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28 July 2015

East coast gas inquiry: producers fear supply squeeze



Royal Dutch Shell’s planned $91 billion takeover of Britain’s BG Group could reduce the incentive to supply eastern gas users by making exports even more financially attractive, according to Manufacturing Australia, a group of chief executives of the nation’s biggest manufacturers.

The lobby group has been vocal about the impact that $70bn worth of LNG plants being built at Gladstone will have on east coast gas supply and availability, having warned since 2011 of a crisis. And in its submission to the Australian Competition & Consumer Commission’s east coast gas inquiry, it did not change tack.

“Without a transparent and competitive east coast gas market, we run the risk that domestic customers pay even more than the so-called international price, and yet will have little opportunity for comparison or recourse other than to cease operations and move offshore,” Manufacturing Australia chief Ben Eade said in the submission. “If gas-intensive manufac­turing leaves Australia it is not likely to return — even if ­prices ­revert to sustainable levels — because of high costs of construction, loss of skills and supporting supply chains, and higher risk ­premiums.”

The link to Shell’s mammoth BG takeover, the biggest oil and gas merger in more than a decade, is around concerns about consolidation of suppliers.

BG has its own coal-seam gas export project and Shell has vast reserves in its Arrow joint venture with PetroChina that have not yet found a path to development.

“Any financial incentive currently favours efficient transportation through established pipelines developed at scale for export,” Mr Eade said. “This financial incentive could potentially be increased should the proposed acquisition of BG by Royal Dutch Shell be approved, due to the potential for shared infrastructure.”

The ACCC is also investigating the merger, which last week received clearance from Brazilian competition investigators.

Mr Eade said that without better transparency, “use-it-or-lose-it” requirements, or a market that provides more opportunity for domestic customers to bid and compete, there was no incentive for the six parties that control 90 per cent of east coast gas reserves to supply domestic consumers. “For example, Shell has not proceeded with investment in an LNG facility at Gladstone and is currently sitting on substantial gas reserves through the Arrow joint venture,” he said.

“Despite the impending shortfall, there is no evidence or indication Shell will unlock any of these reserves for domestic customers without a regulatory imperative.”

Manufacturers Australia says it is an alliance led by the chief executives of BlueScope Steel, CSR, Incitec Pivot, Brickworks, Orora, Allied Mills, Capral, Cement Australia and Rheem.

The submission said the emergence of the east coast LNG market had doubled or tripled prices to as much as $10 per gigajoule and included “dramatic consolidation” of the sector.

“As a result of these events, many gas-intensive manufacturers have had difficulty renewing or establishing gas supply contracts,” Mr Eade said. “A lack of market power by domestic users has led to the withholding of offers from suppliers; take-or-pay contracts; minimal negotiating parameters; and little transparency of pricing.”

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