Finance Finance News Why cutting Australia’s gas exports won’t reduce energy prices

Why cutting Australia’s gas exports won’t reduce energy prices

Australia's growing LNG exports have played a role in increased gas prices, but aren't the sole cause.
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Australia dethroned Qatar in 2018 for the title of the largest global exporter of liquefied natural gas, yet domestic prices continue to rise.

But experts say that reducing our exports won’t fix the problem.

Research by Reuters’ data analytics firm Refinitiv Eikon showed Australia exported 6.5 million tonnes of LNG in November, surpassing Qatar’s 6.3 million tonnes to officially become the world’s biggest exporter.

At the same time, gas prices in most of Australia have climbed significantly (more than 85 per cent in the past decade by some estimates), and east coast states have been faced with the risk of gas shortages.

This prompted the government to look for a solution, but the realities of the industry make it unlikely we’ll ever see prices as low as a decade ago.

Australian prices linked to global demand

Speaking to The New Daily, Grattan Institute energy program director Tony Wood said the prices enjoyed by Australians before 2010 were relatively cheap by global standards, but the past decade has seen domestic prices fall in line with those paid in foreign markets.

Part of this is due to the role foreign businesses played in the development of the local industry, particularly on the east coast where joint ventures between energy firms and overseas buyers were used to finance key projects, including our export facilities. 

As a result, Australian producers have contractual obligations to meet with foreign countries, especially in Asia, and demand for Australian gas increased immensely in the wake of the 2011 Fukushima nuclear plant disaster in Japan, which prompted the closure of multiple nuclear plants and increased demand for alternative fuel sources.

“The price went off. It went from $3 [per gigajoule] to $6, to $9 to $12, and in Asia it went even higher, up to $16 – but they were prepared to pay it because they needed the stuff,” Mr Wood said.

How bad are the price increases?

The price of gas in Australia has climbed a staggering 89 per cent in the past decade, a solid 53 per cent higher than the rate of inflation during that same period, according to research by associate professor Ben Phillips of the Australian National University.

Associate Professor Phillips’ research found most households weren’t badly affected by the rising cost of gas (and energy more broadly), but the effect of rising costs was more severe on the wallets of renters and the unemployed.

A graph showing the cost of energy as a portion of income 2008 - 2018.
Low-income households feel high energy costs more acutely. Source: The Conversation

Mr Phillips also noted that wealthier Australians have the capacity to switch to solar energy, and take-up of that technology – which offers typical savings of $500 a year – is much more common among wealthier households (23.5 per cent) than it is among the least wealthy (4 per cent).

Unfortunately, the likelihood of prices returning to the lows seen up until the late 2010s is unlikely for a slew of reasons.

Mr Wood said gas supplies are falling, and moratoria on new development (particularly prevalent in Victoria) are placing more pressure on existing supplies.

Trying to enforce a reservation process that demands producers set aside gas for domestic use at prices lower than those foreign buyers will pay is also problematic, as it effectively acts as a tax on suppliers without providing the same financial benefits to the community that an actual tax would.

“You’re never going to get gas for $3 or $4 [per gigajoule] but I don’t think anyone’s arguing that we realistically can,” he said.

Graham Bethune, chief executive of energy consultancy EnergyQuest (and former Santos executive), similarly said restrictions on exports wouldn’t be an effective way of managing prices, adding that the bulk of the nation’s gas exports are actually from WA (where prices are lower).

Another challenge is the lack of unity in policies between east coast states.

“You’ve had conflicting objectives between the different states, so Queensland was obviously keen to see the development of LNG, [whereas] NSW and Victoria didn’t want to develop gas,” he said.

“You just had a complete conflict between the states.”

Mr Bethune said the real key to bringing down prices would be to increase development, but that’s “difficult for political reasons” on the east coast.

“What’s most likely to happen is we’ll see LNG imports into NSW and Victoria, which will put a ceiling on gas prices.”

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