Urgent reform needed in gas market, Frencham says

Urgent reform is needed, particularly in the gas market, according to the local MD of one of the world’s biggest chemical companies. Brent Balinski spoke to Dow’s Tony Frencham about the manufacturing industry’s energy worries.

There are opportunities for plastics and chemicals manufacturers, but there’s also an urgent need for action on a number of policy fronts, according to the Australia and New Zealand managing director of Dow Chemical.

Dow manufactures in 36 countries and has done so in Australia for over half a century, with factories currently operating at Geelong and Altona.

Tony Frencham, the local managing director of the $US 57 billion revenue company, has serious concerns about access to affordable gas.

“Right at the moment we don’t have an energy policy in place to meet our competitive advantage around what should be our energy riches,” he told Manufacturers’ Monthly following his address at the Plastics and Chemical Industry Association’s (PACIA) national conference.

“Every inland state has gas onshore and yet we find ourselves on the east coast about to double, triple our prices, and if the reports are correct, [they] are facing a gas shortage in Sydney in 2016.”

The tightening supply as exports commence from seven sites – starting with BG Group’s project on Curtis Island – over the next two years is a deep worry for industry and others. Local prices are set to approach what the market will pay in gas-poor east Asian nations.

Dow will renew its supply of gas at its Altona site at the end of the year, and expects the price it pays to double.

Many predict a tripling of the historical average of about $3 or $4 a gigajoule paid per gas by some on long-term contracts. A recent comment by industry minister that NSW users would pay “north of $10 a gigajoule” was “very realistic,” said Frencham.

The situation is a serious one. A Productivity Commission announcement of a study into the market’s effectiveness has just been launched, though the due date of its report, March next year, has been met with frustration.

There are a number of reasons given for the problems with the local market, described by PACIA as “broken”.

These include massive supply-side issues, according to users such as Dow.

The moratorium on onshore drilling in Victoria until after the election and the exclusion zones for coal seam gas in NSW were frustrations.

“We’ve got gas in the ground stranded that suppliers would like to get out and get to users,” said Frencham.

He added that he believed the federal industry minister understood the problem, but action was needed on a national level to stop the stockpiling of gas supplies.

“We’ve got companies who have gas in their tenements that are effectively warehousing it and not pulling it out and releasing it to the market… We’d just like the market to be able to operate fairly and effectively.”

Some, such as the Australian Workers Union, have suggested a policy to set aside a proportion of gas extracted to be provided to local users at affordable prices.

A domestic gas reservation is not something Dow supports, Frencham is quick to add.

The global head of his company, Andrew Liveris, has been described as a “strong supporter of domestic gas reservation”, though Frencham said Dow was not pushing for such a policy. A “rational discussion” on how to best use the country’s gas wealth, however, was badly needed between government and industry.

“At the moment we’re allowing all of that to be sent offshore – I’m talking about in Western Australia, Northern Territory and Queensland – we’re allowing those ethanes and liquids that are valuable feedstocks to be sent offshore for heating and energy value instead of being kept onshore for value-add and job multipliers in the chemical and other industries,” he said.

The need for action on gas, be it by encouraging a greater supply to come onstream or by intervention in some other way, is something many are concerned about.

The coming boom, which will see Australia overtake Qatar as the biggest LNG exporter in the world, and could earn an estimated $50 billion a year.

The seemingly perverse local squeeze as all this energy is exported could cost, however, $118 billion in lost manufacturing output up to 2021, if nothing is changed and if Deloitte Access Economics’ research is to be believed. It also predicted 14,600 manufacturing jobs would be lost.

Other estimates, such as one by Manufacturing Australia, have put the cost of inaction at 100,000 direct jobs.

There are more immediate examples of the impact of high-cost gas. Two in the chemicals industry are Incitec Pivot’s decision to build an ammonia plant in Louisiana and Coogee Chemicals’ consideration of a new methanol plant somewhere other than Victoria, reported by The Australian Financial Review.

In both cases the availability of cheap energy, due to the United States’ boom in shale gas, was cited.

The complacency by governments on energy policy is a frustration for manufacturers. In his address to PACIA, Frencham suggested that 23 years without recession had possibly crueled the desire for reform.

He believes there are benefits to be reaped by his industry from recent free trade agreements and those under negotiation.

However, there are huge problems to do with energy – as well as things including the much-discussed need for better linkages between researchers and businesses – to be addressed.

“For us to be able to qualify [as] an effective trading partner, we’ve got to get our manufacturing house in order in Australia,” said Frencham.

“We have a number of things we need to get right in Australia if we’re going to be an effective trading partner of anything other than base commodities.”

 

Story image: supplied

 

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