Interview with Tom Connell on Sky News NewsDay
Parliament House, Canberra
Tom Connell: Energy ministers are meeting today. They are trying to thrash out some sort of solution to what most agree is an untenable situation right now to what most agree is an untenable situation on electricity and gas prices. We think we know where the government is heading. We’ll know soon enough. Joining me now to talk more, in particular on gas, is APPEA CEO Samantha McCulloch. Thanks very much for your time.
Samantha McCulloch: Thanks for having me.
Connell: We’re expecting a cap on domestic gas prices. Domestic only. Is that the assumption you’re working to?
McCulloch: Look, we’re reading the media reports and we’re very concerned about reporting that a $13 cap on gas prices will be imposed. This is a very heavy-handed intervention in the market that really destroys incentive for new supply and actually makes the problem worse down the track. So just last week we released analysis by EnergyQuest that highlights that gas price caps will only destroy incentives for new investment, they will increase demand while reducing supply – and in the long term that’s going to lead to higher prices for Australian households and Australian manufacturers.
Connell: Thirteen dollars a gigajoule. At that price, what projects across the country now, or future planned ones, would not be easily profitable?
McCulloch: Look, we don’t have the detail over where these price caps are actually being imposed. Of course, there has not been consultation yet with the industry on these measures. If we’re looking at a wholesale price cap – and of course APPEA members and gas producers are predominantly selling into the wholesale market – then these interventions will…the companies will be looking at their investments and whether or not projects are viable.
Connell: So what projects would not be at that price?
McCulloch: The report we released last week highlighted that actually projects around energy storage, or gas storage, the economics of those projects would be severely impacted by a price cap. LNG import facilities are unlikely to be viable with a price cap. And, according to EnergyQuest, around 50% of east coast gas demand in the southern states would be met by those LNG import facilities in the next decade.
Connell: Yeah, but this is not going to be a decade long price. It’s a year. So, what issue would any of those projects have in terms of a $13/GJ price in place for a year?
McCulloch: I don’t want to name projects that won’t go ahead. That is up to companies to do their analysis.
Connell: I’m wondering, though, because PEP-11 is estimated to at $8/GJ, Narrabri $8.50/GJ. These are the point at which getting gas, you know, and being able to supply it. Beetaloo – $7 to $8. $13 is a huge mark up on that. There is no issue with making a profit out of that with these projects is there?
McCulloch: Putting a cap on the market… these projects are selling predominantly under long-term contracts. As we have seen, those long term contracts are actually being struck on average at the moment at around $12/GJ. And then there’s the spot market. So around 15% of gas is also sold on the spot market. You are fundamentally disrupting the gas market by introducing these price caps and it will have a significant impact on new investments.
Connell: But you’re not able to talk about a single project where $13/GJ, just on domestic gas, just domestic, would mean it not going ahead?
McCulloch: I will have to leave it to my members to do the analysis of which projects they will be looking at carefully with these interventions.
Connell: I’ve named those ones to you. Would you agree they are still clearly viable at that $13 price?
McCulloch: I don’t want to comment on those particular projects. But I also want to highlight that what the industry is facing is intervention, after intervention, after intervention. So we’re dealing with reports of price caps this week, but we’ve also got other reforms that are really impacting how quickly these projects can be brought to market, how costly it is to go through the exploration, development and approvals processes for these projects. What we need to see is actually policies that encourage investment in new supply. That’s actually the key to bringing down prices for Australian households and Australian manufacturers.
Connell: The encouragement is the extraordinary prices they’re getting at the moment. The hurdles are getting approved, so that’s kind of a separate issue once they get approved, they are going to come online, because they are going to make a lot of money. What about whether gas producers are at least partly to blame. You mentioned long-term contract price – $12 or so. The short-term spot price. They traditionally, yes, change a little bit. You get rewarded for locking in a long-term price. So volatility exists. But that gap opened up, became massive… wasn’t there a social licence for gas companies not to charge massive amounts, many multiple times that $12 for local users when Australians ultimately own this asset?
