08 Dec 2022

Op-ed: Let the market, not caps, work to cut gas prices

This article was originally published in The Australian Financial Review on 7 December 2022.

‘Let the market, not caps, work to cut gas prices’ by Samantha McCulloch, APPEA Chief Executive

Instead of letting the new mechanisms introduced only weeks ago do their job, the radical interventions now proposed will just undermine investment in new developments.

Recent gas supply agreements (GSAs) securing competitively priced gas for manufacturers should inform deliberations when state energy ministers and national cabinet meet this week.

At a time when there are calls for market intervention to cap gas prices, major manufacturers like Brickworks are securing future supply.

The brickmaker has struck an 11-year gas supply deal with major energy producer Santos that will provide the gas to make around 500 million bricks annually.

This newspaper reported the price was within the range cited by the competition watchdog as reasonable.

The Brickworks-Santos deal is just one of several gas supply agreements announced in recent weeks, including Woodside and Qenos announcing a deal on Wednesday for the supply of 4.5 petajoules.

There are many ideas being ventilated in the current public debate about energy prices and the pressures hitting the energy system.

But one issue relating to the gas industry hasn’t been given enough consideration – we are not letting the market work, and we are not letting the new mechanisms introduced only weeks ago do their job.

On September 29, the industry and the federal government announced a new heads of agreement (HoA) securing supply for the domestic gas market.

The deal means that LNG exporters will first offer uncontracted gas on competitive market terms to the domestic market before it is offered internationally.

Upward price pressures

There has been upward pressure on prices – driven by international upheaval from the Russian invasion of Ukraine, domestic underinvestment in new gas supply, and increased reliance on gas during coal generation outages and as the back-up when renewable energy is unavailable.

But the recent flow of GSAs shows the market is working. Competitively priced gas is being secured.

We are also seeing evidence of a market working in the recent Australian Competition and Consumer Commission (ACCC) update on prices.

It showed the actual prices being paid for gas supply contracts next year were well below what has been publicly claimed.

Prices agreed for supply by producers under contract to customers in southern states for 2023 averaged $12.38 per gigajoule.

The update showed that average gas prices paid to retailers have risen 95 per cent over the past 12 months, compared to an 11 per cent rise for producers.

The September HoA was combined with a new Australian Gas Industry code of conduct, which was developed during two years of consultation with the government and market participants, including customers.

It also was not given a chance to work.

After only 27 days, the code was effectively sidelined in the federal budget and put under review, with a view to making it mandatory.

Instead we have had a procession of voices calling for radical interventions that would dismantle the market and risk future energy security.

Caps will do the opposite

This threat was shown in a new report on the impact of gas price caps – demonstrating how caps would have the opposite impact to that intended. EnergyQuest’s A Review of Gas Cap Pricing found a cap would undermine the prospects for investment in future gas supply and damage the business case for gas storage and planned LNG import facilities.

These LNG imports could provide around 50 per cent of annual gas supply to the east coast within the next decade, according to EnergyQuest.

“Price caps do not address the cause of high domestic prices – lack of new gas supply and volatility in demand from the electricity market with the transition to renewables,” the report said.

We are already seeing this broad impact play out in the real world, away from the spreadsheets and modelling.

On Monday, ExxonMobil Australia’s Esso subsidiary said it was taking steps to “minimise the business risk of the current uncertain regulatory environment” and has opted to reduce its investment cycle from 12 to six months for the first time.

“The annual investment cycle has been crucial to the success of the Gippsland Basin Joint Venture, which has invested in Australia and supplied natural gas domestically for more than 50 years, but the current uncertainty requires an unprecedented approach,” said Esso.

As the company noted, new gas developments are not turned on at the flick of a switch – they require extensive planning, resources and capital, along with regulatory certainty.

This is one of the factors behind the pricing pressures being experienced on the east coast, where 80 per cent of supply comes from Queensland despite the strongest demand coming from the southern, more populated states of New South Wales and Victoria.

Illogical opposition to gas

Illogically, these jurisdictions are the most ideologically opposed to gas development, stifling investment through exploration bans and regulatory uncertainty over the past decade, despite their large populations relying so heavily on gas.

Ignoring the basic principle of the cheapest gas being the gas closest to the customer, these states pay at least an extra $2/GJ when they have to transport gas from Queensland.

These long-term negative policy environments are in part behind Australian Bureau of Statistics data on petroleum exploration, which routinely shows diminishing investment, dropping from $1.1 billion in the final quarter of 2014 down to $230 million in this week’s update.

The industry has shown its willingness to invest in exploration and supply for the nation, announcing $20 billion of investment in recent years.

But some governments are not planning for the future. A positive policy environment is critical, and that does not include ad hoc interventions that will damage the market.

The best way to put downward pressure on prices is to get more gas out of the ground and increase supply, which can deliver energy security, emissions reductions and substantial economic returns.

When they meet this week, ministers must avoid the temptation of radical interventions that ultimately lead to larger problems and higher prices for Australian households and manufacturers.

Samantha McCulloch is the Chief Executive of the Australian Petroleum Production & Exploration Association (APPEA).

Read this article via the AFR website here.