Gas investment at risk
REPORT SAYS INTERVENTION ‘EXTREME’
THE Australian government’s intervention in the domestic gas market is arguably the most extreme globally and poses a significant risk of killing investment in new gas supplies, industry analyst EnergyQuest says.
EnergyQuest’s report for the March quarter also says the government’s $12 per gigajoule emergency price cap for east coast gas would force companies to discount their product to the tune of more than $2bn against international spot prices, should they seek to fill the expected shortfall.
The report, released on Tuesday, says “the OECD gas market rule book has been thrown out the window, at least on the east coast, with a move to cost-based pricing’’.
“The proposed changes are a stunning departure from decades of gas market regulation and severely damages Australia’s global reputation as a safe place to invest,’’ the report says.
EnergyQuest says the industry actually bolstered gas reserves on the east coast last year, with the proved and probable reserves replacement ratio coming in at 121 per cent, and while supply in 2022 was the highest in five years, this trend could soon reverse.
“There are certainly green shoots appearing but with the risk that they will be killed by the government intervention,’’ the report says.
“Although the (Ukraine) war was a pretext for the Australian intervention, it brought to a head long-running tensions between east coast gas producers, buyers and governments flowing from decisions more than a decade ago to build a world-scale LNG industry based on largely untried, unconventional gas within a largely unregulated free market but in a federation with powerful state governments.
“Until the new rules around reasonable pricing are clear, explorers and producers alike will struggle to justify ongoing investment in supply.”
The report also says the business case for liquefied natural gas imports has “evaporated for the time being’’, with the uncertainty around government intervention in gas prices making investors wary.
The report says there is the risk of an accelerated decline in the availability of gas over the longer term if there is an extended investment strike, and there is a risk to domestic users of a gas shortfall.
EnergyQuest says one conundrum presented by the $12 price cap is that public companies are obligated to maximise value for shareholders.
With the $12 cap “a fraction’’ of LNG prices paid over the past year, it’s a hard case to make that companies should be looking to bring on more domestic supply, EnergyQuest says.
EnergyQuest says it seems the federal government either doesn’t understand that there will be a material impact on investment from its actions “or it simply doesn’t care’’.
The report says comments from Minister for Climate Change and Energy Chris Bowen that the gas sector was being “shrill’’ in its response to the interventions indicated that the latter could be the case.
“The government’s plan appears to be to rely on redirected exports as needed to ensure domestic supply at a ‘reasonable price’ while it develops storage capacity for renewables, past which point it may not support any gas development at all,’’ the report says.