I’ve lost count of how many folks have complained about various solutions to the east coast gas crisis triggering the dreaded “sovereign risk” for the companies involved. To them, I say just one thing today: any nation that cannot rely upon the production of energy is not sovereign at all. Energy is essential to security, to health, to civil order, to industry and standards of living. Energy is not some random market. It is the lifeblood of every modern nation.
When a nation’s energy supply is threatened, it reacts decisively in the national interest. It doesn’t pussy-foot around worrying about who it might offend. “Sovereign risk” is complete bullshit when energy supply is threatened. Countries have invaded others for less.
We all know that Do-nothing Malcolm Turnbull is doomed. Most folks blame his party’s loony right. I am of the view that the fault lies with Do-nothing himself. He has repeatedly demonstrated an impeccable ability to present the perfect mask for any situation but is equally incapable of decisive action to follow through. Rather he dithers and divides, betrays and destroys, as he sits at the centre of the drama.
But there is a way out now for Turnbull. The east coast gas crisis demands decisive action and, given he is going to lose the next election whatever he does, there is little point spending his last few cents of political capital on manipulating those around him to stay atop the greasy pole. He should spend it instead on fixing something for his legacy. He should crash or crash through on a bold fix for the energy crisis.
[The profits ‘earned’ by Australia’s gas industry will make you wince]
Yesterday’s move to summon gas CEOs was a good one. It was a beginning. But these CEOs will give him no joy. They will all say “it is the market” at work and that their hands are tied. They may offer a few tidbit half-solutions that are more rent-seeking dressed up as public interest policy. The bullshit solutions are already flowing at The Australian Financial Review:
“The paradox is that while Queensland’s LNG producers are sucking up vast quantities of east coast gas to ship offshore as LNG, the prices they are getting in Asia are soft and heading south while several of the buyers don’t want the gas they have contracted to buy and are reselling it on the spot market at a loss. Industrial users on the east coast are meanwhile going short.
“EnergyQuest principal Graeme Bethune suggests a sort of arrangement that would see retailer AGL Energy, for example, cut a deal with a Queensland LNG customer — say Sinopec — that would result in a cargo’s worth of LNG redirected instead as gas to the Wallumbilla hub in Queensland …
“Nor would the gas be cheap, with industry sources estimating that based on current oil prices of around $US53 a barrel, the gas would have to be priced at about $9/GJ at Wallumbilla. Also, government is expected to have to facilitate any such deal …
“An equally interesting suggestion is a floating LNG import terminal, which Bethune says could be set up more swiftly than the 2021 start-up envisaged under AGL’s $300 million project proposal currently undergoing a feasibility study.”
If Sinopec is currently reselling its Aussie gas on the Asian spot market — which is not oil-linked — then it’s getting US$6/Gj (per gigajoule). Why would Aussies pay the oil-linkage price, which is currently $7.80/Gj (switched back to AUD it’s above $10/Gj)? Once delivered to NSW and Victoria the price would be $12/Gj. This is not a solution, it is another gouge.
Likewise with AGL. It sold its gas reserves to GLNG 18 months ago, no doubt because the offer was too good to refuse. Now it’s back for a second bite at the cherry and wants to import from the US at $11-12/Gj delivered. I mean, how many goddamn leaches are attached to the national arteries here?
So, when the CEOs arrive, Do-nothing Malcolm, by all means be polite and put on one of those great masks you have. Faithfully record their solutions and charm them in that way that you do best. Then, when they’re gone, take that piece of paper and wipe your arse with it as you turn your prolific ability to disappoint upon them instead of the public. Divide and conquer them.
What is needed is quite clear and easily communicated to the community. It will piss off your crazed rump and it will drive some of our idiot media mad. But it can be summarised in two short words: “market failure”. The government is justified in taking decisive and drastic action because the east coast gas market has failed and that is a national security crisis as power is jeopardised for all essential services.
This approach has one great advantage: it is the truth. And that makes it very difficult to defeat.
Once the declaration of market failure is made, act. Immediately bring new legislation that bans the export of third-party gas from the east coast, as well domestic reservation for all future projects plus “use it or lose it” rules aimed squarely (though not directly) at Shell’s Arrow reserve.
