The unexplainable, under-reported gas debacle

I'm writing this post as a backgrounder and as a reference for future posts because you can't talk about energy policy in Australia without a basic understanding of the ridiculous story of the gas market.  

If you know Australia you know we love a good monopoly and regulatory capture and political interference by large industry lobby groups is a national sport, and there is no better example of this than the eastern Australian liquefied natural gas story.

Australia is the world’s second largest exporter of liquefied natural gas (LNG) , yet unlike the country in first place, Qatar, pays a very high price for domestic gas. 

Unlike Western Australia which began it's LNG export journey back in 2002 , until 2014 all of the gas produced in South Australia, Victoria, Bass Straight, NSW and Queensland was sold, via an extensive pipeline network to electricity generators, industrial users and households along the east coast.  The gas was abundant and relatively inexpensive. 

While cheap gas was great for customers it wasn't great for gas companies (Santos, Shell , Origin, Exxon, Woodside) , who looked over to west coast and dreamt of a whole new customer base in Asia and a connection to the international market. 

In 2007 plans were set afoot to build gas liquefication plants in Queensland. By 2014, after major cost and time blow outs three  plants were built at a combined cost of $60bn.  These costs were far beyond the original estimates leading to massive write-downs, but in the long term that did not matter because the east coast gas industry had succeeded in its long-term  plan to push domestic gas prices up significantly. They could now use their monopoly power to claw back the overspend from the unwitting public, with help of a complicit government.

Over the next few years the east coast gas industry hoovered up all of the domestic gas and sent it overseas. Australia’s gas production surged to meet foreign demand while domestic prices soared.  Australia's were constantly warned of gas shortages , even though Australia produces three time the amount of gas required to meet the demand of Australian customers.

Absurdly there have been a times over the last few years where people in Tokyo were paying less for Australian gas than locals, even though it had to be liquified, put in a ship and sent across the sea.

To rub salt into the wound  Qatar pockets over $20 billion in royalties per year which is used to fund public programs, while Australia barely gets $1 billion.  A quick search of tax office data shows the gas industry has an effective tax rate of around 1%.

In 2021 , as Russia invaded Ukraine, global gas prices rose sharply and once again the domestic gas price in Australia shot to the moon crippling Australian manufacturing while the gas industry gained super profits on war profiteering. 

At this point you would wonder why Australia would have ever have done this, and why there isn't some way of fixing it.  

Western Australia has a gas reservation system , it guarantees that 15% of production is available in the domestic market and is has been very successful in ensuring the WA consumer is supplied with cheap gas.  

It turns out the East coast has one too, it is called the Australian Domestic Gas Market Security Mechanism

The Australian Domestic Gas Market Security Mechanism (ADGSM) was introduced in 2017 to “ensure there is a sufficient supply of natural gas to meet the forecast needs of energy users within Australia.” The mechanism enables the Minister to impose export controls on LNG exports if she or he determines that “LNG project’s use of domestic gas” will result in a shortfall in the domestic market

Ever been used ? Nope.  Not even in the peak of the Russia war. And here's a chart of the impact of the differential in the markets.

And it's not like the government doesn't know about all of this. The ACCC wrote a report about the behavior of the East Coast gas market and clearly point this out. Here's the relevant minister in response:

MADELEINE KING: The ACCC report is damning. No doubt about it. It sets out patterns of behaviour, instances of behaviour that are clearly not acceptable in an environment where we do have, you know, internationally and domestically, a supply – energy supply crisis to say the least. So my message to the gas producers is to please read the report. Know that this government is determined to make sure there will be adequate supply for Australians and a reasonable access to it and to manufacturers as well.

There has been no action at all since.

It is clear by now, after 10 years of market abuse,  that Australian Government bureaucrats and Ministers from all sides have very deliberately decided that the interests of the east cost gas companies are more important than that of Australian consumers. 

The government has sat idly by as the slow destruction of the Australian manufacturing sector proceeds and has tried way too hard to hide evidence that lobby groups have had influence on their decisions not to implement market change.

It's a national disaster , but one that you would barely know exists if you read the mainstream media.