It’s not yet entirely clear what this means:
Resources Minister Madeleine King has demanded the three major east coast gas producers sign a government-drafted deal that may include what some industry figures slammed as an “unworkable” and distortionary price cap mechanism to shield domestic manufacturers.
…After receiving three separate heads of agreements from the key players – Santos’s GLNG, the ConocoPhillips-led APLNG, and Shell’s QGC business – Ms King responded last week with a letter saying that was not what she asked for.
Lacking an industry-agreed version, she then presented the trio with one of her own and a deadline to sign it before October 1, the last date on which she can trigger the Australian Domestic Gas Security Mechanism to take effect on January 1.
It is understood the players were in discussions with Ms King’s department as recently as Tuesday, and have assured the government there will be sufficient supply of gas next year, contradicting an Australian Competition and Consumer Commission report in July that the market faces a 10 per cent shortfall.
“It’ll be done in the next day and a half, or it won’t be done,” one industry source told The Australian Financial Review, adding that the big exporters would never agree to a price cap.
With the industry forecast to generate a record $84 billion in export earnings this financial year, up from $70 billion in 2021-22 and $30 billion the previous year, Mr Husic has been assertively lobbying the government to impose a price mechanism for uncontracted gas that would ensure domestic manufacturers never pay more than overseas buyers.
One proposal would see domestic prices for uncontracted gas effectively capped at the level that exporters receive on Asian markets minus the costs of conversion to LNG and shipping, also known as the ACCC netback price.
…Industry players have told the government that a domestic price cap is bad policy, unenforceable, and likely to result in damping new supply.
“Ed Husic is pushing for a price cap, and we’re just never going to agree to it,” one person said.
Another objection includes its potential to undermine the economics of new LNG terminal developments, which are seen as one way of delivering more Queensland gas to the southern market, as well as the potential transfer of value to third parties.
For instance, they say that giving domestic buyers access to price-capped supplies may result in power stations burning artificially low-priced gas to produce power when electricity prices are high.
Another example could be a generator that sells their coal into an uncapped international market while using the capped-price gas in Australia to run their domestic power stations.
And then there are questions about the consequences of a market in which three producers are constrained while the rest of the gas industry charges at market rates.
OK, so the domestic price cap is what we need. Though an export levy would be much better it is clearly not in the discussions. A domestic price cap is effectively the cost-plus regulatory model that is the most sensible way to manage natural monopolies.
But it can’t just apply to manufacturers. That would be insane. It must be all users or households will be annihilated.
It is only a price distortion if there is an effective market, which there isn’t. See Alan Kolher’s brilliant little video explaining this:
According to the ACCC, the gas comes out of the ground for $5Gj (in reality it’s much cheaper still). Therefore, my argument is to so make the domestic price cap $7Gj. This is high enough for decent returns on new projects like Narrabri as well. As for more LNG export plants, just fuck off.
But, the AFR article is unclear on what kind of price cap we are discussing. If, as the poorly written (or deliberately misleading) article suggests, the only price cap under discussion is the LNG netback benchmark then all Labor mulling is whether to cut local prices down a few dollars from export prices. Today, this would raise the local gas price from $20Gj to $70Gj. Asian futures are are at these prices for years.
If this is the case then the battle is beyond lost. The entire debate is fake.
However, if the price cap under discussion is a cost-plus model for local supply then Labor is on the right track, at least in terms of doing the bare minimum to prevent economic disaster.
The fury of the cartel is no guide to understanding this. It will bleat like a stuck pig no matter what controls you put on it. That’s what cartels do.
Stand by to learn whether your nation lives or dies.
