Originally published in The Australian Financial Review on October 3, 2017

The Australian gas industry’s best hope is the Turnbull government’s worst nightmare; a big increase in world prices for oil and gas. Santos and Origin executives lost billions of their shareholder’s dollars when they bet $60 billion worth of gas export facilities in Gladstone on a world oil price of around $US100. They lost. The price now hovers around $US55.

[First published by the Australian Financial Review – read here]

Any shift in the world oil price that reduces the pain for the gas exporters will simply increase the pain for Australian manufacturers and households. Like houses in Sydney, the price of gas is now too high for the buyers and not high enough for the sellers.

There is nothing Malcolm Turnbull can do to simultaneously make gas cheaper for customers and more profitable for gas exporters so he is working desperately instead to shift the debate back to blaming environmentalists, the Labor Party and, of course, the state governments. The problem is that while the blame shifting buys him time, his story about gas stacks up about as well as Matt Canavan’s attempt to blame his mum for his citizenship woes.

Goodies and baddies

The NSW Liberal Premier, Gladys Berejiklian has been called many things but environmentalist is rarely one of them. And despite the fact that Ms Berejiklian is an enthusiastic privatiser of public assets, there is one asset she is deeply reluctant to sell more of and that’s coal seam gas. But according to the Prime Minister’s story of goodies and baddies, the conservative premier of Australia’s most populous state is some form of economic vandal. That should end well.

It’s hard to put pressure on someone when you are in a weak position, but the gas industry and Turnbull seem willing to give it crack. Indeed, they are now suggesting the distribution of GST revenue between states be reconsidered to punish state governments who listen to their communities. It won’t work.

The first problem is the gas industry pays so little to state governments. Queensland has the biggest CSG industry in Australia but the low levels of royalties combined with the collapse in the oil price meant that in 2016 the Queensland government had to revise CSG royalties down from $129 million to just $33 million. To put that into perspective, in the same year the Queensland government collected $504 million from car registrations. But that fact didn’t stop the owners of the APLNG export terminal taking the Queensland government to court arguing they should pay even less.

But the big risk is the latest debate about punishing states for protecting their water and farm land from CSG drilling might shed light on the opaque state government subsidies to the resource sector as a whole. That is, if the Commonwealth Grants Commission (CGC) is tasked with examining state government resource policies it’s hard to believe it wouldn’t take a close look at all of the financial support state taxpayers have been providing. Traditional miners such as BHP and Rio Tinto may pay the price for the mistakes of the gas drillers.

State revenues

According to a WA Treasury submission to the CGC “the cost of Western Australia’s assistance to the North West Shelf project (e.g. payment of subsidies to the state’s power utility to help cover the losses it initially incurred under crucial ‘take or pay’ gas contracts) is estimated to be around $8 billion”. A Queensland Treasury submission stated: “Governments face budget constraints and spending on mining-related infrastructure means less infrastructure spending in other areas, including social infrastructure such as hospitals and schools.”

While the mining peak bodies are always quick to talk up the tiny proportion of state government revenues that flow from their members they are typically reluctant to discuss the tax concessions, subsidies and dedicated infrastructure funding they so frequently secure. That might all be about to change.

It’s not state governments or environmentalists who forced the gas industry to spend too much money building too much gas export capacity at exactly the time the world price of gas collapsed. And allowing more CSG drilling will not push the world price of gas down or do anything to prevent blackouts this summer. But there might be a silver lining to this most recent threat to the states. If the CGC really does take a close look at state government mining policies it will make for uncomfortable reading.

Richard Denniss is chief economist at The Australia Institute @RDNS_TAI

AFR Contributor

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