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ACCC sets bar on ground for gas industry to jump over

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As Australia’s competition regulator and national consumer law champion, it beggars belief that the ACCC (Australian Competition and Consumer Commission) continues to pander to the gas cartel.

While it is true that there have been some falls in prices following on from the Prime Minister’s intervention in the Australian gas market, any improvement is illusory and fails to take account of the current global gas glut and falling contract prices globally.

Australian consumers continue to pay far too much for gas produced in Australia.

The ACCC Gas Inquiry 2017-2020 interim report contends that supply is better in the domestic market following the gas industry’s offer to divert some gas spot sales into the domestic market.

The market however remains “starved” of supply by the cartel of gas producers. They control the gas industry on the east coast to keep prices high.  So, while the market has gas, it does not have a meaningful surplus of gas.

The east coast is awash with gas and there is no reason that we should not be paying amongst the cheapest prices in the world.

Macquarie Bank recently produced an appropriately titled report “Global LNG – The power balance has shifted”.  This comprehensive review of the global gas industry found that:

“We see global oversupply from operating and under construction projects lasting until 2022, but including advanced projects, this extends until 2027.  Additionally, two factors could shift oversupply out further, export plants running above nameplate and the rise of renewables.”

Due to an international oversupply of gas, it has become a buyers’ market. The shift in power from domestic producers to LNG customers globally means contracts are coming under extreme downward price pressure.

Macquarie note that existing contracts have their pricing periodically reviewed.  Currently all these reviews have been in favour of the gas buyers in the global market and have seen falls of around 25% in contracted terms

Japanese customers pay amongst the highest prices in the world for their gas. They are currently paying approximately $A8.90/GJ for their contract gas under renegotiated pricing arrangements.

Australian customers are currently paying around $8-12/GJ according to the ACCC.  We should be paying substantially less than the Japanese given the gas must be liquefied (an expensive energy intensive process) and shipped all the way to Japan.

Once we start getting into the detail of the report, the ACCC’s gas industry supplied view looks even more absurd.  The ACCC claim that in the southern states we should be paying more for our gas than Queenslanders.

The ACCC says in Queensland we should pay $5.87-7.85/GJ in 2018 while in Melbourne we should pay some $2.45/GJ more accounting for the cost of transporting the gas from Wallumbilla in Queensland.

It claims that the Bass Strait is in decline and gas must come from Queensland to supply the southern states.

This quite simply flies in the face of reality.  On the very day that the ACCC released its report the Bass Strait fields are supplying 100% of the needs of Tasmania, Victoria and NSW, part of South Australia’s demand (the balance coming form the SA gas fields at Moomba) and exporting gas through to Gladstone. Melbourne and Sydney consumers have no need to be paying more than their Queensland counterparts.

 

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The ACCC has clearly stated that one solution to the price crisis is to produce more gas by opening up coal seam gas fields in NSW and onshore gas fields in Victoria.

Politically, this is impossible in Victoria given the onshore gas ban that exists. In NSW it is problematic due to the unprecedented public opposition to the one live project, Santos’ Narrabri gas project.

This ACCC solution also flies in the face of current global gas economics.  Onshore gas has proven to be very expensive gas in Australia.

We live in a low cost gas world.  Producing high cost onshore coal seam gas is no way to bring about a fall in the price of gas.  The ACCC appears blind to what is occurring in global gas markets and is dutifully parroting lines from the gas industry.

It is well past time that the ACCC and Australian governments at all levels took on the gas cartel that is forcing up domestic gas prices to globally uncompetitive levels.  The high gas prices are also feeding through to high electricity prices.

Australia is blessed with abundant energy sources and prices should be amongst the cheapest in the world.  That we pay more than our export customers is testament to the fact that energy policy has totally failed.

The ACCC need to stop siding with an industry that has long failed the domestic gas market.  The gas cartel must be dealt with confidently and with the interest of families and businesses front of mind.

Bruce Robertson is an analyst with IEEFA.  

  • PaulC

    Cartel is perhaps too strong a word here. I don’t believe there is collusion between suppliers but rather that this is another dysfunctional market.

    Markets are intended to balance supply and demand and all else being equal, they do. The problem comes when we have different consumers with differing needs.

    I’d like to understand how domestic supply is contracted because it seems retailers are not using long term contracts whereas overseas contracts with Japan etc. are. Instead, domestic supply seems to be cost-plus based on spot or short-term prices. [The short-term market is supposed to infill demand peaks vs. long-term contracted supply.]

    Gas suppliers as price takers will always prefer the certainty of long-term contracts. So mismanagement of supply contracts domestically seems a probable conclusion when explaining shortage and elevated price (vs. export). Seems especially likely when there is zero consequence with cost-plus pricing. Any better explanations?

