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Lessons from the US for Australia’s energy crisis

Lessons from the US for Australia’s energy crisis thumbnail

As Prime Minister Malcolm Turnbull was convening an emergency meeting with gas producers last week to fix Australia’s looming “energy crisis”, The Wall Street Journal’s front page splashed with the headline that America’s “Natural Gas Glut Deepens”.

Australia and the United States are two of the world’s richest endowed natural gas economies, but the difference between how they are managing their energy windfalls could not be more stark.

The US is drilling record amounts of natural gas – and oil – and as a result the domestic price of gas for industry and consumers has plunged to a historic low below $US3 ($4) a British thermal unit.

Australia is also producing copious amounts of gas, increasingly for export to Asian customers, but domestic industrial users face spot prices of up to about $18.

Malcolm Turnbull and Josh Frydenberg meet gas industry chief executives  for crisis talks last week.
Malcolm Turnbull and Josh Frydenberg meet gas industry chief executives for crisis talks last week. Alex Ellinghausen

Like Australia, about 15 years ago the US was facing a potential energy shortage and companies including BHP Billiton began constructing gas import terminals.

Flood of cheap gas

But the advancement of hydraulic fracturing combined with horizontal drilling into shale rock deep beneath the surface has flooded the US energy market with cheap gas and it is on path to becoming a net energy exporter.

The US shale revolution has boosted natural gas’s contribution to US power generation to 36 per cent, and helped lower the more dirty coal to 31 per cent from about 50 per cent in the early 2000s.

There are a host of variables that contribute to the differences in the energy markets, but four disparities stand out in the US that perhaps offer Australia potential lessons; pipeline infrastructure, financial incentives for private landowners to allow gas drilling, regulation and exports.

First, the US has an elaborate network of pipelines around most of the country to transport gas from energy rich states such as Texas and Louisiana to a majority of its 320 million residents and millions of energy-intensive businesses such as chemical manufacturers.

“Compared to a country like Australia, the United States already has got so much on-the-ground infrastructure to move gas around which is a huge advantage,” said William Ichord, a former US industry executive and now president at consulting firm International Business Advisory.

“The US is in this advantageous position now because 30 years ago a combination of market deregulation and technology investment provided for gas to be priced and move more freely, as well as the incentive to look for more gas and build the additional infrastructure needed to move and store it.”

Indeed, BHP’s president of North America shale, Alex Archila, said on the sidelines of the CERAWeek energy conference this month that its shale field assets in Eagle Ford, Permian, Fayetteville and Haynesville across the southern US are “in the centre of the highway of pipelines and infrastructure” that connect production with markets.

$800m pipeline

In Australia, there is a fledgling plan to build an $800 million pipeline from Northern Territory gas producers to Queensland to help supply the country’s east coast.

Second, American farmers and other private landowners own the minerals underneath their land and are paid lucrative access fees and royalties by shale drilling companies to extract the gas.

“It makes life a whole lot easier and will make life a whole lot easier for the grandkids,” Texas farmer Bubba Steen told The Australian Financial Review on a visit to his cattle farm a couple of years ago where oil rigs were pumping deep beneath the surface.

“Oil cheques” worth hundreds of thousands – or in some cases millions – of dollars have landed in landowners’ letterboxes, though the payments have declined over the past couple of years due to the oil price crash and reduction in drilling rigs.

To boost gas supply, South Australia last week proposed paying landowners 10 per cent of the royalties collected from the underground gas sold from a property where it is being extracted.

Deputy Prime Minister Barnaby Joyce told Fairfax Media at the weekend that a new nationwide scheme to divert a share of government royalties to farmers will overcome furious opposition to coal seam gas in the bush.

The financial incentive and general US support for shale production is in sharp contrast to the “Lock the Gate Alliance” that has taken hold in Australia, which has contributed to state governments imposing  restrictions against coal seam gas drilling in Victoria and regions of NSW.

Trump vow

Third, and related, the US regulatory rules are generally more favourable to the energy industry, including for hydraulic fracturing and environmental regulations that President Donald Trump is vowing to rip up to stimulate an “energy revolution”.

Uday Turaga, chief executive of Texas-based consultancy ADI Analytics, says Australia can learn from this approach.

“I think the government should look at ways to incentivise gas production to deal with the supply issue,” he said.

Fourth, only last year the US began exporting gas beyond neighbouring Canada and Mexico, leaving plenty leftover for domestic users.

In Australia, energy companies have spent more than $200 billion building seven huge LNG export terminals to ship energy to Asia.

Manufacturers in Australia have argued for a domestic reservation quota, a ploy that federal Labor opposition has tacitly supported through a national interest test for future – or significantly expanded – gas projects.