McCulloch: What was driving up that volatility in the spot market was actually the tightness in the market, particularly in the southern states, and the increased volatility that we’re seeing in terms of demand from the power system. So if we look at what happened in terms of the energy pressures over the last winter. The demand for gas in May increased 55% versus the same time last year. That is because gas is increasingly being called on as we are seeking to phase out coal-fired power generation and as we are seeking to bring on renewables and that volatility…
Connell: But it’s the same price to produce it… so at that point the decision from gas companies and gas providers could have been, yes, this is going up, yes, we can charge this. We’ve got a social licence in this country.
McCulloch: Well, this is a spot market. The market is setting the price for that. Around 15% of the market that is being sold on the spot market. Most manufacturers and consumers are not exposed to that because they’re buying gas under long-term contracts.
Connell: But some are, but some are, and that’s the problem. And then you’ve got consumer prices going up as well. So, the issue is if we keep it up to the market, we’re going to see these prices go up because we’ve seen gas suppliers say, it’s tight, here is where the price is going, we’re just going to charge domestic users as much as we can get for this, and that’s why the government is saying we need a cap.
McCulloch: Well, this is an issue of supply and demand. That’s how markets work. We’ve let the market work in this case and we should let the market work to bring down prices.
Connell: But there’s already a pledge from gas suppliers to have enough supply. So the supply is there. You said you’ve guaranteed supply but we’re still seeing that spot price sky rocket?
McCulloch: In September, the three east coast LNG exporters struck an agreement, a Heads of Agreement, with the Federal Government and that ensures that any gas that is not already uncontracted will be offered to the domestic market first. And it’s 157PJ, so that’s around a third of the east coast market that will be offered. The challenge we’re facing on the east coast is that 80% of gas is produced in Queensland but the heavy demand centres are actually in New South Wales and Victoria. Victorian households are the largest users of gas on a household basis and what we’re seeing is more localised supply, like offshore Victoria, is projected to decline. The gas supply production is projected to decline by about 43% in coming years so what we need to do is to bringing on more supply closer to where it is being used.
Connell: And that’s fine but, in the short term, the price cap is needed because as we’ve just seen when a market can let rip, prices go through the roof. We’ve seen that happen. That’s happened in Australia’s domestic market, in the spot market, hasn’t it?
McCulloch: What we need to do is balance the short-term potential benefits of a price cap with the longer term implications and we’ve seen just from international experience that this experiment with price caps has not been successful. It wasn’t successful…
Connell: But it’s a short-term one and if it doesn’t come in, industry will go the wall. Industry, some businesses will go bust in Australia. That’s a real consequence, too.
McCulloch: We’ve seen just in the last few weeks is multiple gas supply agreements being struck with major industrial users. We’re still seeing the market working. We’re seeing gas being sold at competitive prices that allows Australian manufacturing to continue. Santos struck an 11-year supply deal with Brickworks just last week. That shows the market is still working and that gas is being supplied to the users. I think what we need to be doing…
Connell: Some of those contracts have been reported as a lot lower so then what’s wrong… a $13 a cap is essentially saying suppliers want to be able to charge much more than that when they can?
McCulloch: What we want to avoid some of the heavy-handed interventions in the market that have long-term consequences.
Connell: If it’s a one-year cap…
McCulloch: Will it be a one-year cap? We don’t know.
Connell: If it is, would it be acceptable then. Would it avoid those long-term consequences?
McCulloch: It doesn’t avoid the long-term consequences because the disruption to the market over that period. Keep in mind the analysis we released highlights that actually what you’re going to do is increase demand for gas by capping the price while reducing the incentives for new investment in supply.
Connell: You increase demand because people can afford it again… That’s good, if businesses can afford it. And supply, if it is a cap only for a year, the hope is that Beetaloo still goes ahead, for example. Beetaloo is the biggest potential supply they are saying there will be for domestic gas.
McCulloch: The Beetaloo is of course a huge opportunity for the Northern Territory and Australia in terms of new supply.
Connell: We’re nearly out of time. If it can be one year, and that’s it, and that’s a firm commitment. Surely that would not scare off too much investment?
McCulloch: Gas price caps are not going to be the answer.
Connell: But short-term would it really scare off that much investment?
McCulloch: It will.
Connell: For a one-year cap?
McCulloch: These interventions in the market – on top of the challenges that the industry is already facing – will really be a significant impact on new investment.
Connell: We’ll both know soon enough a lot more about this. Perhaps we’ll talk after then. Samantha McCulloch thank you for your time.