    • Bruce

      Unfortunately, in gas, there is no market. The Australian Industry Group surveyed their members. What they found was that many received no offers for gas when they put out a tender. Some received just one offer. A market relies on having multiple sellers. In gas there is no market.
      Industrial consumers in Australia have to use long term contracts for supply as the spot markets are failed markets in Australia. They are illiquid and cannot supply large volumes.
      Hope this helps your understanding.

      • PaulC

        Thanks… So that confirms market failure then. I read that AEMO operates a short-term trading market and a declared wholesale market in Vic, but ‘no sellers’ is a problem for any market.

        That also confirms that MT asking nicely is unlikely to remedy the issue. Either there is an effective market or intervention is required. And that also explains AGL considering arbitrage via gas imports.

        So people can draw their own conclusions. Mine would be that like with the massive rort of poles and wires, governments have been deaf to an issue of looming shortage raised repeatedly over several years (I read the warnings).

    • PacoBella

      The term Cartel is used when there is agreed communication among the members. The Uni of Qld academics who wrote the book “Game of Mates” pointed out that among some Australian business people such formal arrangements are superfluous. Wink, wink, nudge, nudge – say no more!

      • PaulC

        I’m sure it’s just coincidence! Just a ‘recurring coincidence’ in markets dominated by oligopolies.

        Seriously though, given the common corporate goal of maximising profit, it is unsurprising to find similar behaviour across participants. Most markets exhibit herd behaviours and fewer participants implies lower diversity of behaviours.

        The surprise here is that this is a market of critical importance for a resource owned by the Crown and extraction rights granted at their behest. So a hesitancy to stipulate constraints on the disposition of said resources by the granting entity is let’s say “perplexing”. Do they benefit we might ask??

        • neroden

          Kickbacks to Liberal/National politicians? Say it ain’t so! Oh, wait, the campaign contributions are *documented already*.

  • Joe

    Can I just ask the question that if Gas is hideously expensive then why are consumers sticking with it. Are there not alternatives?

    • Bruce

      Many industrial consumers have little choice at present for high heat applications and for chemical, fertilizer and glass manufacturing. What is occurring is that these industries are re locating off shore to jurisdictions where gas is priced reasonably.

      • Tim Forcey

        Heat pumps (that harvest renewable heat from the air, and/or can use “waste heat”) can be economic options for lower-temperature industrial applications.

        See this important recent research by Alan Pears et.al.: https://www.a2ep.org.au/files/Reports/FINAL_A2EP_HT_Heat_pump_report_v2_1_170911.pdf

      • neroden

        Tesla is using 100% electric heating for their giant battery ovens.

        It’s possible to do literally all industrial heating processes with electricity. In order to do it *efficiently* it requires (1) heavy insulation, so that the heat doesn’t get wasted — much easier when you don’t need to ventilate combustion byproductions, and (2) for lower-temperature operations heat pumps, which are typically more efficient than electric resistance heating. (That said, steel mills simply use electric resistance heating in their electric arc furnaces, same for aluminum, and the same can be done for glass.)

        It requires massive retooling of the factory so factories designed to use gas have to be essentially rebuilt to use electricity. So that’s a big issue.

    • Tim Forcey

      People interested in operating their homes without gas, and saving money, can join the discussion at My Efficient Electric Home.

      https://www.facebook.com/groups/996387660405677/

    • Tim Forcey

      This study investigated renewable energy alternatives to gas for Australian industrial users: http://arena.gov.au/assets/2017/05/ITP-RE-options-for-industrial-gas-users-Summary.pdf

  • Grpfast

    “Prime Minister’s intervention in Australian gas market”, is another joke. He has meetings! All for show. Parties involved too concerned with shareholders, not Australian resource security or possible industrial growth.
    TRAITORS!

  • RobertO

    Hi All, I saw a comment by Ian MacFarlane (ex pollie) about not letting too much gas into the market as it would depress the prices in the market place. Profit must come first never mind the consumer even if they are paying way over the costs of sending it overseas to be sold at quarter of the price they get in Australia

    • MaxG

      All well and good… and how it works… but people have choices… sometimes they have to be radical… and done with foresight.

  • Verdant_One

    Australians are paying the price for supporting the City Of London’s plot to supply gas to Eastern Europe through a gas pipeline (Nabucco) through Syria from Qatar who have now switched sides to support the Iranian #PeacePipe. The Nabucco Project through Syria was a rear guard for the Petrodollar by cutting the Russians and Iranians out of the European Market and would have given Australia dominance of the East Asian market which is now oversupplied as Qatar is still supplying them.

  • Ken Fabian

    In a nation with a glut of gas for export we have a gas industry – and it’s yes-team – that insists that only some kind of super-glut of gas from unrestricted access and expansion can have enough left over to supply Australia. But it’s not supplying Australia at reasonable cost they want, it’s the unrestricted access and expansion. End the perpetual amnesty on climate and other externalised costs and there is no such thing as cheap gas and encouraging it’s unrestricted expansion requires rejecting or – more easily – ignoring the climate consequences.