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.
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.
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.
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.
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.
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.
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.