07 Nov 2022
Op-ed: APPEA Chief Executive Samantha McCulloch on why price cap hype casts an investment cloud over gas
This article was originally published in The Australian.
As the debate over energy prices roared across the media in the wake of the Federal Budget, new domestic gas price data from several major Australian gas companies went largely unnoticed.
While commentators lined up to call for gas price caps – some even suggesting a limit of $10/GJ – several east coast gas producers reported results with average realised prices between $8.50/GJ and $13/GJ.
For example, Beach Energy said its September quarter price was down 3% to $8.50/GJ.
Cooper Energy reported $9.06/GJ while Australia Pacific LNG reported $12.44/GJ, lower than its LNG sales at $19.52/GJ.
Earlier, Senex Energy, in its last report before delisting, reported a price of $7.60/GJ.
The gas market is complex and these figures underscore the misinformation about energy and contract gas prices as well as proposals for intervention in the gas market.
To get the best outcome for Australia, governments need to recognise that the energy system as a whole is under pressure. Effective solutions will need to be found across the energy supply chain, rather than targeting only one part of it.
Focusing on gas prices in electricity generation is also misleading because coal – now rightly being identified as a major problem given its soaring price – and hydro more often set the price of power than any other energy source.
For example, in the second quarter of 2022, in NSW hydro set the price 48% of the time, coal set the price 34% of the time, with gas only doing so 17% of the time.
Along the east coast of Australia, gas is setting the power price less than 20% of the time. It also accounts for less than 7% of electricity generated in the national energy market.
In terms of gas prices, most business users have supply locked in at lower prices because most of the gas sold to industry is on long-term contracts that cover about 90% per cent of the market.
It is important to note that long-term contracts were still being offered to businesses at the start of this year for between $6.70/GJ and $9.40/GJ.
This underscores the point that regulatory price intervention may have a much smaller impact for manufacturers than what some claim.
But it will have a much bigger impact on the broad strength of the Australian economy than what those calling for caps have admitted.
Price caps will undermine investor confidence in the new supply that is critical to putting downward pressure on prices – creating more problems down the road.
It would also obviously mean less revenue, less profit and less economic contribution for cash-strapped federal and state governments.
That means the industry’s strong government receipts – like recent forecasts from our gas exporters of delivering an extra $9 billion in Petroleum Resource Rent Tax, corporate income tax, state royalties and excise this financial year – will be negatively impacted.
Are state governments like Queensland, where almost $6 billion of gas royalties are forecast in coming years, happy with a price cap to limit the revenues from the gas sales they rely on for revenue in order to build hospitals, roads and schools?
A price cap is not the only intervention being discussed and each measure or change, even if only threatened, chips away at investment confidence.
Whether it be suggested changes to the industry-led Code of Conduct; the recent announced changes to the Australian Domestic Gas Security Mechanism (ADGSM); the additional powers to the Australian Energy Market Operator (AEMO) to intervene in the market’s operation; the ongoing Australian Competition and Consumer Commission (ACCC) inquiry into the gas industry; or the Budget’s cuts to carbon capture and storage funding (despite the technology being crucial if Australia is to meet its net zero goals), each sends a message that rattles investment confidence.
Ultimately, it comes down to simple maths when the numbers needed to make large multibillion dollar, capital-intensive investments stack up financially frequently change and the policy environment shifts again.
And it doesn’t just risk new investment and supply – it risks the associated and substantial economic, emissions reduction and energy security benefits of that supply.
It is ironic that the source of much of the debate around gas prices and intervention at the moment is Australia’s world-leading LNG export industry.
Critics often try to paint our gas exports as the problem for pricing pressures but export levels have actually stayed flat or slightly down this year.
And anyone who knows the fundamentals of business and encouraging investment would see the policy environment that fostered the global success of our LNG exports as an example of the kind of policy solution Australia needs now.
In little more than a decade, the gas industry invested over $300 billion in seven new LNG projects which are now set to produce record-breaking export earnings of $90 billion this financial year.
Critically, this investment was supported by positive investment policy environments from federal and state governments in Queensland, Western Australia and the Northern Territory that laid the foundations for the returns we see today.
These governments and their constituents are now reaping the benefits – the projects are underpinning our domestic energy security, delivering billions of dollars in new revenues and supporting thousands of jobs.
Consider the success of this collaboration between industry and government in the national interest against the current short-sighted debate we see today.
We need new investment in new gas supply, not intervention, if we are to get the best outcome for Australia.
Samantha McCulloch is the Chief Executive of the Australian Petroleum Production & Exploration Association (APPEA)
Read the original publication via The Australian here.