The profit model that has underpinned the massive investment in Australian gas suddenly looks in danger.
We have projected big rises in demand, with a view to supplying the Asian market, as well anticipating power plants to switch from high-emission coal.
But we planned our North West Shelf and Gladstone expansions before we realised the extent of the American shale and coal gas deposits. Now, we must also take into account the long term implications of the Russian’s decision to pipe gas from Siberia directly into China and also to Vladivostok, where it will be exported as LNG into Australian markets.
Add that to the increased gas coming out of the Middle East and we are looking at major increases in supply. The energy supply will be further boosted if America starts reducing its reliance on Middle Eastern oil by switching transport fuels to US gas. Today’s video interview, filmed at the ADC Hayman Leadership Retreat, is with Macquarie Bank chief economist Richard Gibbs who has just returned from the US where he saw first-hand what the Americans are planning.
I can see a world in which the price of energy declines, or at least does not rise with other costs. Because we tried to build so many plants at once, costs ballooned and we allowed bad labour practices in some of the new projects. Australia is going to be a relatively high cost producer of gas, exactly at a time when so much supply could come into the market.
If world demand rises dramatically then it will absorb the big rise in supply. In the Middle East, if the Syrian conflict spills over into an Iran war, or some other event, then oil prices will go through the roof.
But we should all be aware that between 2015 and 2025 we are likely to see a very big increase in the supply of gas. Demand will have to be very strong to absorb it and maintain current prices.
There is a buffer for gas producers, however. Most of the Australian gas projects have a price that is linked, but not directly tied, to the oil price. And so, hypothetically, if the oil price falls from $100 to $50 the gas price might fall from say $80 to $65. This will protect Australia from any fall in energy prices but it won’t completely insulate us.
Nobody realised a few years ago just how abundant gas is going to be. Even China is looking closely at whether it can exploit its shale gas reserves.
Here in Australia we are struggling to provide enough gas to satisfy the big plants being erected at Gladstone. But longer term, we too may have substantial reserves of gas available to us, at least at a price. I suspect we are going to need a lot of this gas to generate our future base load power requirements.
This is not a commentary forecasting a dramatic collapse in the gas and oil price but it does alert us to the danger of such an event and that we are looking at a different situation to the one that seemed likely just six months ago.
This article first appeared on Business Spectator.