17 Aug 2014

The economic transition taking place in Australia today is delivering winners and losers because that is the nature of change.

The role of government is not to resist change and to prop up the losers but to facilitate the shift for the long-term benefit of the majority of Australians.

This requires seeing self-serving calls for intervention for what they are.

No area of the economy is experiencing more change than the energy sector and none more so than gas supply. Not surprisingly, then, we are also seeing a lot of reaction from vested interests struggling to cope with our gas revolution.

Opinions abound but facts are important in this debate.

For example, 2012-13 saw Australia ship 24 million tonnes of LNG to customers in Japan, China and South Korea from three projects.

By 2020, Australia will have 10 LNG projects and they will be shipping some 80 Mt to Asia.

Over 20 Australian and international companies are funding this transformation which will see almost $65 billion into the national economy each year, accounting for 3.5 per cent of GDP.

It will be delivering about $13 billion to the Australian community in taxes, with more upside potential in future years.

In a country consumed with debate about government budget problems, this contribution is not to be taken lightly, not least because it comes without any form of subsidy.

In the energy debate, however, the value of LNG export is frequently overshadowed by other industry sectors seeking to be shielded from its domestic effects. They lay many of their own competitive challenges at the feet of the gas industry.

But even the modelling that manufacturers have commissioned, most recently by Deloitte Access Economics, shows affirmatively that the growth of the gas industry is of net economic benefit to Australia boosting GDP significantly.

Deloitte’s report also shows the high value-adding gas contributions compare favourably with quite low value-added contributions associated with manufacturing.

Some of this boost to GDP comes from the opportunities provided by the growing gas industry for other parts of the economy.

Gas pipelines are an example.

Each of the LNG operations in Queensland is fed by more than 400 km of large transmission pipelines, purpose built at a cost of several billion dollars, and the Ichthys LNG project based on Darwin requires an 890 km subsea pipeline, one of the largest and longest built anywhere.

As additional projects are developed, more pipelines will be needed – and the prospects for this happening are good even if the global competition for LNG development is fierce.

A recent report by McKinsey & Co has found that LNG export is one of three industries in which Australia is truly globally competitive.

The consultants say that, if all the LNG developments currently proposed for Australia are actually built, they will add another $320 billion to national GDP over their lives, creating 150,000 jobs and contributing another $5 billion a year in taxes for the community.

In this environment, the prospects for gas pipeliners look good, too.

It is surprising, therefore, to find their industry body, the Australian Pipeline Industry Association, taking a narrow and inward-looking view of the gas sector (see “Local market needs our gas”, The Australian, 28 July).

Rather than focusing on the additional role pipelines can play in facilitating export and domestic gas supply, APIA is calling for restrictions on producers that will inhibit development of the market.

It would be far more in the national interest for it to focus on what additional role pipeliners can play in bringing more avenues of supply to domestic customers.

Two players – APA Group and Singapore Power International (through its subsidiary Jemena) – are the principal owners in the gas transmission sector. There is little depth in the market for pipeline capacity affecting the incentive for owners to offer competitive prices. This structure raises a number of questions.

Is existing pipeline infrastructure really used to its full potential?

What opportunities exist for improving the efficiency of the movement of gas through pipelines servicing the domestic market?

What additional opportunities are there for gas storage to smooth out the peaks and troughs in domestic gas demand?

How can the availability of information be improved to support a more transparent and efficient pipeline trading market?

The Council of Australian Governments’ energy ministers are at present investigating improved pipeline trading capacity.

Rather than support the proposed changes, the pipeline industry seems resistant to change.

Rather than opening their minds to overcoming barriers to providing more gas supply, they are throwing up impediments that hinder the timely and efficient development of gas production.

As the debate over gas has shown time and again in the past 2-3 years, it is easy to lose track of the main game – the major opportunity to develop the industry still further as a key prop of the economy and a big contributor to Australians’ standard of living – and to focus on narrow, sectoral interests.

The challenge for governments, federal, state and territory, is to hold the high ground – as most are doing in resisting the hard lobbying for gas reservation – and to help communicate to the “sensible middle” of the population the benefits of doing so.

This really is in the national interest.

This blog post was first published in The Australian on Monday 18 August.