Deepening gas glut poses a critical risk to the financial viability of Gladstone

Bruce Robertson, from the Institute for Energy Economics and Financial Analysis, talks about why some Coal Seam Gas and Liquefied natural gas plants are set to shut within two years

Introduction – critical risk to the financial viability of Gladstone

Ross Greenwood: I tell you another thing that I really been watching very closely in the last little while. We told you a little earlier this week. We gave you a bit of a hint about this when it came down to things such as those giant gas plants that are operating on Curtis Island just off Gladstone as you’re well aware. Now, these have cost tens of billions of dollars to put in. The suggestion right now is that the three plants built just off Gladstone on Curtis Island were built during one of the great resources booms of our time.

A little earlier this week, I spoke with Australia’s resources minister Matt Canavan. I asked him about those plants and reports that very shortly, because of global pressures, one or all of them may very well be mothballed, which is almost unthinkable. Here’s what he told me

Matt Canavan Resources Minister

Matt Caravan: I’d guess export terminals in Gladstone and in Curtis Island were all decided upon and the investment is decided upon when the oil price was more around $100 where it’s more around $50 in the last year or so. Certainly, I think if I had their druthers, if I had the choices again, some of those projects may not have proceeded. Of course, all that money’s being spent. Infrastructure is there, so they will continue to be used.

The issue for us as a country now is we’ve got some of the highest gas prices in the world and higher at the moment than the price paid for gas in North Asia, where we export. No, that’s not sustainable. That’s why the government is going to introduce a licensing model for gas. We’ll have that in place by July 1 where we will ensure that prices here reflect an international price and we can protect jobs, energy, security in Australia.

Ross Greenwood: There is your resources minister telling you that the massive investment there could ultimately be mothballed which is, as I said, incredible. The reason I asked him that question is because, earlier this week, the Institute for Energy Economics and Financial Analysis did an incredible piece of work which suggested that the three plants at Gladstone could be destined for mothballs even with growth in some emerging markets.

It says like South Korea and Taiwan, the global LNG market remains significantly oversupplied. It says the three gas plants at Gladstone said at the very apex of the global cost curve, so these plants that will feel the pressure to shut in capacity most acutely. Let’s go to Bruce Roberston Robertson, who is the Australasian analyst for the Institute for Energy Economics and Financial Analysis.

Bruce Roberston, many thanks for your time.

Interview with Robertson Robertson

Bruce Roberston Robertson: Thank you very much, Ross.

Ross Greenwood: Explain briefly to us the basic economics of these gas plants at Gladstone.

Bruce Roberston: Well, it all started at the very beginning. We’ve got to go back in history a little bit, Ross. What they did was they did the whole development in totally the wrong order. What they did was they, first of all, got the contract, then they built the plant, then they went looking for the gas instead of actually finding the gas first. What actually occurred was the costs are much, much higher than they expected.

When they came to build the plants, all these three plants are built at the same time. At the same time, there were plants being built in the Northern Territory on the west coast of Australia. Globally, simply, there wasn’t the engineering capacity to be able to do that, so the cost of the plants were way, way, way in excess nearly three times the cost of what plants are being built for today.

Ross Greenwood: We’re talking $70 billion for those three gas plants give or take, Bruce Roberston, aren’t we?

Bruce Roberston: Yes, we are, we are.

Ross Greenwood: The fact is if other gas plants can be built more economically than that, they’re not having the holding cost of capital. They don’t have to return as much money to try and make a profit on that money that’s been put out there and given the fact that oil prices. Therefore, gas prices are basically half or more. These operations right now are in a world of pain.

Bruce Roberston: They are in a world of pain. They are really in a world — It’s actually a little bit worse than that because not only didn’t they find gas at an economic price at the time, they have never developed and used their best resources. Every till they’re moving on to now are if you like the secondary ones. Because when you build one of these big parks, you always develop your best shots, first of all, to try and recruit some of your money in the early day.

All they’ve managed to do is make losses and they’re using up, they’re getting through their best fields. They’re now moving on to even higher cost fuel. Ross, this is why when people like Josh Frydenberg and Matt Canavan, they go on and on about, “We need to open up more gas.” It makes no sense because developing high-cost resources is no way to bring down the price of a product.

Ross Greenwood: The only issue is there’s also the political pressure on these plants, such as Santos, to try and quarantine some of that gas for the domestic market. Because the domestic market right now is facing significant spikes in price. Everybody argues, of course, laying on this gas is going into these massive plants and it is being pushed overseas to the detriment of the Australian consumer and Australian industry. That is another potential handbrake on the companies that are operating these gas plants.

Bruce Roberston: Well, look, we can just look to Victoria. Victoria has decided that it is well and truly fed up with this situation of having gas on its doorstep. Watching again sent all the way to Gladstone at vast expense and then exported and paying more than they do in Japan. Yesterday, they’ve moved to say, “Well, we’re not putting up with that. We are actually going to withhold exports leaving Victoria and we’re going to make sure that Victorians are supplied first.” That’s going to be very interesting, Ross, because almost instantly, they will have the lowest cost gas in Australia.

Ross Greenwood: It also means that those plants have to pay more to get gas. As a result, if they have to pay more to get gas, the losses will only deepen because of the heavy cost of construction.

Bruce Roberston: Exactly. What we’re looking at here, Ross, is at the moment, everyone is trying to bend over backwards to satisfy this industry. In the end, we’re chasing a rabbit down the hole. What I mean by that is these was very poor investments. They were very rushed and ill-thought-out. Now, they’re paying the price. What they’re trying to do is socialize that cost across the entire Australian economy by sending manufacturing businesses broke and by forcing up domestic electricity prices. Make no mistake about it. Gas is the swing producer. If you force up the price of gas, you force up the price of electricity in Australia.

Ross Greenwood: Tell you what, Bruce Roberston Robertson, we’ll come back to you in regards to this because this is one of the most interesting conversations we can have right now.

$70 billion worth of assets that we have built in Australia could end up being complete and utter white elephants. The price that you pay for gas, the price that you pay for electricity is determined by their viability. It is really one of the most interesting conversations we can have right now. Bruce Roberston Robertson is the Australasian analyst for the Institute for Energy Economics and Financial Analysis.

Bruce Roberston, we appreciate your time here on Money News.

Bruce Roberston: Thank you very much, Ross.

 

 

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