Got Gas? The best laid plans… still don’t have cheap in them

The Australian government’s gas-led recovery plan just can’t seem to catch a break in recent weeks.

Sky high gas prices have prompted Australian manufacturers to demand for urgent market intervention with Australian Industry Group chief executive Innes Willox warning that gas users are worried about surging prices.

“None of the gas-fired recovery policies looks capable of changing the fact that when export gas markets sneeze, eastern Australian gas users catch a cold,” the Sydney Morning Herald reported Willox as saying.

That’s a shot across the bow for the government, but it’s not hard to see where businesses are coming from given that wholesale spot prices have hit $20 a gigajoule in Sydney and Adelaide due in part to the combination of factors that we covered previously.

In fact, eastern Australia currently ranks as the seventh-most expensive domestic gas market in the world, just behind the very customers that it exports its gas to according to the Institute for Energy Economics and Financial Analysis.

Little wonder then that there have been renewed calls for a Western Australia-style domestic gas reservation policy to be implemented in the east… but that ship might already have sailed.

Japanese gas usage

And it’s all because of the growing transition towards renewable energy, which has seen Japan, one of Australia’s biggest customers for liquefied natural gas, saying that it would halve its gas usage by 2030 in line with an increase in the use of renewable energy.

But wait, you say, won’t exporting less gas to Japan mean having more gas available for domestic consumption, which would in turn mean lower prices?

Well, that’s a yes and no.

While lower exports to Japan will indeed mean more gas available for the local market, it also removes a significant amount of impetus for the development of said gas resources in the first place.

Asian countries have historically been willing to pay a decent sum for Australian gas.

More importantly, they have preferred long-term contracts for the bulk of their needs with spot cargoes tapped for exceptionally cold winters and the like.

This makes for large and consistent demand that allows gas producers to make development decisions for new resources to replace those that are being depleted.

Given that the Australia Institute has estimated in late 2020 that just 1% of gas produced in Australia is used for feedstock in manufacturing versus 82% that gets exported, it really isn’t hard to see that local demand alone might not suffice.

There could still be a case for developments to cater for domestic requirements, but the likelihood that this would be ‘cheap gas’ to meet the government gas-led recovery hopes is vanishingly small.