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It’s a trap: mooted gas cap plays into the hands of the cartel, locks in high energy prices

by Rex Patrick | Dec 7, 2022 | Energy & Environment, Latest Posts

National Cabinet is to consider capping the gas price at $12 when National Cabinet meets Friday. At that high price, the government is gifting super profits to the gas cartel at the expense of Australian customers and industry. A price of $7, new research shows, still leaves solid profits for gas producers. Is $12 the gas cartel number? Rex Patrick writes.

National Cabinet will meet this Friday to discuss putting a $12 per gigajoule price cap on gas. But a new report released by the Institute of Energy Economics and Financial Analysis (IEEFA) shows that the right price for a cap is $7 dollar, not $12. The research will be released today.

Coupled with the Labor Government’s six months of equivocation and inaction on high energy prices, and a gas cartel that have exploited that hesitation and delay to normalise extraordinarily high gas prices, a $12 cap might seem like a win for Australian consumers and industry, but it won’t be. $12 will be a price that plays into the hands of the cartel.

$12 plucked from thick air

The $12 figure that’s been bandied about is number that lacks explanation. It appears to be a figure plucked from the thick air, or rather the thick political smog, that surrounds the issue.

The gas cartel has been very active in its advocacy of the need to let its super profits flow, with much airtime being given to its arguments by commercial media which will benefit from the cartel’s threatened advertising campaign.

The media mantras are flowing thick and fast: “We’re charging fair prices” … “We’ve signed a heads-of-agreement” … “It’s the international market” … “We need more local supply” … “Sovereign risk!” … “Here comes a Rudd tax campaign” … “a price cap will artificially stimulate demand and tend to restrict supply, leading to gas shortages”. 

Why is gas half the price in WA?

Of course, anyone who has looked into the effects of the gas reservation scheme in Western Australia, will see that reservation schemes work in ensuring plentiful supply and affordable prices, and that investment is not stifled. Gas prices in Western Australia range between $5 and $7 per gigajoule.

The gas industry’s quotes in the media are just phrases from the cartels’ greed play book – each designed to scare members of the public and those gullible and fearful in Government.

If the National Cabinet agrees to $12, they need to come clean on how that price was selected.

 

7 dollars, not 12

Energy industry analyst Bruce Robertson has just released the only known public analysis of what a fair price might be; that is a price that will allow for substantial profits for the gas companies over and above a return on investment for the majority of gas produced on the east coast of Australia. 

The report states, “a price cap of $7/GL would see all producing fields make a return on equity and a profit on top”.

Gas price production cost table

Source: Bruce Robertson, IEEFA

The major coal seam gas production regions of the Bowen and Surat Basins in Queensland account for approximately 64% of known proven and probable reserves on the east coast of Australia. The two basins have production costs (including a return on equity) of just $4.55/GJ making them profitable at $7/GL. 

At 12/GL the National Cabinet is set to consider, the government will be gifting super profits to the cartel at the expense of consumer and at detriment to Australian industry. In the national interest, they must not do this.

An export super profits tax is the tonic

The report correctly identifies that Australia is bubbling over with gas. Over 70% of Australia’s yearly gas production is exported. We are the world’s largest LNG exporter.

Assuming gas producers are supplying our gas to us at reasonable prices, no Australian would object to the cartel charging world market prices for export gas.

Firstly, this helps Australian industry. High energy industries in Australia are disadvantaged over international industries because of a small domestic market and high labour costs. Our abundance of gas should be a source of competitive advantage through low gas prices (which also set the electricity price).

We have already seen Incitec Pivot close its Queensland nitrogenous fertiliser plant citing high gas prices as the major reason. China, which is a major exporter of nitrogenous fertiliser, is the likely beneficiary.

Secondly, high gas prices in the international market will encourage international industries to shift from gas to renewables.

Thirdly, with an appropriate super profit tax applied to gas exports, such that the gas companies and the Government share benefits from high international prices, the Government could spend more on both industry investment and social programs. It’s not appropriate that the gas cartel is the sole beneficiary of price increases in the international market that have absolutely nothing to do with its own investment decisions.

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A shift away from gas

As it stands, Australia has developed proven and probable reserves that amount to the equivalent of 8.4 years of production at the current record production rates of 2021.

Representations by the gas cartel that we need to develop more gas fields are representations of self-interest, not national interest. The development of new fields is simply inconsistent with the Government’s net zero ambitions.

This must be recognised in any decisions made by the National Cabinet.

National Cabinet outcomes

There is no shortage of gas in Australia. There is only a shortage of willingness by the gas cartel to sell Australian gas to Australians at a reasonable price. And there’s a real shortage of political courage from our leaders.  

The National Cabinet needs to make three strong decisions on gas when it meets on Friday.

It must put a price cap of $7 on gas for the local market. It must put a super profit tax on the export of gas. It must not support the development of new gas fields, which will only serve to hinder State and Federal Government reaching their own net zero emission targets. It cannot say one thing and do another.

Six months have passed since Labor formed Government. So far they have done nothing to curb unreasonable energy costs This failure has had a direct impact on the cost of living, an adverse impact on inflation and a crippling effect on industry. Time’s up Prime Minister Albanese! 

It’s time to act and act decisively in the interest of Australians, not the greed driven gas executives who lost their social licence to operate in this country some considerable time ago.

Fossil Fibs: how the gas lobby gets away with cooking the planet, rooking its customers

 

Rex Patrick is a former Senator for South Australia and earlier a submariner in the armed forces. Best known as an anti-corruption and transparency crusader - www.transparencywarrior.com.au.

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