AFR: Stumbling Towards the Worst of All Worlds on Gas

Published in the Australian Financial Review on September 2, 2014

The inability of industry and governments at all levels to effectively address the community’s environmental concerns about coal seam gas, combined with political opposition to its development, is creating substantial economic risks in south eastern Australia. A freeze on coal seam gas development would lead to higher gas prices and uncertain supply for industrial gas customers. It would put further pressure on manufacturing industry jobs and investment, especially in NSW. And it would reinvigorate coal as a fuel source for future electricity generation, creating higher greenhouse gas emissions.

While a moratorium on coal seam gas extraction continues in Victoria, the NSW government has tentatively resumed the issuing of permits. Any coal seam gas development in NSW and Victoria needs to meet high hydrological and other environmental standards. But environmental issues associated with coal seam gas should be determined on the basis of science, research and empirical evidence, not on political grounds.

Gas is a transition fuel to a low-carbon future. Gas emits half the carbon of coal when used to generate electricity. With the removal of the carbon price, coal-fired electricity generation will continue its dominance over natural gas in Australian east coast power generation. The gas will instead be liquefied for use by other countries as they substitute gas for coal, reducing their emissions. Its benefits are appreciated by the US Administration, with President Obama earning national and international praise for his program to reduce power plant emissions by 30 per cent – achieved mainly by switching from coal to shale gas.

At present NSW imports 95 per cent of its gas from other states. Heavy dependency on other states’ gas was manageable before the emergence of an LNG export industry using east coast gas, but gas supplies are tightening as the LNG industry causes a trebling of demand for eastern Australian gas within just three years. Unlike the policy approach in NSW and Victoria, successive Queensland governments have had a positive attitude towards the development of coal seam gas.

Gas from the Cooper Basin and Gippsland that has been readily available to supply NSW and Victorian households and commercial users can now be diverted to the LNG export plants at Gladstone where it will fetch up to three times the price that domestic consumers have been accustomed to paying.

Most of the existing long-term supply contracts for eastern Australian gas users expire over the period 2015 to 2017. With an eye to the lucrative export market, gas suppliers are unwilling to commit to new long-term contracts with existing users at the historical low prices.

While offering benefits in terms of jobs, incomes and taxation revenue, the east coast LNG export industry is raising costs for Australian gas-intensive manufacturing as previously low domestic gas prices move towards export parity. Deloitte Access forecasts serious declines in Australian east-coast manufacturing to the year 2021, with an income loss of up to $118 billion and more than 14,000 jobs lost. 

With gas prices rising towards export parity and supply tightening it is exceptionally difficult to make a business case for new investment in gas-intensive manufacturing in eastern Australia. Increasing the supply of gas is the only answer. And that means addressing any legitimate environmental issues and unlocking gas in NSW in particular.

Without urgent new coal seam gas development in NSW the state’s industrial gas users will face uncertain supply and price volatility during peak usage periods from 2016.  Gas-intensive manufacturing is already migrating from Australia to the United States to take advantage of cheap American shale gas. Supply uncertainty in NSW, combined with sharp price rises associated with the development of LNG export facilities at Gladstone, would cause plant closures and job losses in urban and regional centres of eastern Australia. Withholding the development of coal seam gas reserves in NSW and Victoria would make the job losses worse.

Based on existing proven and probable reserves, NSW has enough coal seam gas to supply the state for at least 20 years. The gas is there but the political sensitivity of coal seam gas extraction is making its utilisation difficult. A moratorium has been placed on the development of coal seam gas in Victoria.

Refusing to develop coal seam gas as a matter of political expediency would cause needless further job losses in a manufacturing sector already under extreme pressure. Saying no to coal seam gas would constitute the worst of all possible worlds: exporting Australian manufacturing jobs to the United States while increasing carbon emissions at home.

Craig Emerson and Greg Combet, former cabinet ministers, are economic consultants. Their clients include AGL, but the opinions expressed here are their own.

Source: http://www.afr.com/p/opinion/stumbling_tow...