As the Albanese government reminds us regularly, defensively, the current energy crisis is global, driven largely by the war in Ukraine and the curtailment of Russian gas exports to Europe, which have driven prices through the roof. But, says Rod Sims, in at least one way Australia’s problem with high power prices is unique.
“Australia has the highest, by far the highest, domestic gas prices of any gas-exporting country,” says the former head of the Australian Competition and Consumer Commission (ACCC), who spent much of his 11-year tenure working to rein in the greed of Australia’s gas miners.
“Of course, if you import gas, you’re going to pay the world price. But no country that exports gas pays anything like the prices we are paying. None requires that their local consumers pay the international price, if they’ve got gas themselves. It just does not happen.”
Except in Australia. The budget forecast electricity prices would rise 56 per cent this year and next, largely due to gas prices, which have already risen sharply, and are predicted to increase a further 44 per cent.
Energy prices are feeding inflation. They are, in the words of Treasurer Jim Chalmers, “strangling industry”. They are also adding to the load of Australians already burdened with escalating mortgages, rents and other costs of living.
It is not the fault of the current government, but Labor must quickly solve a problem that has been long in the making, and which has come to a head because of the Ukraine war.
Sims sees two issues to be addressed – call them problem east and problem west. Problem east relates to gas producers trying to sting consumers in Australia’s eastern states by charging them inflated global prices. Problem west is different. Because the Western Australian government had the foresight to insist, in 2006, that 15 per cent of gas produced in the state should be reserved for local users, prices there are now about one-fifth of those in the east. Problem west, says Sims, is that the federal government gets “close to nothing” in tax from offshore gas operations.
In both cases, the giant gas extraction companies are making enormous windfall profits at the expense of Australians.
Australia produces vast amounts of gas – many times more than is needed to supply the domestic market. It is one of just five nations that together produce three-quarters of global liquefied natural gas (LNG) exports, along with Qatar, the United States, Russia and Malaysia. Australia and Qatar are the big two, each accounting for about 21 per cent of global trade.
As Minister for Industry and Science Ed Husic told ABC Radio: “This not a shortage of supply problem. This is a glut of greed problem.”
The value of Australia’s gas exports has more than doubled, from about $30.5 billion in 2020-21 to about $70 billion this year. According to the latest official forecast by the federal Department of Industry in its September Resources and Energy Quarterly, they will reach $90 billion in 2022-23.
As the department and the ACCC both point out, this was not because the gas producers increased production to any significant extent. It was simply because prices went up.
“Their revenue went up with no increase in their costs,” says Mark Ogge, principal adviser for climate and energy with The Australia Institute.
Which is to say, they made super-profits and should be hit with a super-profits tax. In a recent paper for the institute, Ogge calculated those super profits over the past year to be at least $26 billion more than the producers’ average revenue over 10 years.
So huge windfall gains are being made off a resource that belongs to the people of Australia, and are flowing straight to the bottom lines of gas companies that are, according to The Australia Institute’s analysis, 95.7 per cent foreign owned.
In the ACCC’s interim gas inquiry report, released in August – its 13th since 2017 – forecasts show the east coast producing 1981 petajoules of natural gas next year, 1299 petajoules of which is expected to be exported under long-term contracts with overseas buyers.
The remaining 682 petajoules “can be supplied either to the domestic market or to overseas markets”, but if it were all exported “the domestic east coast gas market is likely to be 56 PJ short of gas needed to meet forecast demand for 2023”.
Of course, says Sims, the big LNG producers, which control about 90 per cent of east coast gas supply, would rather export it to cash in on high global prices. Or, alternatively, sell it here at global prices that would be “ruinous” for Australian gas users.
Issues of cost and domestic supply shortages, he can attest, have been a recurring problem ever since three big export terminals began operating in Gladstone in 2015, notwithstanding the fact that producers had promised they would not affect the domestic price when they started operating.
Many argued at the time that three export facilities was one too many, and would result in domestic supplies being diverted into exports. Sure enough, right from the start the new docks hoovered up domestic gas supplies to meet international contracts.
“Prices went to $20 a gigajoule when the world market price was probably $10 or less, and there wasn’t enough gas for the domestic market,” says Sims.
