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IEEFA Update: The markets won’t respond to Australia’s proposed 'gas-fired recovery'

June 09, 2020
Bruce Robertson

Key Findings

COVID recovery plan looks to lower domestic price and build a gas intensive manufacturing based on a cheap resource, which is not a sustainable model.

The major players in Australia's east coast fracking industry have written off billions already and are not investing.

The COVID recovery commission is also looking at petrochemicals, a sector with global over-supply and a challenged demand profile.

Australia’s National COVID-19 Coordination Commission (NCCC) has outlined plans for a gas-fired recovery in a leaked report. Essentially it is looking to lower the domestic price of gas to $4/gigajoule (GJ) by following the U.S. model of gas production and to build a gas intensive manufacturing base off the back of this cheap resource.

The results of following this model have been nothing short of a disaster

There are several problems with this approach, the first and most obvious being that Australia has already adopted the U.S. model on the east coast onshore gas industry. Drilling is done by U.S. contractors Halliburton and Schlumberger; fracking techniques are wholly imported from the U.S.; and Australia has followed the U.S. in LNG technology.

The results of following this model have been nothing short of a disaster for Australia’s East Coast coal seam gas (CSG) to liquefied natural gas (LNG) industry that the NCCC is looking to prop up.

The three major players in this industry on the East Coast are Origin Energy, Santos and Shell. Since 2014 these three companies have written off more than $19 billion, a staggering amount. These large write-offs occurred before the recent crash in the gas price. Further substantial write-offs are a given.

IN THE U.S. THE RESULTS HAVE BEEN EQUALLY BAD FOR THE COMPANIES INVOLVED. This year alone 19 oil and gas companies have filed for bankruptcy with $13bn of debt at risk.

The “shale gas revolution” has produced cheap gas prices for consumers but it is not a sustainable business model

Undoubtedly the “shale gas revolution” has produced cheap gas prices for consumers but it is not a sustainable business model. Why? It has failed to make money for the past 10 years.

The gas industry is currently delaying projects, shutting in LNG capacity, and cutting capital expenditure budgets as gas prices plunge to historic lows. At the same time, the NCCC is trying to stimulate the Australian economy by subsidising this industry at a time when even those within the industry are not investing.

The Commission’s favoured industrial project is an ammonia-based fertiliser and explosives factory for Narrabri in New South Wales. It neglects to look at world markets where ammonia-based fertiliser prices are at 10-year lows making any investment dependant on large government subsidies.

OTHER PETROCHEMICAL-BASED COMPANIES ARE FACING A SIMILARLY CHALLENGED OUTLOOK. According to the International Energy Agency (IEA), the pace of investment in petrochemical facilities in recent years has moved well ahead of the pace of demand growth. The overcapacity has led to a significant drop in ethylene prices across the board. Earnings of many chemical companies fell sharply, by 60-80% compared with 2018. The IEA notes that a confluence of weakened economic outlook and overcapacity casts clouds over industry margins and utilisation rates in the coming years. The IEA also notes headwinds from a growing backlash against plastic waste, citing bans on single use plastics and plastic bags.

Ammonia-based fertiliser prices are at 10-year lows

As such, breaking into a globally over-supplied market with a challenged demand profile in the short and medium term is problematic for new projects.

Overriding the lack of economics in the NCCC’s plans is the emissions profile of the fossil fuel, gas. At best, gas is only marginally better than coal for greenhouse gas emissions and in many cases it is worse.

GAS WILL NOT MATERIALLY REDUCE OUR CARBON FOOTPRINT, as highlighted in Australia’s Technology Investment Roadmap:

“According to the International Energy Agency (IEA), switching from coal to gas can provide ‘quick wins’ for global emissions reductions and has the potential to reduce electricity sector emissions by 10 per cent.”

Reducing emissions by 10% compared to the high emitting coal is at best only a marginal progression towards net-zero emissions.

The NCCC was tasked with stimulating the economy post COVID-19. Its gas-based agenda will increase emissions and is bound for failure as the markets will not allow it to succeed.

Bruce Robertson is a gas/LNG analyst with the Institute for Energy Economics and Financial Analysis (IEEFA).

This article first appeared in Renew Economy.


Related articles:

Gas Cannot Stimulate the Economy, Reduce Emissions, or Provide Cheap Power

Banking on oil, gas and petrochemicals is a defensive strategy unlikely to work

Greenhouse emissions from gas higher than industry estimates

Auditors take note – Santos’ accounts misleading since 2014

Volkswagen lied about emissions from their vehicles, and the gas industry is also lying about their emissions

Bruce Robertson

Bruce Robertson has been an investment analyst, fund manager and professional investor for over 36 years. He has worked with Perpetual Trustees, UBS, Nippon Life Insurance and BT.

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