Opinion

Gas wars flare for the Albanese government

Ministers can’t agree on what to do about unacceptably high prices and producers are resolutely opposed to price caps.

Jennifer HewettColumnist

Oct 18, 2022 – 5.55pm

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Despite Labor’s promise to boost local manufacturing, the Albanese cabinet is suffering a bout of policy paralysis about how to achieve this given the outlook for international gas prices.

The recent broadside about the unacceptably high domestic gas prices from Dan Walton at the Australian Workers’ Union adds to the pressure. But it’s not just the union movement warning of the dire consequences of inaction.

Energy-intensive manufacturers on the east coast are sounding increasingly desperate about their ability to survive, let alone thrive. Little wonder Industry Minister Ed Husic has been insisting more must be done to make gas more affordable for Australian customers. But what exactly?

The government clearly doesn’t want to follow the UK and other European governments in giving massively expensive subsidies to businesses and households to compensate them. Treasurer Jim Chalmers has also rejected imposing windfall profits taxes on producers getting the benefits of much higher prices.

That leaves some form of potential direct action on prices. The government is trying to figure out its least-worst options on this issue. Is insisting on greater pricing transparency enough? What about stiffer regulatory tests? Perhaps even a price cap of some sort?

“They just don’t know what to do,” says one observer. The government has clearly been reluctant to make a drastic intervention. Yet it knows that without it, domestic prices will remain at unprecedented levels – with the prospect of worse to come next year.

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Expressing political sympathy about the impact won’t cut it.

Nor will the efforts of Resources Minister Madeleine King to secure an adequate supply of gas by making a deal last month with the Queensland-based LNG exporters to avoid any shortfall for the domestic market next year.

This deal means non-contracted gas must first be offered domestically rather than simply exported. Yet the heads of agreement and minor changes in the attached code of conduct for gas producers had nothing meaningful to say about prices on offer for domestic users – either on the spot market or longer-term contracts.

They just can’t be more than international prices – hardly reassuring given the global frenzy to find new supply at whatever cost following the collapse in Russian exports to Europe.

Although today’s domestic gas prices are not nearly as high as that or as they were during the latest energy crisis last June, they are still multiples of what they were pre-COVID – both for spot and new longer-term contracts.

Innes Willox from the Australian Industry Group was scathing about the result.

“The agreement is crushingly disappointing for Australian industry reliant on gas to make the products that Australians need,” he said. “As they roll off existing gas contracts, Australian manufacturers of bricks, chemicals, plastics, paper, aluminium, steel, fertilisers, cosmetics, gloves and masks will increasingly face crippling energy bills they will have to pass onto consumers.”

King had loudly threatened export controls to concentrate the minds of gas producers. But she knew this would alarm Australia’s trade partners while high LNG prices also have obvious benefits for Australia’s terms of trade. So King preferred to avoid triggering the Australian Domestic Gas Security Mechanism introduced five years ago during yet another made-in-Australia energy crisis.

“I am pleased we’ve been able to work with LNG exporters to avoid the shortfall, and prevent the need to activate the ADGSM,” King told an oil and gas conference this week.

“But that said we need to be mindful of the impact high gas prices are having on manufacturers. This Government is committed to doing more to support manufacturers and I expect gas companies to do their part too.

“We need to continue to invest and promote exploration.”

Quite. But as her Cabinet colleagues argue, new gas development is not only increasingly difficult, not least because of the Victorian government’s opposition. It won’t help lower prices in the short term.

Instead the Australian Competition and Consumer Commission metric for export parity pricing translates into around $60 a gigajoule for Australia’s East Coast this year and next year, before falling to $30 in 2024.

And although today’s domestic gas prices are not nearly as high as that or as they were during the latest energy crisis last June, they are still multiples of what they were pre-COVID – both for spot and new longer-term contracts.

Spot prices are about $20 a gigajoule – compared with about $50 a gigajoule in mid-June – but this is much higher than pre-COVID norms of about $8. Contract prices for terms of a few years are usually cheaper although notoriously opaque. Producers suggest some new contracts are being offered at about $15 a gigajoule but many businesses complain it’s closer to double that.

With international prices showing no sign of easing as the northern winter arrives, it’s also more likely domestic spot prices will follow the familiar pattern of converging more closely with those offshore. But the terms of contract pricing for Australian businesses will be key, too, although less clear-cut.

That’s unless gas producers resist the temptation of higher prices – or are forced to do so by the government. Complicating the issue, the imposition of any price cap through national gas laws would probably have to be agreed on by state and territory governments.

Ben Eade, CEO of Manufacturing Australia, argues members rolling off old contracts and trying to negotiate new ones must pay three to four times previous levels.

“Absent something being done to remedy that, you really have to question how you could possibly invest new capital if you are an energy-intensive manufacturer,” he said. “If we are serious about solving this East Coast gas problem, we have are going to have to see further intervention and particularly intervention that addresses price.”

Gas producers are just as firm in their opposition, warning of the damaging impact on investment and confidence.

The government is running out of time to decide what’s the lesser energy evil.