That will crash the Santos share price. Too bad. Do not offer it compensation. Why would you? Especially when others don’t get it, even if they are:
- buyers of an inflated house and land package on the fringe that finds its value reduced as more adjacent land is zoned residential by the government;
- buyers of off-the-plan apartments whose value is reduced by newly approved developments nearby;
- owners of businesses that go out of business due to international competition via a ‘free trade agreement’ signed by the government; or
- owners of businesses that suddenly face increased competition from market deregulation (e.g. airlines, pharmacies, etc).
As Credit Suisse points out:
“Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable.”
Quite right. This will solve the immediate crisis in one swift stroke as it releases 160 petajoules of gas locally.
Make the deadlines on “use it or lose it” tight for Shell. It should have to shit or get off the pot within 12 months even as east coast prices slump. If it develops, terrific. If it sells make it abundantly clear to the buyer that it must be developed immediately. That solves the problem long term.
[Plenty of blame to go round for gas ‘crisis’]
These three rule changes, which are already in operation in WA, will resolve the problem for long enough that decarbonisation can continue and the market be reformed to fit rising power sources. Labor and the Senate will have to back it.
Do it, Malcolm. You have nothing to lose. And who knows, if you actually lead, instead of spending your energy retaining your lead, the public might warm to you a little.
More to the point, if you do not do it, then … well … what’s the point of “Australia” at all?
*This article was originally published at Macro Business
It’s good to read the correct SI units (joules) being used for gas. For those who want to connect with older units, 1 GJ is the energy in about a thousand cubic feet of gas. That much heat in a power station would generate about 100 kWh of electricity. So $10 per GJ of gas represents a fuel component of about 10c per kWh in a gas-generated elec power bill.
(The prefixes run, kilo-mega-giga-tera-peta-exa, so a petajoule, 1 PJ, is a million GJ. Being named after a person, “GJ” has a capital J but “joules” does not. )
DAVID LLEWELLYN-SMITH: Congratulations X 200. What is the matter with this country? I can remember years ago writing comments to the effect it was ludicrous to be selling our gas at bargain prices to China whilst failing to retain any for domestic consumption.
Meanwhile I repeatedly bucketed the FT agreement, on the grounds that Australia had no super-smart politicians who could steer Australia into gaining-for once-a fair deal for this country.
As you will recall instantly the enormous support I had from our politicians. Ha! Now if those lilly-livered, mentally-constipated oafs who run this country, led by whatisname, put up the price of gas to the level they’re considering, I, for one, will be exceedingly hostile.
All hail to Tony Abbott for reducing Australia to a tenth-rate monarchy and to Malcolm Turnbull for making it impossible to recover any respect.
Another solution would be to nationalize the gas industry and require them to provide the domestic market with what it needed at production cost plus a small margin, and then flog off the rest to whoever wants to buy it.
James, in a situation like this, that is exactly what would China do.
“what China would do”
In essence, this rapine of our country is the norm, gas, ore, coal, meat or grain (the latter 2 should be classed as mining the soil) – we receive a pittance for the raw material and buy it back at the cost of many multiples as ‘elaborately transformed manufactures’ in the delightfully dusty ABARE phrase.
An impressive argument, but a fairly obviously flawed one, I think.
When, specifically, did SELF RELIANCE in energy supply for power generation suddenly become “essential” to Australian sovereignty (given it was never treated as such in the past)?
The short answer is, it didn’t. What properly functioning energy ‘self reliance’ would guarantee though is supply, which implies below global market domestic energy pricing. There may be a case for this (i.e. ruthlessly exploiting our comparative advantage), but there’s also the counter-case (i.e. cosseted industries do eventually become internationally noncompetitive).
The author wants us to believe that a temporary energy market failure proves the case for the need to quasi-nationalise the domestic energy market, i.e. because it’s a uniquely special market (upon which our sovereign survival depends) that we can’t risk it ‘ever’ failing. It’s a sham argument right there. We can risk temporary domestic energy market failure.
There are good reasons to nationalise parts of many critical markets (energy, housing, communications, infrastructure, etc), but this author’s ‘market failure’ furphies can offer no guide to them.