“So the Turnbull government got them around the table. I was in the room at the time, and said, you’ve got to make sure you supply the domestic market. It’s ridiculous having prices in Australia double what the world price is. And that basically sorted that problem out and prices came down to a bit below $10.
“That agreement came to an end … and the Morrison government negotiated an extension. And recently the Albanese government did the same thing, to make sure there’s enough supply.”
But the heads of agreement that the new minister for Resources, Madeleine King, struck with the producers six weeks ago appears to have fixed only half the problem, says Tony Wood, energy program director at the Grattan Institute. “I think the companies got away with a lot. They agreed to do something they would have done anyway, which was basically supply the domestic market,” he says.
The deal did not solve the issue of price. It provides only that “in respect of uncontracted gas … domestic gas customers will not pay more for the LNG exporters’ gas than international customers”.
Apparently others in the government also think King made a poor deal. On Thursday Husic, who represents business users of gas, said some contracts offered since the heads of agreement were actually more expensive than those before it, and the gas companies remained of the view “they can keep doing what they’ve been doing”.
As for how to stop them, the government seems indecisive. “We’re examining all of the options and we’ll continue to do so,” Albanese said on Wednesday.
One option, taken up by some European nations, is for the government to compensate consumers for the extra cost of energy. But this would be hugely expensive to the government and potentially inflationary. And frankly ridiculous since, as Sims says, Australia doesn’t have to buy gas at world prices.
A second possibility, now advocated by the Victorian and New South Wales governments, among others, is to bring in a reservation policy similar to the one in the west. King rejects this on the basis that applying such a policy retrospectively could deter investment and potentially breach World Trade Organization rules.
Shadow Treasurer Angus Taylor doggedly maintains the position he championed as Energy minister in the Morrison government, of a “gas-fired recovery” involving greatly expanded gas extraction. But we already have plenty of gas and the long lead times involved in providing more would do nothing to solve the immediate problem.
Says Wood: “I don’t know what Angus is talking about. I don’t know of any gas that can be turned on that would improve the situation in the short term.”
The simplest solution, say both Sims and Wood, is the forcible separation of domestic and global prices. In short, threaten the greedy corporates.
“Whenever you’re getting somebody to do something that’s not in their self-interest, then you have to have a threat. And it has to be real. And the good news here is we’ve got export controls,” says Sims.
It would not be necessary to threaten their existing contracts, so no problem with sovereign risk. It would be enough for the government to warn they could be prevented from exporting uncontracted gas. “All I’m suggesting is that you’ve put enough gas on the domestic market to make sure that that price gets below $10. And it’s not a massively large amount of gas,” Sims says.
Even then, the gas export industry would remain obscenely profitable because of high global prices, which brings us to back to that issue the government is under pressure to resolve: how to claw back some of those billions of dollars for Australians.
Polls indicate a majority of Australians, and a growing number of governments around the world, want a super-profits tax. Sims says we’ve in fact already got one. “That’s what the petroleum resource rent tax is. It’s just that it doesn’t work.”
The PRRT imposes a 40 per cent tax – on top of ordinary company tax – on most, but not all, offshore oil and gas production. But, says Dr Diane Kraal, a senior lecturer at Monash University’s business school, who specialises in resource taxation, the PRRT raises “almost nothing” because costs incurred during the exploration and construction phases of projects can be expensed against future tax liabilities.
“The credits are carried forward and the whole amount is uplifted annually until such time as there are sufficient petroleum receipts to cover expenditure,” she says.
Without getting too technical, these uplift rates were set extraordinarily generously, so that some projects will never pay any PRRT. Most won’t pay much, and not for long time. Kraal would scrap the whole system and replace it with a new regime of royalties.
Sims says it should at the very least be dramatically overhauled to make it less generous to the miners. “If you fix it up, depending on how you fix it up, there’s many billions of dollars per year to be collected,” he says.
So, far from being a curse, high global gas prices could be a blessing for Australia. We could be one of the few countries that don’t have to just accept the global price. We could reclaim billions from the fossil fuel giants, have a competitive advantage in manufacturing, and neutralise a major factor pushing up inflation.
But it requires courage from government to stop “examining the options” and do something.
This article was first published in the print edition of The Saturday Paper on November 5, 2022 as "Wasted energy".
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