We are all feeling the pain from high energy prices. It’s hitting us at the pumps, it’s hitting us in the shops and it’s now poised to put 170 people working at Incitec Pivot’s Gibson Island fertiliser plant out of their jobs next year.
The bad news is that it is not going away anytime soon and could quite conceivably get worse if the imminent Northern Hemisphere winter is even slightly colder than usual.
Here’s a bit of history why.
The current energy crisis started due to low inventory levels of natural gas, strong demand and declining production that was coupled with poorer than expected performance from renewable energy.
This created a perfect storm that whipped up a frenzy, sending gas prices in Europe and Asia rocketing well past the equivalent price of oil, which led to frantic buying of spot LNG prices, only for supplies of the supercooled gas to thin out as well.
Buyers in both countries then turned to oil, which was already seeing the impact of increased demand and OPEC’s stubborn reluctance (some say inability) to increase production.
The hunger for energy has also seen increasing use of thermal coal, which has caused much gnashing of teeth from the green lobby.
Australia’s feeling the pinch
While Australia’s position as a gas exporter has insulated us from the worst of the Northern Hemisphere’s relentless hunger for gas, it has not done anything to alleviate sky high oil prices, which is why you’re always wincing whenever the bill for topping up your tanks appears.
Insulated also does not mean immune.
While gas prices in Western Australia have remained fairly stable thanks to the state’s domestic gas reservation policy, the same isn’t true over in the East Coast where market forces mean that gas prices are several times higher.
And here’s where the high LNG spot price is likely to bite (and already has).
With gas sold on the open market, domestic buyers are going to be competing with the sky high prices that the big coal seam gas to LNG players in Queensland can benefit from by maximising their throughput to produce more spot cargoes above their long-term contracted amounts.
Santos (ASX:STO), which is pressing ahead with its acquisition of Oil Search (ASX:OSH) after the court approval of the scheme, had noted last month that it has realised higher LNG prices thanks to the oil-lined pricing for its long-term contracts and the higher spot prices.
And the rise in prices is starting to make itself felt with Incitec Pivot (ASX:IPL) warning that its ability to secure economically viable long-term gas supply has resulted in plans to shut its Gibson Island plant once current supply arrangements expire at the end of December 2022.
It is not a stretch to say that further closures are likely, especially in industries exposed to high energy prices.
The interconnectedness of energy
This situation is likely to continue for some time and it’s sad to say there are no quick and easy fixes.
No matter how much the green lobby would like to claim that putting all our energy dollars into renewable energy will solve all our problems, new infrastructure will still take time to construct before it comes online.
Much of the new investment in renewables is also likely to replace coal-fired power rather than natural gas for some time to come, meaning that further investment in natural gas exploration and development will still be required to replace declining supplies.
Investment also needs to made in other forms of carbon abatement, including (shock, horror, gasp) carbon capture and storage.
The latter is not so much for keeping natural gas plants running because we want to keep them running, but to lower their carbon emissions while we need them running.
But these fixes will all take time to implement, which means this energy crisis is not going away anytime soon.