lack of an energy policy will hurt our economy

http://www.theaustralian.com.au/business/opinion/lack-of-an-energy-policy-will-hurt-our-economy/story-e6frg9if-1226651688339

Lack of an energy policy will hurt our economy

by: ANDREW LIVERIS
From: The Australian
May 28, 2013 12:00AM

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AS a proud son of Darwin, everywhere I go, I extol the virtues of the Australian way of living and doing business. Australia's forthrightness, our can-do work ethic, our commitment to free enterprise; these things are models for the rest of the world.

However, one aspect of Australia that I do not hold up as a model for the rest of the world is this country's energy policy. Australia's de facto energy "policy" is really having no policy at all.

And in this day and age, when countries compete like companies, Australia is in a poor position to attract new high-value energy-intensive investments.

Even worse, because of volatility in natural gas prices, Australia is losing existing investment commitments.

Australia has an abundance of natural gas resources. And yet the supply of natural gas available for domestic use is contracting. In turn, prices are shooting through the roof, causing Australian manufacturers to close up shop or shift their new investments to other places. This does not make sense. And it should not be the case.

Consider the US, where new drilling technologies have unearthed vast quantities of natural gas from shale formations. This new abundance has helped to reverse an overwhelmingly negative trend. For the first time in decades, manufacturing companies are re-creating high-wage, high-skill jobs that just 10 short years ago many thought were gone for good.

In contrast, in Australia, all of our expanded natural gas supply is committed for export. While there is certainly merit to sending excess natural gas abroad as LNG, natural gas is fundamental to the domestic economy as a fuel and as a raw material in manufacturing.

Natural gas in the volume Australia has should make manufacturing competitive, especially on power costs, and that underpins the opportunity to build scale as a competitive exporter of finished high-quality goods.

We can benefit from our highly skilled and trained workforce, like Germany and Singapore, and be as competitive as the US on input costs. Australia can be a dynamic advanced manufacturing economy.

Manufacturers like Dow Chemical use natural gas to make everyday products, from food packaging to your mobile phones. Transformed through the manufacturing process, natural gas actually creates eight times more value for the economy than when it is burned or exported.

So we don't just export it as a raw material, but convert it to higher value, more hi-tech jobs and revenues as a result. Australia, with its stability and rule of law, should be a haven for such industries.

Of course, there is a reflexive urge among some to dismiss calls for a robust energy policy. Detractors say we should let the free market govern how gas is used instead of implementing a policy that ensures the leverage of this resource yields maximum advantage. But this is a false choice. Indeed, we can do both.

We can let the market govern the consumption of our natural gas and set a smart policy that considers our domestic needs at the same time.

This is fair trade. Rules-based trade. It is about having policies that ensure that the market is working. After all, the laws of supply and demand may drive my business, but that is not what drives the natural gas export market in Australia.

Because of high transaction costs in transporting natural gas, there is no "world price" of natural gas, only contracted prices. And these prices, set to the world oil price, are then imported back to our shores, forcing Australia's homes and factories to pay an unnecessary premium for energy.

On the supply side, challenges in Australia's domestic gas market are even more basic.

In the US, gas in the ground is owned by individual landholders who have every incentive to monetise their property. But a big part of the problem in Australia is the lack of this kind of competitive behaviour at the source.

In Australia, the gas in the ground is owned by the state, which allows permits for exploration and production. And the bulk of these permits are held by oil and gas companies.

Furthermore, while the US benefits from ample pipeline infrastructure that brings incremental gas to market and allows the market to be contested, Australia's pipeline infrastructure is limited and its ownership is heavily concentrated.

As you can see, this is not a simple argument. We are not only deciding whether to encourage more LNG exports or to set aside more natural gas for domestic use. This debate is bigger than that. This is a debate about Australia's economic future.

That is why we must put in place a policy that delivers the benefits of functioning domestic market where supply is ample: natural gas prices that are affordable and stable.

Australia's energy resources are a great gift -- one that, if used properly, can spark a domestic manufacturing renaissance that will create many jobs and widespread wealth.

We cannot afford to waste this opportunity.

Andrew Liveris is the chief executive of Dow Chemical.