Jane Nakano, a senior fellow at the Center for Strategic and International Studies in Washington and former US government energy official, said the US comparison with Australia on exports was not apt.

Export terminals

Unlike the huge US domestic market with 320 million people and thousands of businesses using gas to fire their operations, the gas infrastructure investment in Australia may have never happened had energy companies been prevented from selling at higher prices to Asian customers.

“Many of the LNG export terminals require huge investments, bigger than the US,” she said.

“To what extent would these companies have come in and developed the fields and pipelines if it was just for domestic consumption and no export prospects?”

“They couldn’t get a return on their investment.”

The first new US LNG export facility, Sabine Pass, began operations in 2016, and four more LNG export facilities are scheduled to be completed by 2020.

The US is on track to become the world’s third largest exporter, nipping at the heels of Australia and Qatar.

Leslie Palti-Guzman, director of global gas at The Rapidan Group, said studies show US prices may increase moderately as exports ramp up.

“Even if prices rise a little bit, the producers will produce more,” she said.

In the US, the policies are all about expanding – not restricting – gas supply to meet energy demand.

AFR.com



22 Comments on "Lessons from the US for Australia’s energy crisis"

  1. rockman on Sun, 19th Mar 2017 6:25 pm 

    “Fourth, only last year the US began exporting gas beyond neighbouring Canada and Mexico, leaving plenty leftover for domestic users.” More bullsh*t according to the EIA stats. First US NG production peaked in July 2015 at 2,447,800 million cuft. Since then it has been on a slightly declining bumpy trend: latest – 2,358,770 million cuft.

    “…plenty of left over for domestic users”. Not even bullsh*t spin but a flat out LIE. Again from the EIA: for 2016 we imported 3,000,600 million cuft and exported 2,314,650 million cuft. IOW not only was therewere no “left overs” but we had to import NG to satisfy US buyers.

    https://www.eia.gov/dnav/ng/ng_sum_lsum_dcu_nus_a.htm

    But thankfully the Marcellus boom did keep us from importing even more NG. It grew from a small % of US production to almost 20%. But those boom days are over: the MS is barely holding its own today.

    Just as there has never been an effective ban on exporting oil produced in the US there is no ban on exporting NG. In fact, exporting oil hasn’t been the key to maintaining gasoline and other refinery product prices: US consumers have been competing with foreign buyers for a much larger volume of products then for oil.

    US NG have had to completely primarily with Canadian and Mexican NG buyers. But with the increase in LNG export capability new markets are opening up. The good news: LNG prices are much lower then there recent peak: $18/mcf summer 2012 vs $7.50/mcf today. Which gives a far bit of incentive to sell US NG overseas even if US demand isn’t met. The bad news: as international LNG prices increase and US LNG export capability increases the financial ability of foreign buyers to outbid US consumers.

    Which the Rockman and his cohorts fully support: anything that increases NG prices for US consumers is A-OK by us. LOL.

  2. DerHundistlos on Sun, 19th Mar 2017 11:44 pm 

    This today:

    “TRUMP INSTALLS POLITICAL MINDERS IN AGENCIES TO ENSURE POLITICAL ALLEGIANCE

    Most members of President Trump’s Cabinet do not yet have leadership teams in place or even nominees for top deputies. But they do have an influential coterie of senior aides installed by the White House who are charged — above all — with monitoring the secretaries’ loyalty, according to eight officials in and outside the administration.”

  3. dooma on Mon, 20th Mar 2017 4:23 am 

    Whoever wrote this article has probably never set foot in Australia to get a true gauge of just how barren it really is.

    It is not uncommon to drive in the outback and not see another motorist for a couple of days. This is why people tend to wave when the do see someone else. At around 28 million people, most on the Eastern seaboard, we simply do not have the population density to achieve massive engineering feats such as 100’s of kilometres of pipelines.

    I would still rather learn to live with less than allow fracking in such a dry country where water is extremely precious.

  4. Cloggie on Mon, 20th Mar 2017 4:41 am 

    Australia has about the same size as China. China is half desert.

    China 1350 million
    Australia 28 million

    Chinese army: 2.3 million
    Australian army: 30,000

    It are facts like these that caused Malcolm Fraser, one of the most senior politicians Australia can come up with, to write articles like these:

    https://deepresource.wordpress.com/2015/01/02/america-australias-dangerous-ally/

    If for some reason the US would descend into chaos, as many on this board fear, absolutely nobody is going to defend Australia.

    https://s17.postimg.org/6wwnomfpb/worldmap.jpg

    Europe did it to North-America and Africa.
    Russia did it to Siberia.
    China could do it to Australia.

