not just a theory

So according to AGL, 20 days without gas in winter 2016 doesn't sound like much? Well good to know that the 20 days could be spreaded throughout the 90 days winter period, thus making business planning and factory operation in Western Sydney almost near impossible!

Casino doesn't have to suffer this knid of gas shortages, uncertainty and cost.

It's Common Sense vs Scare Mongering NIMBYs.

Oh yeah Rosella E01

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March 15th, 2014 | Author: Keith Orchison

The economic working papers produced by the AGL Energy economics team of Paul Simshauser and Tim Nelson (and various colleagues) are not for the fainthearted reader.

Simshauser is not just the company’s chief economist, he is also professor of economics at Griffith University. Nelson, who is head of the company’s economics and sustain ability unit, has had a long involvement with the University of New England.

The title alone for their new paper — “Solving for ‘x’ — the New South Wales Supply Cliff” (available now on the company website) — is enough to put the fear of a deity in to those of us who struggled with maths at school, but the gist of what they are saying is a must-read for the State’s policymakers and a raft of others.

Being economists, they just love expressions like “non-trivial” — as in “A non-trivial quantity of existing gas contracts currently supplying NSW will mature by 2016. Much of that gas has been (now) recontracted to LNG producers in Queensland, thus creating a gas supply cliff in NSW.”

The pair’s point, enmeshed in analysis from their dynamic partial equilibrium model over which your’s truly skips at speed, is that, absent new supply-side development, unserved load events in the State “remain more than a theoretical possibility.”

This is the bit that needs to be communicated to the State community, factory owners and the politicians in the direct firing line (including a number in Canberra when the issue spirals in to a national economic problem) as some in the media and on the sidelines continue to assert rather loudly that the whole supply threat issue is confected for the benefit of big, bad producers and retailers.

With footnotes and references, the Simshauser and Nelson paper runs to 36 pages, so all you get here is a paraphrase but it’s the shorthand, I think, that needs to be seriously appreciated by the consumer and policy players.

In passing, the pair answer the squawkers about how there wouldn’t be a domestic gas supply problem if we didn’t have all that dreadful LNG development. “It was clear to (coal seam gas) resource owners (they say) that the east coast market was not large enough to enable the monetisation of reserves in suitable timeframes and at the scale necessary to maximise profit, so developing an export market was a logical strategic solution.”

Of course, for those who faint at the mention of profits (or pretend to do so while, in more than a few cases, watching their investment returns, including super, through slitty eyes), this is the root cause of the whole problem.

To them, one merely says that the alternative was a pipeline from Papua New Guinea and would they care to guess at its delivered price to Sydney in 2016?

Coming back to Simshauser and Nelson, the pair point to the “irony” of the present restrictive NSW policies on CSG development compared with the accommodating approach in Queensland — the former is the region almost totally vulnerable to a large demand shock — and they say the firmly expressed South Australian view (no commercial arrangements to be broken to help out NSW) is also going to be held north of north of the Tweed and in Victoria.

One of the issues management problems with situations like this is what I like to call “MEGO” — an acronym for “my eyes glaze over,” a frequent difficulty in translating for politicians stuff like “an inter-temporal mismatch between supply and demand is predictable because gas consumption patterns display diurnal cycles with marked seasonal variation.”

Huh?

Translation: there are going to be days in winter in the relatively near future when there’s not going to be enough gas to meet all NSW needs.

This is something about which the deniers (of the looming State crisis) get very worked up because (they say) it is a hollow threat. Simshauser and Nelson deal in some detail with those in the denial camp who believe the NSW supply cliff can be avoided by rapidly expanding gas pipeline capacity and storage infrastructure from Victoria.

Orchison’s shorthand is that big-time augmentation of this capacity doesn’t stack up with the moneylenders: the long-run outlook is financially dodgy because of demand uncertainty over the life of such projects.

In the real world, sadly (if you are a bottom-of-the-garden fairy), people want a rather large degree of certainty that they are going to get their money back plus the best possible return on putting it to work. This, too, is not just a theory — it’s how the world works

And, the AGL pair point out, when one finally gets to the point in NSW in the depths of winter where gas supply is inadequate, the State minister for energy is required by law to step in and direct progressive shedding of large industrial users from the supply chain until available volumes meets demand. That’s also not just a theory.

Simshauser and Nelson point out that, in this situation, gas-intensive industrial users in NSW who have contracts maturing in 2016-17 have, in essence, three choices: pay substantially higher prices to get supply, cease trading or reduce production.

“Under these circumstances,” say our pair of economists, “it is difficult to imagine employment levels associated with NSW manufacturers being completely unaffected in the short run.”

No prizes for how the “Daily Telegraph” would translate that in to a big, black headline.

Now don’t draw alarmist conclusions, say Simshauser and Nelson. Not all manufacturers in the State are gas-intensive and those that are represent a small share of national employment. But there will be locations where the impact really hurts — they point out that the Sydney suburb of Smithfield, for example, has at least 12 large gas-consuming sites employing 17.3 per cent of its local workforce.

(Of course, the demand story is complicated. In another example, a big chunk of NSW gas demand in recent years has gone to power production, but, for a range of reasons, east coast generators’ needs are falling away — possibly, the pair, say from 30 per cent of total weak peak gas demand in 2012 to less than 10 per cent in 2018.)

Buried in the paper’s middle is a piece of modelling that postulates what might happen in winter 2016 is that as many as 48 large industrial customers could need to be shed from the supply system over 56 days. It’s not a prediction — it’s a scenario, but it is also not just a theory. It involves real company needs for gas and a real issue with adequate supply.

There’s a whole chunk of the Simhauser/Nelson paper dealing with gas reservation proposals and why they are undesirable, including this sentence: “(Such a) policy in Queensland seems an unlikely outcome and almost impossible (without constitutional amendments) as a resolution to transient unserved load events in NSW in 2016.” Quite.

The long and short of the AGL paper comes in this observation: “The most obvious policy response is to remove non-scientific, and therefore unnecessary, regulatory and policy barriers to gas exploration and field developments.”

That,too, is not just a theory.

From where I sit, it’s just common sense — which, in this respect, seems to be in very short supply where it matters in NSW policymaking.

The AGL paper demonstrates why this is a bad thing.

http://www.coolibahconsulting.com.au/TiP/2014/03/15/not-just-a-theory/