(The opinions expressed here are those of the author, a
columnist for Reuters.)
* Graphic of Australian LNG projects: tmsnrt.rs/2jTq9jO
By Clyde Russell
LAUNCESTON, Australia, May 2 When governments
adopt new policies the benchmark for success should be that the
change works, is efficient and fair to all parties and does not
create unintended consequences.
The decision by the Australian government to restrict
exports of natural gas if the domestic market is constrained
meets none of these criteria, although it may just persuade an
increasingly angry public that the authorities are doing
Whether the new policy does serve some short-term political
objective shouldn't distract from the view that this is a
radical change that will serve mainly to undermine Australia's
reputation as an investment destination of choice for the
Prime Minister Malcolm Turnbull announced last week that his
centre-right Liberal Party government was adopting a policy of
intervention in the natural gas market to restrict exports of
liquefied natural gas (LNG) if the domestic market was
The move was welcomed by industry groups, which have become
increasingly alarmed that domestic natural gas prices have
spiked, sometimes to levels above spot Asian LNG prices, while
at the same time cheap, long-term contracts have become
difficult to source.
The new policy sounds alarming for Australia's emerging
status as the world's top supplier of the super-chilled fuel as
the country's $200 billion investment in new plants is poised to
see it overtake Qatar as the biggest producer.
But the likely impact on the supply of LNG is largely
immaterial, as it would only involve relatively small volumes
and only at times of peak domestic demand.
Also, the bulk of Australia's 85 million tonnes of LNG
capacity will be unaffected as the export restrictions only
apply to the three plants on the east coast in Queensland state
that use coal seam gas as a feedstock, and not to the
conventional facilities in the north and northwest of the
It's not exactly clear how the government's planned
mechanism will work as this is still to be revealed, but
ultimately the aim should be to ensure that domestic users have
adequate supply and aren't paying more than the export price.
It's these details that will prove tricky, as industry
consultants Wood Mackenzie pointed out in a research note last
If the aim is to provide price parity for domestic and
export natural gas at the Wallumbilla hub in Queensland, the
impact on the LNG plants will be minimal, according to Wood
Mackenzie, as the three plants already divert gas to the
domestic market in response to price signals.
However, if the aim is to make prices in the southeastern
states of New South Wales and Victoria the same as the export
price, this implies intervention to lower domestic prices at
Wallumbilla in order to compensate for the high costs of moving
the natural gas via pipeline to the major domestic consuming
markets, Wood Mackenzie said.
IS ANYBODY HAPPY?
No matter what strategy is ultimately adopted, it's unlikely
to please any of the participants in the market.
Rather, the various players should face some home truths.
For domestic users, they should realise that as soon as
Australia approved LNG projects using coal seam gas it was
always going to be the case that domestic prices rose to match
In fact, it was also likely that domestic prices would
exceed the export price given the high cost of transporting fuel
from Queensland to New South Wales and Victoria.
The natural gas industry should also accept that it will
have to do everything it can to supply the domestic market, even
if it means accepting lower prices on occasion.
There is also no point in the industry bleating about the
need to increase supply, especially from New South Wales,
Victoria and the Northern Territory, all of which restrict or
ban exploration and production in some form or another.
It's clear that those state and territory governments have
caved in to the environmental and rural lobbies. Yes, the
industry can complain that the politicians lack the courage or
the will to explain to voters the consequences of restricting
supply, but this is unlikely to make them change their minds.
The industry has largely lost the public relations battle
with the environmentalists, and politicians from both
Australia's major parties see little upside in siding with
industry against a well-funded green lobby that is opposed to
any form of exploration and production of natural gas.
Rather the industry should shore up its existing assets and
relationships with the gas-friendly state governments of South
Australia and Queensland.
But the biggest loser is likely to be Australia as a whole.
Once your reputation is harmed, it's extremely difficult to get
There is little doubt that government changing the rules in
response to domestic political needs is a major risk to
companies planning multi-billion dollar investments.
(Editing by Richard Pullin)