5 December 2022
Interview with Patricia Karvelas
ABC Radio National Breakfast
Topics: Energy system pressures, gas price caps, coal price caps, gas supply, Federal Court ruling relating to NOPSEMA and Santos Barossa project
Patricia Karvelas: The issue is set to dominate this week’s National Cabinet meeting with the Prime Minister, hoping to get the states and territories on board with a plan to cap wholesale gas and coal prices. But the government is facing resistance from the association that represents petroleum producers, which warns a cap would damage our international trade and distort the internal market. Samantha McCulloch is the Chief Executive of the Australian Petroleum Production & Exploration Association and our guest. Samantha, welcome.
Samantha McCulloch: Good morning, Patricia. Thanks for having me.
Karvelas: The government is believed to be planning to cap the wholesale gas price at around $12/GJ, demand guaranteed domestic gas supply from producers, and to enforce a mandatory code of conduct. Do you accept that will bring down gas prices?
McCulloch: Well, Patricia, actually we released new analysis last week that actually highlighted that a gas price cap does the opposite of what we need. In the longer term, it actually increases prices because it increases demand and reduces the incentive for supply. And when we look at what it is actually driving the higher prices currently, it’s the lack of supply, and it’s the volatility that we’re seeing for gas demand stemming from the role of gas in power generation. So what we really need is solutions that do provide relief for households and for vulnerable manufacturing. But we need solutions that actually don’t make the problem worse over the long term and that’s what gas price caps will do.
Karvelas: So you’re saying while the cap’s there it will reduce prices, but you’re going to hike them up after?
McCulloch: No, what we’re saying is in the short term… when we look at the gas price cap, it would apply, we assume – we haven’t been consulted on this yet – to the spot market. Just to be clear about how the gas markets work, around 85% to 90% of gas is actually sold under long-term contracts and the realised price for those long-term contracts currently is around $12/GJ, according to the most recent figures from the ACCC. The spot market has higher prices because it is slightly more volatile because of the demand profile. If we put a cap on that market, what we’re going to see is increased demand, including from power generation, and we’re going to reduce the incentives to bring on new supply. So over the long-term, this is going to actually hurt manufacturers, it’s going to hurt households, because we’re not going to have adequate supply and we’re not going to have the lower prices. The key to actually bringing down the prices currently is bringing on that new supply.
Karvelas: Doesn’t the plan to cap the price of coal in the same way avoid the kind of market distortions that you’re warning about?
McCulloch: The discussions we are seeing currently really underscore just how complex this problem is and that there are no easy solutions. We need to be looking across the energy system to identify where relief can be provided. Again, without the detail it is very hard to understand how different interventions might interact with one another and the impacts they would have on the market. Certainly when we look just at the wholesale gas market, we see a real risk, and this was underscored by the report and the analysis that we released from EnergyQuest last week, that actually we could be creating even larger problems long term through these interventions.
Karvelas: The Industry and Science Minister, Ed Husic, was asked about supply and demand last week. Here is what he had to say.
Ed Husic: I don’t think supply is a problem here. I mean we had 157PJ secured under the Heads of Agreement. The commitment from the suppliers was that they would offer that to the market, that that would overcome what the ACCC was concerned about a few months ago, of a shortfall of 56PJ. The supply was there from uncontracted gas. Supply is not a problem here. It’s the pricing of that supply that is an issue.
Karvelas: Isn’t the minister right, that supply actually hasn’t been our issue, it’s the outrageously high prices?
McCulloch: So when we look at the Heads of Agreement… this was an agreement struck between the three east coast LNG producers and the Federal Government in September that has been in place only two months. But we’re already seeing that it’s working. And what the agreement does, as the Minister outlined, is ensure that uncontracted gas is offered to the domestic market first before being exported. That 157PJ of gas is uncontracted and will be offered to the domestic market. We just saw last week that Santos struck an 11-year supply deal with Brickworks. So this is working, this mechanism. We haven’t given it very much time to work. It’s only been two months before there’s been calls for more intervention. But the challenge we’re facing with supply is actually having the supply where it’s needed. So 80% of east coast supply is coming from Queensland. But yet where we’re seeing the demand is primarily in the southern states, particularly in Victoria, where we’re phasing out coal because the state is quite heavily reliant on coal today and increasing the penetration of renewables and we need more gas in the system to provide that security when that coal is not available and when renewables are not available.
Karvelas: Origin Energy told shareholders its gas operation is profitable at $3.50/GJ. Production costs, of course, vary, but aren’t companies just making huge profits?
McCulloch: I think what we’re seeing is just very strong demand for gas currently. And, you know, there’s complexity in the market when we when we’re talking about the supply contracts. So as I indicated, gas is being sold under long term contracts at around $12/GJ or less currently. That’s the realised price that we’re seeing that’s reported by companies. This is 11% up from this time last year. So it’s not actually a massive increase when we consider the demand that’s being put on gas in the market.
Karvelas: But we’ve seen the predictions in the Federal Budget. It’s huge.
McCulloch: Well, the Federal Budget, it’s talking about primarily retail gas increases. So I’m talking primarily around the wholesale market because APPEA members, the gas producers, sell the gas into the wholesale gas market. And again, the prices that we’re seeing in that gas market for long term contracts is around the $12/GJ mark. It’s not the $40, $50, $60 that we see being reported in the press.
Karvelas: Just on another issue, what impact will the Federal Court ruling against regulatory approval for Santos’ Barossa project in the Timor Sea have on east coast supply.
McCulloch: Look, what that ruling does is really underscore that uncertainty around the consultation requirements and what the industry is calling for is certainly not to… we still need very robust consultation requirements. This is something the industry’s been committed to in projects for decades and decades. But what we need is certainty around what those consultation requirements are, and that certainty wasn’t provided by the regulations. It’s now been the subject of the Barossa court case and what we’re calling for now as an industry is just the greater clarity to ensure we’ve got workable, clear regulations that govern those consultation requirements to ensure that projects can go forward. There’s around 35 environmental plans currently being held up because of the uncertainty around this decision that includes the northern part of Australia and Northern Territory, which could potentially have an impact on the east coast markets.
Karvelas: We’re out of time. Thank you, Samantha.
McCulloch: Thanks, Patricia.
Karvelas: Samantha McCulloch is the chief executive of the Australian Petroleum Production and Exploration Association.