  5. Davy on Mon, 20th Mar 2017 5:35 am 

    Clog, China will be lucky to keep the peace at home soon let alone conquer Australia. China is a ticking time bomb of overshoot and building mayhem. They have insignificant air and marine transport currently to do a sea invasion that far away. They currently are set up to attack Taiwan. They are in the process of adding those components but that takes time and practice. Do you remember Iraq? It is sometimes easy to conquer a country but quite another thing to run it and keep the natives happy. You are stuck in your 20th century mentality of great armies roaming the world conquering and pillaging. This is the 21st century of interconnected economies in overshoot. Your mentality went out with the hula-hoop. And please, don’t reference the Australian politician Fraser like you have in the past. I respect very few politicians today. He is not on the list. If China is going to invade somewhere it will be a mass migration of desperate people into Russian Asia. That is where the real invasion will be when the Asia comes apart at the seams.

  6. Cloggie on Mon, 20th Mar 2017 6:00 am 

    China will be lucky to keep the peace at home soon let alone conquer Australia. China is a ticking time bomb of overshoot and building mayhem.

    Where are the signs of their internal instability? We had some hick-ups during the transition of Hong-Kong, but that seems to have been digested now. My impression is that meanwhile China is nationalist as hell and has a “don’t rock the boat” attitude, while China is rapidly ascending to the world’s largest power in a decade or so.

    Before the US arrived at planetary pole position in 1945, it had endured a severe depression during the entire thirties.

    In fact major internal instabilities, if they would occur, are usually a motivator for adventures abroad, to deflect attention from internal misery.

    I perfectly understand the fears of Malcolm Fraser. The Philippines domino seems already to have fallen. Australia could be next and is far more attractive than Siberia, which would mobilize nuclear power Russia as well as the EU, that doesn’t want the Chinese to show up at the Ural mountains either. In fact the rise of China will cause Russia and the EU to cooperate in the future to prevent Chinese expansion to the North.

    That is where the real invasion will be when the Asia comes apart at the seams.

    First see, then believe. Excessive, dogmatic doomerism can cloud judgment severely.

  7. Davy on Mon, 20th Mar 2017 6:09 am 

    “Where are the signs of their internal instability?”
    Clog, do the math and review the reality of China. 3.5BIL or so Population is clearly in overshoot. The environment in severe decline with air, water, and soil. The financial system imploding with a circular bubble economy, and ever growing NPL’s.

    I reference problems in China constantly for the anti-Americans and techno porn stars. I guess you ignore them because for you they are doom. They are reality Clog and since we are in an interconnected world your reality too.

  8. makati1 on Mon, 20th Mar 2017 6:30 am 

    Cloggie, we agree on one point. China is not going down anytime soon. Nor is Russia. Americans have nothing but their government’s propaganda Koolaid to help make a clear judgement on the rest of the world. Facts don’t exist in America anymore. They finally went extinct on November 7, 2017.

    “Financial regulators from the two countries (China/Russia) agreed last May to issue home currency-denominated bonds in each other’s markets, a move that was widely viewed as intended to “dethrone” the US dollar.”

    http://www.scmp.com/news/china/diplomacy-defence/article/2079648/russian-central-bank-opens-first-overseas-office

    Sorry, but the U$ is being told to bend over and lube. The Bear and Dragon are going to take turns. LOl

  9. makati1 on Mon, 20th Mar 2017 6:30 am 

    Ooops! 2016

  10. Davy on Mon, 20th Mar 2017 6:43 am 

    Ooops, makati, where is the bric bank these days. You used to talk about the yuan as the new global reserve currency, what happened? Clearly your agenda is a failure.

  11. Davy on Mon, 20th Mar 2017 6:48 am 

    “China Accounts For Half Of All Global Debt Created Since 2005: Here Are The Implications”
    http://tinyurl.com/h6n2u36
    “Over three years ago, in November 2013, when the world’s attention was still largely focused on what
    the “Big 4” central banks would do with QE and/or interest rates, we wrote an article showing in one
    simple chart “How In Five Short Years, China Humiliated The World’s Central Banks”, and noted that in
    just the brief period since the financial crisis “Chinese bank assets (and by implication liabilities) have
    grown by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has
    expanded its financial balance sheet by 50% more than the assets of all global central banks combined.”
    Fast forward to today, when not only is China’s debt the biggest wildcard for the stability of the global
    financial system (recall last week UBS observated that for the first time in years, the global credit
    impulse had tumbled to negative largely as a result of a slowdown in Chinese credit creation), but even
    central banks openly admit that China’s relentless debt-issuance spree is a major risk factor for global
    financial stability.”
    “Debt in China has increased dramatically in recent years, accounting for roughly one-half of all new
    credit created globally since 2005. The country’s share of total global credit is nearly 25 percent, up
    from 5 percent ten years ago. By some measures (as documented below), China’s credit boom has
    reached the point where countries typically encounter financial stress, which could spill over to
    international markets given the size of the Chinese economy. Nonfinancial debt in China has increased
    from roughly $3 trillion at the end of 2005 to nearly $22 trillion, while banking system assets have
    increased sixfold over the same period to over 300 percent of GDP. In 2016 alone, credit outstanding
    increased by more than $3 trillion, with the pace of growth still roughly twice that of nominal GDP. As a
    result, the “credit-to-GDP gap”—the difference between the debt-to-GDP ratio and its long-run trend—
    has reached almost 30 percentage points. The international experience suggests that such a rapid
    buildup is often followed by stress in domestic banking systems. Roughly one-third of boom cases end
    up in financial crises and another third precede extended periods of below-trend economic growth.”

