Australian oligarchs move to manage the angry mob

In truth it started long ago as the revolving door between policymakers and corporate titans began to spin in the late nineties. Combined with ever increasing market concentration and the big privatisation push, this stoked a trend towards Australian oligarchy over appropriate separation of markets and regulators. It was most apparent in banking, infrastructure and mining.

Then the GFC came and what had been a quiet agreement among gentlemen suddenly broke into the open. Banks and property were bailed out holus bolus and the rules that had underpinned what had still been a nominal division between public and private interests were swept away in a weekend. None have been restored since.

The oligarchs were now off the leash. If it was good for banks then it was good everyone else and the rent-seeking mentality spread. It was next exposed when mining decided it could set its own tax rates and engineered a soft coup to make it happen, even rolling a prime minister to get it done.

Then carbon transformation was undertaken and far too much input was sought from winners and losers in industry, as well as compensation being offered to all and sundry. In the end, one half of parliament aligned itself with fossil fuel interests against doing anything at all. Again there was a soft coup as anti-science oligarchs swept to power and trashed the public interest.

Today Australian “markets” are unrecognisable. Closet agreements between government and private interest are commonplace. Governments run interference against the public interest to protect rentiers and expect media support from the latter in return. Both sides concoct absurd policy disguised as “reform” to increase their economic rents and power. Employees from both switch sides like shelling pees. In truth, there are no sides in the great Australian kleptocracy.

Today is has infected another sector. This time it’s energy. The oligarchs screwed themselves in a mad LNG bubble that is now destabilising the entire east coast economy as it drives up gas and electricity prices. But there’ll be no fix with new rules to restore a functional “market”. No, instead there’ll be inappropriate meetings between public and private oligarchs where shadowy deals are agreed upon over backslapping and giggles. Moral suasion and moral hazard have become indistinguishable.

To wit:

The chance of blackouts in South Australia next summer has been reduced by deals struck between Origin Energy and Engie that will enable the restart of the second turbine at the French firm’s Pelican Point generator.

Origin signed up for 240 megawatts of generation from the plant near Adelaide and will also supply gas to Engie, justifying a $40 million upgrade so the turbine can run on a regular basis.

Engie has said it isn’t profitable to run the unit for just a few days a year.

Federal Energy Minister Josh Frydenberg claimed some credit for the move, saying it was helped by Prime Minister Malcolm Turnbull threatening gas suppliers with export controls unless they freed up more for domestic use.

“[The threat] has had a real impact in this decision,” he said.

The multi-part deal between Origin and Engie is, however, understood to have been under negotiation for several months.

Origin chief executive Frank Calabria said the agreements were “examples of immediate steps industry is taking to safeguard electricity supply” and ensure more gas was available for customers.

…The gas is likely to be priced at about $7-$8 a gigajoule plus network costs, Citigroup said.

Everybody wins! Except markets and the public interest. That’s still $9-10Gj gas once it has to pass through the pipeline gouge. Via Matthew Stevens:

It’s a strategic parachute drop of gas to avoid further SA blackouts so that the oligarchy can keep on gouging without the disturbance of a mob angry about eating by candlelight.

All Do-nothing Malcolm has done is smash together his special blend of public and private policy trifle in a way that confuses everything even further. But, then, why not? He’s got no pressure from the Labor Party, whose like-minded former ministers are all enjoying plumb jobs with Big Gas as the party itself cowers in fear of mining sedition and it pointedly refuses to put forth its own plan to fix the gas market.

What needs to be done here, and in all such circumstances, is very straight forward. There is no need for industry consultation, that is just code for corruption of good process. Rather, focus on convincing the public of your mission and simply change the rules that govern the market so that it works again as a competitive mechanism in their interests. The rules should be as big and as dumb as possible. The more finessed they are the easier they will be to corrupt.

In the case of energy, the answer is very obvious, as Credit Suisse has explained:

■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5%

■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5% thirdparty gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other thirdparty gas would get extremely close to balancing the market. Clearly these things are far better done by mutual agreement from all parties, rather than a political mandate.

■ GLNG loses but can all be compensated? We estimate that, at a US$65/bbl oil price, GLNG as an entity would lose US$447m p.a. of FCF if they could no longer toll thirdparty volumes. Interestingly, if Kogas and Petronas could recontract their offtake on a slope of 12x (doable in the current LNG market) then their losses as an equity partner are all offset (not equally between the two albeit). Santos would see ~50% of its US$134mn net GLNG loss offset if the Horizon contract could move up to a slope of 8x from 6x. The clear loser would be Total. We wonder whether cheap government debt, a la NAIF, could be provided at the (new, lower volume) project level or even to take/fund an equity stake in it? In reality all parties (domestic buyers included) have some culpability in the situation, so a sharing of pain does not seem unreasonable 02 March 2017 Australia and NZ Market daily 31.

Ban third party gas exports. It will only ensure that 3.6% of export volumes remain here. Install domestic reservation to ensure all future projects require export approval. Install “use it or lose it” laws so that reserves cannot be hoarded and customers gouged. Then let the gas market go to work competing as best it can.

Gas market restored. Energy crisis solved. Public interest served. Oligarchs sent to the woodshed.