Contrary to popular belief we are awash with gas, and it’s being exported for less than local markets would pay. Confused?

We are told high gas prices on the east coast of Australia are caused by a lack of supply, and that the solution to that is to allow more coal seam gas projects such as that in Narrabri to go ahead in New South Wales and Victoria.

But on both counts, nothing could be further from the truth.



Firstly, Australia is awash with gas. It is even producing more than the giant gas exporters in Gladstone need to fulfil their export contracts.

Rather, high local prices appear to be the result of so-far inexplicable behaviour by those exporters, selling gas at lower prices on the export spot market than they could achieve by selling the gas locally.

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Secondly, the controversial Narrabri coal seam gas project is simply not a way to reduce the cost of Australian gas. Quite the contrary: it is a bet by Santos that prices will remain at record high levels, and if it does go ahead, will embed high-priced gas in the market.

This week, the ACCC’s interim gas report made clear that Australia had plenty of gas.

It forecast a shortfall in domestic supply, but it noted Australia was producing more than enough gas to fulfil local demand as well as all export contracts.

Rather the local shortfall was caused by the three gas exporters in Gladstone – owned by Shell, Origin and Santos – choosing to sell additional locally produced gas on the international spot market.

That much has been widely noted. But what has received little attention is that they appear to be doing that despite the gas fetching miserable prices on the international spot market, and, by selling it there, the companies are foregoing higher returns they could get by selling it to the starving domestic market.

It’s not a small difference either – the ACCC report notes that the spot market in Southern Australian states averaged $9.52 for the second quarter of 2017. And contract prices for 2018 have averaged around $7.33.

Meanwhile, a worldwide LNG glut has pushed prices on the international markets way down. In the first quarter of 2017, the asian LNG spot market was achieving just $6.50 per GJ.

Prima facie, the exporters were piping, liquefying and shipping gas – all of which costs money – and then selling it for 30% less than they could have sold it for in the domestic market (without liquefaction or shipping).

If that behaviour seems bizarre to you, you’re not alone. While politicians and news reports have ignored it, the point was raised by the head of the ACCC, Rod Sims, in a speech to the National Press Club last week.

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“International prices are at all-time lows; Australian gas prices are at all-time highs,” he said.

Then, in the subsequent report, the ACCC noted that “the LNG projects are forecast to have about 90 PJ of gas in excess of [their contractual requirements] that could be used either for additional LNG export sales or to supply the domestic market”.

But by examining internal documents, the ACCC found that “the LNG projects are expecting to sell up to 63.4 PJ on international LNG spot markets”, which would be entirely responsible for the gas shortfall the report forecast, which amounted to less than 55 PJ.

The ACCC interim report fails to find an explanation for the situation. Santos, Origin and Shell failed to respond to enquires about it, as did the industry lobby group Appea, who directed the Guardian to a press release about the industry agreeing to meet the domestic shortfall after it was threatened with intervention by the prime minister.

Bruce Robertson, from the pro-renewables Institute for Energy Economics and Financial Analysis (Ieefa) said the ACCC report was further evidence the three gas players were restricting gas to the domestic market in order to push up prices.

“The strategy is survival: keep the price of gas high in Australia so they can make real money out of the Aussie customer,” Robertson said.

“Essentially Australians are subsidising loss-making exports,” he said.

All signs are that those export ventures have been failing to make money. Last month, both Santos and Origin announced they had wiped more than $1bn each from the value of their LNG plants. Combined with previous write-downs, the two plants have now been devalued by about $6bn overall.

In a properly working market, companies wouldn’t be able to force prices up by constricting supply – competitors would bid in and bring prices back down.

And when a market is failing, something needs to be done. According to Robertson, the solution to that is to reserve some gas produced here for local markets, and to set the price – something the ACCC appears to be considering.

So where does all that leave the controversial Narrabri project?

Federal government ministers have been arguing the Narrabri project needs to go ahead to bring down prices. But in saying that, they’re ignoring basic facts.

The Australian Energy Market Operator (Aemo) estimates the cost of producing one gigajoule (GJ) of gas from Narrabri to be $7.25. That’s well above the price of gas on the international market, and significantly more than what the ACCC thinks is a fair price for gas coming from existing Queensland CSG.

And that’s just the marginal cost of getting the gas into a pipeline – it doesn’t include the cost of piping it to the point where it needs to be used. And it doesn’t include any of the capital expenditure that the company spent developing the site, which it will need to recover. (For Santos’s Narrabri project, that figure is already said to be $1bn.)

So all up, the cost of gas delivered from Narrabri is going to be considerably above what prices should be today, if the existing market were functioning well. It is clearly not, then, a way of bringing prices down to historical levels, which were less than half of what it costs to get gas out of the ground at Narrabri.

Even Santos seemed to acknowledge this when it downgraded the status of the gas at Narrabri from what is called “proven” to “contingent” – which means the company doesn’t currently consider it commercially viable to extract the gas.

But Santos wouldn’t be the only company betting that measures to bring prices down will fail. AGL is pressing ahead with plans to invest $250m on a gas import terminal in Victoria, leading to what some have described as an “absurd” situation where the world’s second biggest gas exporter has to import gas in order to supply its domestic demand.

It has been reported that AGL thinks it could sell gas from the terminal at between $8 and $10 a GJ – a price that is again higher than what the ACCC thinks prices should be now, and much higher than what prices have been historically.

As Dylan McConnell from the University of Melbourne pointed out earlier this year, Australia is awash with cheaper gas than that in Narrabri, or other CSG sites in NSW and Victoria.

According to Aemo estimates, which McConnell compiled, there is more than 40,000 PJ of gas that would be cheaper to extract than from Narrabri – most of that is in Queensland, with a bit in South Australia and offshore Victoria. That is enough gas to supply Australia’s domestic and export markets for 20 years.

With that in mind, the emphasis on expanding gas in NSW and Victoria seems more like an opportunity to shift blame to the states than a real attempt to fix the problem.

The Liberal NSW energy minister, Don Harwin, gave the federal government some refreshing straight-talking recently when he ridiculed claims that expanding gas exploration in NSW was the key to fixing Australia’s gas crisis, saying such an idea was “curious”, and describing it as part of a “self-indulgent climate culture war”.

“The idea that NSW’s gas sector was supposed to save the nation from the way the LNG sector grew is curious,” he said. “It was never predicated on it.”