Today's Weekend Daily Reckoning will wade into the shifty and dangerous swirls of Australia's oil and gas politics. Up for grabs are billions in royalties and earnings. But it may also be a tale of price spikes and lost jobs. In other words, it could get ugly.
But let's hope not. NSW Treasurer Mike Baird set the agenda early in the week. He pointed out that NSW's contracted natural gas supplies are running out. That left some big questions hanging in the air: where will the replacement gas come from, and just as important, at what cost?
The answer to the second question is most likely higher. Take this fromThe Australian:
'The Abbott government is preparing for urgent meetings with the states to prevent a spike in energy prices from a looming gas shortage, as NSW admits that companies could go broke if the problem is not fixed.
'Industry Minister Ian Macfarlane has made energy security a top priority as he tries to unlock more supplies, telling The Australian that "every molecule" should be extracted whenever possible.'
According to the Australian Financial Review, NSW sources 95% of its gas from other states. So it has a choice: pay more or develop its own supply.
Paying more is about to get expensive. The contracted supply to NSW is set to dry up just as the LNG terminals around Gladstone, Queensland begin to fire up, sending fresh LNG supply over the ocean to Asia. That's expected to triple east coast natural gas demand, soaking up spare gas from South Australia and Queensland. It could double the domestic price, at the least.
A supply squeeze and demand spike at the same time don't usually make for a pretty forecast when it comes to business costs. So this is getting domestic NSW gas users nervous. They're pushing for gas 'reservations' to be set aside for local industry and retail users as they warn of an 'energy shock' and 'gas crunch'.
Resource Minister Ian Macfarlane threw users a bone when he confirmed he was not entirely opposed to the idea of reserving natural gas for the domestic market, but only for new projects. That's not that much help in the short term.
Hence the reason the NSW state government called an energy security summit on Thursday. That put the spotlight on the gridlocked coal seam gas debate (CSG) in NSW. Nobody doubts NSW has a lot of natural gas. But any CSG development faces a hostile and sceptical public.
That's the reason the NSW government would prefer if we all call it 'natural gas from coal seams'. This is the new friendly term used in all official docs now. Hence these headline gags recently about:
'The gas that dare not speak its name'
'A gas by any other name'
Mr Macfarlane was a late addition to the NSW energy security summit. The federal government wants more CSG production in the state. The general outcome? Not much progress on any front. But they are going to organise another summit. Hmm. Watch this space.
Not to worry on one point. Macfarlane will go from out of the fire and into the frying pan because his next task will be to talk WA Premier Colin Barnett out of locking horns with Woodside Petroleum.
Woodside pulled the pin on developing a $40 billion onshore LNG plant at James Price Point in Western Australia. Instead, the company wants to use floating LNG (FLNG) technology to develop its offshore Browse gas fields, 200kms out to sea.
That means WA doesn't get the investment spending and jobs that would normally come with building the plant. It also means Woodside only has to cough up royalties to the federal government and not the state. That's because it would only be operating in commonwealth waters. Woodside can extract and liquefy the natural gas at sea. It's then transferred to cargo ships.
At the moment, the FLNG Browse plan is all on the drawing board. But Woodside has essentially been given the all clear from the federal government. However, Premier Barnett says WA owns about 15% of the total project via leases. The catch is he won't amend them in an attempt to block Woodside using FLNG. Hence the spat.
We don't think Ian Macfarlane will be that sympathetic to the WA premier. The way investment spending in LNG is trending, he'll take what he can get. Let us show you what we mean....
According to The Australian, if no new projects are approved, LNG investment spending will drop from 24 billion in 2013 to 2 billion in 2017. Resource journo Barry Fitzgerald sums up the problem: 'But what of the next generation of LNG projects? The twin challenge of high capex/opex costs, and a potential squeeze on future export prices because of the US/East Africa challengers, is real to them, making their move beyond the drawing board problematic.'
If they have a problem, the industries associated with construction and development have a problem. Stay tuned.
for The Daily Reckoning Australia