  12. onlooker on Mon, 20th Mar 2017 6:49 am 

    Yes, I have to also side with the interconnected world thesis. The world together will go down with each region in the world having its own unique set of intractable problems

  13. onlooker on Mon, 20th Mar 2017 7:03 am 

    None of this is theoretical. Globalism is stating to go in reverse. http://www.zerohedge.com/news/2017-03-20/behind-smiles-china-prepares-worst-ready-counter-all-us-trade-penalties
    Behind The Smiles: China “Prepares For The Worst”, Will Counter All US Trade Penalties

  14. Davy on Mon, 20th Mar 2017 7:08 am 

    “Spring Equinox – 2017: The End of the Beginning of the End”
    http://questioneverything.typepad.com/

    “the collapse of the current cultural system (neoliberal capitalism, profit maximization, revolving debt financing, the impacts on the education system, etc.) is a good thing. When I say unfixable, I mean just that. Some systems are fixable, or adjustable so that they work better in time. This one we live in is neither. It is so full of positive feedback loops that reinforce destructive behaviors that there is very little that can be done to break out without that very act destroying the interlocking processes and thus, itself bringing about collapse.”

  15. onlooker on Mon, 20th Mar 2017 7:13 am 

    More evidence of Globalism in reverse
    Globalism going in reverse now:
    http://www.zerohedge.com/news/2017-03-2 … -penalties
    http://www.zerohedge.com/news/2017-03-2 … 0-march-29
    http://www.zerohedge.com/news/2017-03-2 … ps-4th-day
    http://www.zerohedge.com/news/2017-03-1 … ise-europe

  16. rockman on Mon, 20th Mar 2017 7:24 am 

    Dooma – “I would still rather learn to live with less than allow fracking in such a dry country where water is extremely precious.” With fresh water that scarce it must be expensive. Expensive water would make the frac method that don’t use fresh water viable…if the well is economical in the first place.

    But it seems like y’all need electricity more the oil/NG. As such it would seem that with all that empty sun soaked land solar should be the option now that it has gotten much cheaper.

  17. Cloggie on Mon, 20th Mar 2017 7:36 am 

    Who needs fracking in the Outback?

    https://www.youtube.com/watch?v=x6Nl2tBWuLk

  18. george on Mon, 20th Mar 2017 8:19 am 

    it’s all that fosters beer

  19. GregT on Mon, 20th Mar 2017 10:55 am 

    IMF Adds Chinese Renminbi to Special Drawing Rights Basket

    September 30, 2016

    What does the renminbi’s inclusion in the SDR basket mean for China?

    The RMB’s inclusion is an important milestone in the integration of the Chinese economy into the global financial system. The IMF’s determination that the RMB is freely usable reflects China’s expanding role in global trade and the substantial increase in the international use and trading of the renminbi. It also recognizes the progress made in reforms to China’s monetary, foreign exchange, and financial systems and acknowledges the advances made in liberalizing, integrating, and improving the infrastructure of its financial markets. We expect that the inclusion of the RMB in the SDR basket will further support the already increasing use and trading of the RMB internationally.

    http://www.imf.org/en/News/Articles/2016/09/29/AM16-NA093016IMF-Adds-Chinese-Renminbi-to-Special-Drawing-Rights-Basket

  20. GregT on Mon, 20th Mar 2017 11:07 am 

    GDP growth (annual %)

    World Bank national accounts data, and OECD National Accounts data files.

    South Asia – 7.1%
    North America – 2.0%
    European Union- 2.2%

    © 2016 The World Bank Group, All Rights Reserved.

    http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?name_desc=false

  21. GregT on Mon, 20th Mar 2017 11:08 am 

    Sorry,

    North America – 2.4%

  22. GregT on Mon, 20th Mar 2017 11:21 am 

    Zero Hedge

    Zero Hedge publishes information that cannot be validated and that is anti scientific fact. The information provided should be regarded as speculative opinion or propaganda and cannot be substantiated by fact or evidence. It is among the most untrustworthy sources in the media.

    http://www.fakenewschecker.com/fake-news-source/zero-hedge

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