The unique conundrum of natural gas in Australia has just heated up. The country’s government has unveiled a plan that will effectively allow it to cap and restrict exports of Australian LNG to meet domestic shortages of natural gas. Predictably, Australian LNG producers – who have invested billions to push Australia to become the second-largest LNG exporter in the world – reacted negatively, while domestic consumer and manufacturer groups welcomed it.
Why is this happening?
Australia produces natural gas on both coasts. On the west coast, where the population is sparse and the reserves are vast, the LNG boom there has been geared towards export to Asia. Natural gas produced in the Northern Territory follows a similar pattern, exported as LNG through the Darwin plant. However, in the southeast, natural gas has two outlets – export as LNG through three of the east coast plants, or domestic demand to power a region that accounts for more than three quarters of Australia’s population, industry and manufacturing.
A combination of factors – higher-than-expected costs, global LNG glut and depressed prices – have led the gas producers in the east to choose to sell their gas as LNG to eke out better profits. This led to the situation of the Gladstone LNG plant diverting third-party gas to be exported as LNG, an unusual occurrence that came about mostly due to poor logistics on Gladstone’s part. (The two other east coast LNG plants – Shell’s Queensland Curtis and ConocoPhillips’ Australia Pacific LNG – remain net gas suppliers to the Australian market). But it comes at a time when Australia’s domestic gas prices are soaring, translating into higher power prices for consumers and manufacturers, in what the Australian competition regulator is calling a ‘disaster.’
"Suffering from high prices, Australians are wondering aloud why the country is sending so much of its gas overseas when its own citizens and businesses are lacking"
It is a political hot potato that has certainly caught the attention of the federal government. Malcolm Turnbull’s plan to tackle the situation is this: empowering the government to restrict exports of LNG during times of domestic shortage. Acting on advice on the market operator and regulator, the government will be able to demand unilateral control of LNG volumes, coercing firms to send that gas domestically instead of overseas, possibly in defiance of existing LNG trade contracts. The plan will come in effect July 1, and producers are already moving to lobby against it – with reasons ranging from opaque details discouraging investment to being a knee-jerk intervention that will achieve nothing. Instead, they are lobbying for the government to open up more onshore drilling to ease the supply crunch, a move that will do nothing to ease the current urgent shortage.
The devil is in the details. On the surface of it, the government having power to dictate flows of natural gas to favour domestic consumers in times of national shortage is logical. The question is how. In countries like Malaysia or Indonesia, state oil firms like Petronas and Pertamina will perform the national balancing act on behalf of the government. But Australia is a free market; and the companies it is restricting from selling LNG are the ones that it will depend on to redirect the gas domestically. Interventions like this need to be well thought out, otherwise, as some analysts have noted, could have ‘long term unintended consequences for energy security and the economy.’
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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