3 November 2022
Interview with David Speers, ABC 730
Topics: Industry Minister comments, gas prices, export profits, economic contribution of the oil and gas industry
David Speers: Now, the industry waits to find out whether the Albanese government will go for serious intervention and put in place a price cap.
Samantha McCulloch is the Chief Executive of the Australian Petroleum Production and Exploration Association, which represents gas producers. Samantha McCulloch, welcome to the program.
Samantha McCulloch: Thanks for having me, David.
Speers: So, the Industry Minister says the problem with gas prices right now is a “glut of greed” by the gas companies. Is he right?
McCulloch: David, what we’re seeing is high energy prices across the globe. This is the result of a global energy crisis triggered by Russia’s invasion of Ukraine. It’s affecting all energy sources, and it’s affecting all countries.
Speers: But can you explain to me why that should push up the price of Australian gas in Australia?
McCulloch: We’re seeing very strong demand for gas domestically. This has been driven by a critical role that gas is playing, particularly in the electricity sector. Gas is increasingly being called on to fill the void when renewables are not available and when coal-fired generation is not available. We saw this over the recent winter, where gas demand increased 55% in May versus May last year.
It’s increasing demand for gas that’s driving up these prices – as well as, of course, international pressures. And the key to driving down these prices and putting sustained downward pressure on gas prices is increasing supply.
That’s what the industry is seeking to do. But we need a clear runway for more investment to boost supply and put downward pressure on prices.
Speers: OK. But you did say a few days ago yourself the domestic market is well-supplied, and the agreement that was struck only just over a month ago between the LNG exporters and the government was about boosting supply – so, even more supply. Supply doesn’t appear to be the problem, does it?
McCulloch: The gas industry is committed to supplying the domestic market. And the domestic market has been well-supplied.
The heads of agreement that was struck between the three east coast LNG exporters and the federal government committed to ensuring adequate supply for the domestic market.
Speers: So what’s the problem with supply? Is price the problem?
McCulloch: The problem that we’re seeing is the increasing demand for gas is predominantly in the southern states, for this growing role for gas-fired power generation. Yet we’re not seeing the investment in supply in those states.
Speers: You just said they’re well-supplied.
McCulloch: The cheapest gas is the gas that’s close to the use. So we need to be building more supply where it’s needed. And that predominantly is in Victoria, in New South Wales, who are major gas-using states.
Speers: That’s not going to fix the immediate problem. The immediate need is to bring down prices. Coming back to what you were saying – you’re saying the price increase, the doubling and more of gas prices in Australia, is driven by higher demand for its use in electricity?
McCulloch: It’s driven by a number of factors, including those international pressures. But the key is – and this has been acknowledged by the Prime Minister, it’s been acknowledged by the Opposition Leader, the CEO of the Business Council of Australia – bringing on new supply is the key to putting sustained downward pressure on prices. That’s what the gas industry is trying to do.
Speers: OK. Let’s talk about that. If more supply is the answer, one proposal being considered by the government is to let the three big LNG exporters keep their international contracts in place – no breaching of contracts - but excess gas that’s currently sold on the international spot market would instead be made available in Australia first at a price of no more than $10 a gigajoule – more than they were getting last year, so they’d still get a profit. What’s wrong with that idea?
McCulloch: David, that uncontracted gas is already being offered to the domestic market first. That was the basis of the Heads of Agreement that was struck, the deal that was struck, between the three east coast LNG…
Speers: At very high prices. Not at $10 a gigajoule. It’s being offered for more than that.
McCulloch: Let’s just be clear on what these gas-price caps would do. I know it sounds like an easy and quick solution.
Speers: Yep…
McCulloch: But it’s not that simple.
Speers: Why not?
McCulloch: Gas prices, gas price caps would have a chilling effect on new investment. It will undermine investment confidence in new supply. It will actually increase demand while creating structural shortages in supply, which just creates further difficulties and problems long-term.
Speers: Talk about a chilling effect - manufacturers are facing more than a chilling effect with the current gas price. That’s spooking a lot of investors, having to face double the gas price they were a year ago.
McCulloch: When we’re talking about gas prices, let’s just be clear. This is a complex market, and gas pricing is complex. There’s the retail market, and then there’s the wholesale market.
I’m focused on the wholesale market because that’s where the gas producers are supplying into.
And the realised average price for gas sold in the wholesale market – 90% of which is sold on the long-term contracts – is priced between $6 and $12 a gigajoule.
Speers: That was probably on contracts written before this price spike, right?
McCulloch: That’s the average price being realised in third-quarter this year.
Speers: What’s being offered now? That’s between July and September, and presumably contracts that pre-date what’s happened with the gas price. What’s being offered now?
McCulloch: David, this is where we need far more transparency in the market.
Speers: Can’t you tell us?
McCulloch: Well, we’re seeing claims of very high prices being offered in the market, but there’s no…
Speers: Don’t you know?
McCulloch: …details around that.
Speers: Why don’t you know?
McCulloch: No, this is reported to the ACCC. We’ll get more details of this, but there will be a delay.
Speers: Can you tell me how much have the profits of the LNG exporters grown since the war in Ukraine?
McCulloch: David, what I can tell you is that the strong demand for our LNG exports is delivering returns for Australian budgets and the Australian people…
Speers: I’m asking about the profits for the companies, though. There are estimates it’s around $26 billion in profit growth.
McCulloch: I don’t have an estimate for individual companies. They report this on a quarterly basis. But what I can say is that we’re seeing more returns to the Australian people in the budget, in state government budgets, in the Commonwealth budget.
In last month’s budget…
Speers: To be clear on that, the Petroleum Resources Rent Tax is returning very little – $2.6 billion – and that’s barely moved from before the gas price spike. Is that really fair given the sort of profits that are estimated to be $26 billion in profit growth?
McCulloch: The Petroleum Resource Rent Tax is projected to provide $11 billion to the federal government budget in the…
Speers: Over four years. What are profits over four years? If you want to use that figure.
McCulloch: This is already a profits-based tax of at least 40%. And it’s just one aspect of the financial contribution of the industry to government revenues.
Speers: Why can’t you tell us the profits they’re raking in?
McCulloch: Look, I’m representing the industry. These are international companies too, of course, David. But what I can tell you is the direct contribution that we’re making to the Australian governments and to Australian people will triple this year, according to our estimates. That includes royalties. It includes taxes. And this is good.
This is $9 billion extra in government revenues this year that can help to fund hospitals, schools, paid parental leave.
The industry is making an enormous direct contribution to Australian government budgets and, of course, it’s enabling – according to estimates – around $470 billion in economic activity annually.
Speers: Alright. Samantha McCulloch, we’ll have to leave it there. Thanks for joining us.
McCulloch: Thank you, David.
