There is a fine line between acting hasty and being decisive.
After just a fortnight in office, the Albany government faces a crisis that has been a decade and a half in the making.
The bitter irony of all this is that when it comes to energy, Australia is one of the best affluent countries on earth.
It boasts vast reserves of high-grade fossil fuels, including one of the largest supplies of natural gas, and an environment and landscape that is ideal for the new world of renewable energy needed to power the world.
And yet, we are facing a serious failure in energy and electricity supply here that threatens to wreak havoc on the economy, shutting down major manufacturing industries and potentially increasing both unemployment and inflation. Causes.
On a larger scale, the obvious culprit – at least in recent months – is Vladimir Putin and his reckless disregard for humanity with the invasion of Ukraine, which, as a side effect, has thrown global energy markets into chaos.
But to a large extent, we blame ourselves for the present situation.
First, the nearly 20-year battle over climate science – waged primarily by the Coalition for political purposes – resulted in a serious lack of investment in energy production.
This has left us dependent on an old and unreliable fleet of coal-fired generators that spew massive amounts of carbon into the atmosphere and often break down.
And second, we have allowed a cartel of large global energy companies – many of whom specialize in tax avoidance – to control our natural gas supply, setting rules and prices on the Australian East Coast.
Both the major parties are responsible for this.
A significant portion of that gas is now being diverted to China, a nation that has waged a brutal trade war on Australia for the past three years and is now vying for diplomatic and potential military supremacy in the South Pacific.
The rest mostly go to Japan and South Korea.
Most of that exported gas is tied up with inflexible long-term contracts. But more than a third of exports are sold under flexible short-term and spot contracts.
With global gas prices rising, this is bringing windfall benefits to our gas exporters, while inflicting enormous pain on Australian industry and households.
Meanwhile, much of the hot air is highly misleading regarding the lack of gas.
There is no shortage of gas in Australia. It’s just that, in the past, at least, we’ve allowed most of it to be shipped offshore.
How the West won the energy war
This is a story of what could have happened. But maybe it’s still not too late.
Back in 2006, a contingent of executives from Exxon, one of the world’s largest energy companies, flew to Perth for a showdown with then-WA Premier Alan Carpenter on the giant Gorgon gas project on the northwest coast.
While federal politicians were cooperating with the multinational, local producers were very uneasy about the prospect of gas shortages and price increases.
Carpenter’s solution? He insisted that 15 percent of any gas from the new project should be reserved for the domestic market.
The Exxon team was furious and gave an ultimatum. They would largely walk away from the project until “every molecule of the gas” was available for export.
The carpenter bluffed him. He thanked them for coming and for all the effort and investment they made.
But, he said, if this was his situation, then sadly the project was over and there was nothing left to discuss.
Less than 24 hours later, a more generous Exxon executive requested another meeting.
Overnight, he said, he had crunched the numbers again and was now confident he could make the project work with domestic requirements.
The result is that in Western Australia, a sudden jump in global gas prices is hardly recorded. Gas is available at about $6.50 per gigajoule.
Compare this to the east coast, where the Australian energy market operator was forced last week to cap gas prices to $40 per gigajoule and further markets sent prices into orbit, in Melbourne on Monday at $383. Per gigajoule was recorded and reported up to $800. next day.
For the first time ever, the regulator introduced a gas supply guarantee mechanism, citing a “threat to system safety” as a result of insufficient gas supply to meet demand.
Once inexpensive and plentiful on the East Coast, gas is the primary source of fuel in the manufacture of everything from steel, glass, paper, plastics and fertilizers to food.
While many large firms have medium- and long-term contracts, large numbers also rely on short-term deals and spot prices for excess supply, which increases their cost of production and threatens their viability.
Unlike their WA counterparts, East Coast state governments give carte blanche to local and multinational energy firms to export as much as they want.
The real cause of the crisis, however, relates to a catastrophic fault that lasted more than a decade during the Queensland coal seam gas boom.
The energy giants overestimated the amount of gas in the ground and contracted to sell more gas offshore than they source.
To make up for the shortfall, they have since robbed local gas supplies, driving up domestic prices.
Their overseas customers now enjoy much cheaper Australian gas than Australians.
Turnbull’s Gas Crisis Redux
This is not the first time we have faced gas crisis. In 2017, then-prime minister Malcolm Turnbull was forced to bring gas exporters on the heels.
Australia recently overtook Qatar to become the world’s largest exporter of liquefied natural gas. But the domestic market was facing shortages as exporters curtailed supplies to meet their offshore commitments.
As ridiculous as it sounds, buying Australian gas offshore was cheaper, shipping it back home and converting it from liquid to gas, than buying it on the local market.
In response, Turnbull created the Australian Domestic Gas Protection Mechanism – a strategy designed to limit exports in the event of a domestic shortage.
Although it was never triggered, the threat of its manufacture and its use stoked some of the worst excesses of exporters.
at least for a while.
Two local energy giants, Santos and Origin, have major interests in two of the three gas export terminals in Gladstone, while AGL supplies gas for export.
Global giant Shell controls the third export terminal.
In each of the three projects, there were problems extracting gas from new Queensland fields.
Santos in particular had difficulty meeting its export commitments. The situation continues to worsen as exporters continue to write off potential reserves in their new gas fields.
And while a federal investigation in 2019 found that the Turnbull government’s gas system was working well, the truth is that our LNG exporters continue to supply East Coast gas to supply offshore markets.
Here’s an excerpt from a speech by Australian Competition and Consumer Commissioner Anna Brecky in March, shortly before everything went pear-shaped.
“LNG producers have been supplying less and less gas to the domestic market for the past five years, and the declining trend continues,” she said.
And she did not lag behind in sharing the blame.
“It is the rapid and significant reduction in domestic supply from LNG producers that has contributed to the tight and uncertain conditions in our domestic market.
“Let’s be clear – this is contrary to what the government had been told before LNG projects were developed. The gas companies assured governments that there was sufficient supply and that domestic gas prices would not rise.”
He said the situation is likely to worsen in the next few years.
So what should the government do?
There are two possibilities. The obvious is to limit East Coast exports, especially those going to China and especially those being diverted to capitalize on the current exorbitant spot prices.
The second is to impose a tax on exporters that can be used to subsidize domestic industries and households, as has been done by Boris Johnson’s conservative government in Britain.
Both actions will elicit outcry from the energy giants of dishonesty, sovereign risk from export controls and threats to move away from new projects on a single tax.
But there is a huge sovereign risk in allowing one industry to cripple others and damage the broader economy.
To get an idea of how attractive the current market is to exporters, Origin Energy admitted last week that it has once again been hit by shutdowns on coal-fired power generators, causing its shares to drop 14 per cent. I have come
But the pain was at least partially offset by its gas business.
One of the three major export terminals on Curtis Island, off Gladstone, has 27.5 percent of its origin. And Windscribe will disburse an additional $300 million this year from earlier, bringing its total annual profit from the project to $1.4 billion.
Multiply those numbers by a little less than four to get an idea of the total additional returns to the energy giants this year in the APLNG project. Then consider two rival projects and you start to build a picture of how much money is involved.
And while that’s a topic for another day, keep in mind that despite our rapidly growing gas exports, revenue from the petroleum resource rental tax is lower than it was 20 years ago.
Gas was considered a transition fuel as we transitioned ourselves away from coal to a renewable energy future.
In addition to manufacturing, it is a key element in determining electricity prices and without prompt action, East Coast energy bills are likely to rise, feed into inflation and further pressure interest rates.
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