TiP

The federal government is not going to buy the push for sequestration of gas resources to feed the domestic market.

After several weeks of pressure from gas users, especially manufacturers, spearheaded by Dow’s global boss, Andrew Liveris, Energy Minister Martin Ferguson gave no ground when he spoke to the annual conference of the Committee for the Economic Development of Australia in Canberra this week.

The DomGas Alliance argument, in essence, is that “Australia is the only country where international oil companies can access and export gas without prioritising domestic supply – the only major gas-producing country suffering serious shortages and sharply rising prices even as production increases.”

However, Ferguson sees things differently.

“It is my view that restricting energy exports in a bid to suppress (domestic) energy prices will provide the wrong signals to potential investors,” he told the CEDA audience.

“Artificially holding down gas prices, as a reservation policy will do, only acts as a disincentive for gas extraction and may risk shortages in the longer term.

“Adequacy of supply will suffer because investors will turn away from what will become less attractive development opportunities.

“Calls for intervention in the market only serve to dampen any appetite for the very investment needed to bring on new gas supplies.

“Reliability would diminish because investors may seek to recover costs by reducing maintenance and upgrades to maintain profitability.

“And while local energy prices may be suppressed in the short term, in the longer terms costs would eventually increase when consumers demanded improvements in adequacy and reliability.

“Fundamentally, from an economy-wide perspective, price restriction only leads to inefficient allocation of resources.”

He readily acknowledged that a key challenge on the east coast as well as in Western Australia is going to be managing the potentially tight market conditions driven by the competing demands of foreign and domestic customers – and that this may result in higher gas prices here.

Referring to the meeting of the Council of Australian Government’s energy ministerial committee in Darwin a week ago, he said governments have collectively agreed on the need for national policies to be made sufficiently flexible to meet market conditions.

Ministers agreed as well, he said, on the need for a national regulatory framework for coal seam gas developments.

Ferguson also took the opportunity of the CEDA talk to warn that optimism in the gas industry about the domestic market based on the uptake of the fuel for power generation may need to be curbed.

Gas suppliers hope to see some 10,000 petajoules of their product sold to the power industry over the next two decades as its share of electricity production effectively trebles in a carbon-constrained environment.

However, Ferguson said: “Domestically, the role of gas in Australia’s electricity system may take longer to materialise than expected.”

He pointed to the downward revision of east coast electricity demand by the Australian Energy Market Operator and its expectation that consumption will not return to growth in the next few years.

“This is suppressing wholesale electricity prices, which, roughly speaking, are (now) around half of what they were five years ago,” he said. “The flow-on effect will be to lock coal-fired electricity generation in to the market as the incentive is weakened for cleaner forms of baseload generation such as gas.”

The current government expectation, according to Ferguson, is for new investment on the east coast to focus on gas-fuelled peaking plants and wind power driven by the RET.

He attributes the change in the east coast market to (1) a greater uptake of rooftop solar power, (2) lower demand from energy-intensive industries including aluminium and steel, (3) a delayed coal seam gas start-up, (4) milder seasonable weather patterns and (5) greater than expected demand response to higher electricity prices.

In short, the federal government is offering cold comfort this mid-winter for both gas suppliers and gas users on the domestic front.

On the other hand, Ferguson remains resolutely upbeat about Australia’s prospects in the international market and keen to press for greater understanding of the benefits.

“Australia ultimately has far more to gain than to lose from global trade and investment in our energy resources,” he told the CEDA audience, pointing to the current level of capital investment of $197 billion in energy projects, with seven out of 10 of the world’s current LNG developments under construction here.

“With our small population and massive resources base,” he said, “we are one of just three net energy exporters in the OECD, with 70 per cent of our annual production going to international markets. We must do all we can to enhance Australia’s competitiveness in international markets – for the good of our own population and that of our trading partners.”

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