike electricity, where the status of supply is highly transparent as are wholesale prices, the gas market is more of a black hole.  

A few years ago a number of smaller gas producers and explorers were steadily snapped up by larger companies. These larger gas companies are more able to take a patient and strategic approach to the sale of their gas. They are reluctant to sacrifice price in order to lock-in sales volume unless you happen to be a huge overseas buyer like the Chinese national oil company or a Japanese utility.

Then Santos encountered serious problems in accessing enough gas from their Queensland coal seam fields to satisfy contracts they'd signed with LNG export customers. They now need to make greater use of gas they have in the Cooper Basin to satisfy these contracts. This means everyone else in the country who didn’t lock in gas contracts, because they thought there was plenty of gas to go around, is now in a bit of strife.

Further frustrating things is that regional communities have become highly hostile to development of new sources of coal seam gas.

Trying to change any of the above issues is likely to only make a difference over the long-term. The only option that could make any difference within a few years is to help consumers become more efficient in their use of gas – something the Clean Energy Finance Corporation is keen to help facilitate.