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Tuesday, September 26, 2017

No easy answers as the world's second biggest gas exporter prepares to run short

Surely the world's second biggest exporter isn't about to run short of gas?

We are, according to the Australian Competition and Consumer Commission, although not for the reasons that are widely believed.

The conventional wisdom has been that when three big exporters opened six big liquification plants at Gladstone in Queensland and locked themselves into long-term supply contracts with Japan that they couldn't fulfil they had to commandeer gas that the rest of us would have used.

That did happen, but it's not the main reason we're about to run short of gas. It's that the exporters also shipped a lot of extra gas overseas, in addition to the gas they were contractually obliged to export.

It's easy to understand why. They spent billions building the liquification plants and they are trying to get a return. The ACCC has a particularly good insight into their thinking. It's used compulsory information-gathering powers to amass a trove of 20,000 industry board papers and reports.

The commission says next year the big three are planning to export 64.3 petajoules of gas that they are not contractually required to export. One petajoule is enough to supply the residential needs of a city like Warrnambool, Wollongong or Penrith for a year; or enough to supply one very big industrial user.

It says coincidentally 64.3 petajoules "accounts for the entire expected gas supply shortfall".

Next year's expected gas supply is 1901 petajoules. Domestic users – industry, business and households – will need only 642 petajoules. But the exporters are planning to ship out more than all of the rest: 1314 petajoules, resulting in a shortfall of 55 petajoules. (A worse-case scenario, also modelled by the commission, is a shortfall of 110 petajoules).

The ACCC says it would be possible for the exporters to ship out less than they are planning to without breaking contracts, and although they've made some moves in that direction, it is "unclear" why they haven't done more.

In the meantime, in a disturbing development for the businesses that rely on gas, many are being offered blind auctions. Rather than being given a price, they are are being asked how much they would be prepared to pay to keep the gas on. It's a one-shot game. If they don't offer enough they miss out.

One offered 20 per cent more than it had been paying and missed out. Those that get offers are being given very short deadlines to accept, often just two to five days, a "significant constraint for many large users who are required to obtain approval from company boards and executive management". Even when they accept offers, some have them withdrawn.

One A third of the commercial and industrial users the commission spoke to were considering either winding back production or closing down.

So it's understandable that Prime Minister Malcolm Turnbull is considering "pulling the trigger", using the new powers granted to him by Parliament to restrict exports from next year.

He hasn't pulled it yet because he would prefer persuasion. So would the commission. It points out that the big exporters are also big producers. If forced to wind back exports the big three might respond by winding back production. We'd be no better off.

In The Age and Sydney Morning Herald