December 14, 2020

More gas is a win-win for all of Australia’s economy, not just manufacturing

When it comes to Australia’s domestic gas market, two key issues need addressing to safeguard long term supplies of gas to households, commercial businesses, and industries. First, how does production capacity continue increasing to meet growing demand for gas? And second, how does Australia attract the capital investment needed to stimulate exploration and development of new gas resources?

APPEA CEO Andrew McConville was invited to a virtual webinar held by the Australian Domestic Gas Outlook Conference (ADGO) last week to respond to these and other difficult questions alongside several industry experts from organisations such as Qenos, Credit Suisse, Squadron Energy, and The Australian Workers’ Union.

The webinar, titled Solutions for Industrial Gas Users, brought attendees together to discuss the pricing and availability of gas in the domestic market and the impact it has for Australian manufacturers and industries.

The current debate about the role of gas in manufacturing is too narrow; the truth is gas has a much larger part to play in helping nearly every part of the Australian economy during a time of crucial recovery. Manufacturing is certainly an important sector for Australia, but it is not a dominant user of gas — it accounts for less than a quarter of total domestic gas consumption. The mining industry uses more gas than manufacturing, for example, and large volumes of natural gas are used to generate energy for homes.

As Australia moves towards a cleaner energy future, it need more gas to help lower the nation’s emissions as a significantly cleaner alternative to thermal coal, and a baseload complement to renewable energies such as wind and solar.

Attendees at the webinar debated the relative merits of domestic gas reservation and related price setting measures. Experience from other countries shows that these types of interventions — aimed at artificially lowering gas prices for domestic users — do not work. They serve only to discourage crucial investment needed to maintain gas supply levels, and in the long-term lead to supply shortages and ultimately higher prices.

The oil and gas sector is capital intensive. To increase, and even maintain supply, it needs the right investment settings to attract capital for exploration and development of new gas resources and continue existing operations — the wells that are supplying gas now need ongoing capital to operate, and more investment is needed to find and develop new resources.

In the current COVID climate, international capital is scarce and competition for what is available is fierce; Australia has a golden opportunity to compete on the global stage given its world-class gas supplies and status as a premier LNG exporter, but it’s an opportunity that will only be realised by maintaining a transparent, competitive market and a policy environment conducive to investment.

Relatively simple measures such as extending the Junior Minerals Exploration Incentive and allowing junior oil and gas explorers access to the scheme, as well as shortening depreciation time frames for projects, will go a long way to stimulating new exploration and development activity.

It is important to step back and see the whole picture. There is a very real risk that constraining the gas sector through domestic reservation or price controls will trigger a flight of capital; the consequence of this will not only mean less gas for manufacturing, but for all other domestic gas customers who make up three quarters of gas consumption in Australia.