South Australia’s royalty plan for farmers a gas game-changer 

South Australia’s decision to offer farmers a direct share of the royalties that would be generated by expansion of the state’s rich onshore oil and gas bounty should resound nationally as the most important single initiative in a new energy plan that is otherwise surprisingly rational and generally positive.Sure the plan arrived replete with a self-serving narrative that blames the faceless energy bureaucrats in Sydney and Melbourne for South Australia’s energy frailty while utterly failing to acknowledge the national network instability caused by the state’s excessive dependence on renewable power.

But Tuesday opened to fears that the South Australians were about to force retrospective gas reservation on its Cooper Basin producers, a move that would risk further market destabilisation, raise questions of sovereign risk for a state excessively dependent on a diminishing cohort of direct investors and also ramped up the pressure on one of the state’s few home-grown industrial champions, Santos.

So the fact that Tuesday’s bellicose political rhetoric from South Australian Premier Jay Weatherill was not preceded by anything like the market interference that had been anticipated was a serious positive.

There is nothing wrong either in the idea that the state should build itself a new peaking gas power station, or that it should demand that gas developers who accept state funding at any point in their progress should deliver gas to South Australia as a priority.

How the government’s plans to deliver itself new powers to direct the way the power industry supplies the state fit with South Australia’s national market obligations and with its existing commercial generators, well, time will tell.

But nothing in the package stands as nationally significant as the decision to offer farmers a direct financial incentive to further embrace oil and gas development on their properties. This is a first in Australia and it is the sort of direct incentive that the National Party’s federal leadership has been banging on about for some time.

The petroleum industry will be just as welcoming, not least because South Australia, for the moment at least, is offering farmers a share of the state’s existing royalty.

Petroleum extractors in South Australia pay a royalty equivalent to 10 per cent of well head sales value. So this plan will see farmers earn the equivalent of 1 per cent of the value of sales from future wells on their properties.

It is indicatively ironic that it is a South Australian Labor government that is the first to get the message on pastoral inclusion. Whatever we think about the state’s self-indulgent renewable energy policy, when it comes to the extractive industries, there are few states that get the regulatory and fiscal regimes as right as South Australia.

And, given the troublesome gas market outlook published on Tuesday by management consultants McKinsey & Company, South Australia’s clear-sightedness is a very good thing indeed.

The way McKinsey sees it, Australia’s east coast gas demand has peaked with the arrival of three suddenly very controversial liquid natural gas projects but the nation faces a $50 billion investment task just to maintain the current delicately poised supply and demand balance through to 2030.

The proponents of the Queensland’s three gas chillers expect to spend about $40 billion over the next 15 years on rolling out the coal seam gas wells that will be needed to feed their machines.

But, McKinsey estimates that the gas industry needs to spend a further $10 billion on new production if it is to get anywhere close to filling a supply shortfall caused by the natural decline of the nation’s original oil and gas wellsprings, the Exxon operated Bass Strait fields and the Santos operated Cooper Basin.

If timing is everything in business then McKinsey has proved why it ranks among the best in the consultancy game. The key data points offered in its analysis describe with numerical simplicity the nature of the gas supply side task ahead.

East coast demand is about 2155 petajoules of gas. McKinsey sees that to remain flat or to drift slightly lower between now and 2030. McKinsey assesses that the market is fully supplied.

But McKinsey warns that, without that additional $10 billion of currently unfilled investment, the market will enter a shortage from 2020 and that by 2030 the shortfall will be equivalent to 21 per cent of total demand.

McKinsey captures with clinical directness the nature of the contest between suppliers and contract customers over the availability of gas and the tenor and price of future contracted supplies.

“Historically, east Australia has benefited from lower gas prices than most other areas of the developed world,” McKinsey observes. It finds that, over the five years until 2013, the average price of gas in Victorias was $3.30 a gigajoule. Over that same period gas customers in the US paid an average $5.20/GJ, in Europe $9.70/GJ and in Japan a massive $18.60/GJ.

Australia’s new reality is more daunting.

“Conventional gas supply capacity is in steep decline and higher cost unconventional supply sources represent an increasing share of future supply capacity,” McKinsey says. The next wave of supply will demand a cost of between $5 and $8/GJ and the wave after that will cost even more.

The challenge we have right now is that, for reasons mostly outside of the control of the gas producers, the price signal has not triggered the supply-side response that it should. There are a host of reasons for that and most of them, it has to be said, are linked in some way or other to Santos.

Of the three Gladstone LNG projects, Santos operates the one that most relies on third-party producers for its gas feedstock. Each of the Gladstone operators runs two production trains. Santos should have stuck to one. Indeed, it would have done better to consolidate its ambitions with one of the other operators.

Origin’s project is more than self-sufficient and Shell’s BG-built project largely supplies itself. But the disappointing productivity of some Santos coal seam fields has left it short of gas. So it buys gas from Origin’s Queensland fields and its third party gas vacuuming stretches all the way to Bass Strait.

The other corner of Santos’ problems lies in northern NSW. The original plan was that Santos would be introducing material quantities of new gas from its Narrabri coal seam gas project by the end of this year. The original plan was that the project would quickly ramp up to better than 150PJ of annual production, equivalent to 50 per cent total NSW demand. But nothing went to the original plan.

But the project and the APA pipeline needed to support it remain effectively stillborn, having only just entered an environmental approval process that everyone knows will be a fierce contest.

High on the list of reasons why Santos has struggled at Narrabri is that the local farmers see risk but no reward from engagement with the coal seam gas sector. And that is why South Australia’s proposed royalty initiative is so important.

Grylls baked
In conceding personal defeat on Tuesday, the now former National Party leader, Brendon Grylls, completed a pretty handy weekend for the Pilbara iron ore miners.

The former member for the Pilbara went into Saturday’s election confident his proposal to snatch another $3 billion a year from Rio Tinto and BHP Billiton was a winner. It wasn’t.

The National Party vote collapsed and his locals turfed him out. The plan to increase the rent on iron ore leases from 25¢ to $5 a tonne will now disappear. The party most opposed to that plan won the day and Labor’s victory was so profound that the Liberal losers could not blame the big miners’ campaign for its loss. And Labor’s election arrived without the fulfilment of the miners’ worst fear, which was that their campaign might inflate radical minor parties such as One Nation. Didn’t happen.

This win, win, win, win announces the effectiveness of a campaign, which had as its most senior public face BHP’s Mike Henry, but the success of which was also shaped by several veterans of another big mining tax war.

Mentioned in dispatches are Rio Tinto’s local government and media boss Ben Mitchell, who was a lead actor in the Minerals Council’s destructively successful war on the offensively stupid Resource Super Profits Tax. He was joined by another pair of RSPT warriors in the form of adman Geoff Denman and focus group specialist Tony Mitchelmore.

We hear too that former ALP secretary, now BHP’s George Wright proved particularly critical to the second half of the contest. Wright, of course, was not part of the anti-RSPT campaign. Indeed, he came as near as damn it to sitting on the other side of that debate, having worked with Kevin Rudd until joining the NAB in 2008, then returning to run the ALP’s 2013 election campaign as it tried to recover from the electoral damage triggered, in part, by mining’s industry’s fight against the RSPT.

Read more: http://www.afr.com/business/energy/gas/south-australias-royalty-plan-a-gas-gamechanger-20170314-guxxtr#ixzz4bSM5G9at 

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