Welcome to Finance and Fury. The Say What Wednesday edition. This week we’re continuing the Question from Phuong –

Part of the question from last week that wasn’t covered.

“I heard about the Government’s plan to build some gas station? do you think this is green energy and does it help with economic growth?”

Last Say What Edition episode – went through the future energy plans that Governments have – a lot of this has to do with CO2 emission reductions

In this episode – be focusing on the Australian Government’s plans – looking at one section of the budget for economic growth and that is the focuses on the Gas industry

  1. the Government wants to reset the east coast gas market and create a more competitive and transparent Australian Gas Hub – aim to do this by “unlocking gas supply, delivering an efficient pipeline and transportation market, and empowering gas customers”
    1. Goals are to make energy affordable for families and businesses and supporting jobs as part of Australia’s recovery from the COVID-19 recession – so we will break these down

First step – answering the question on is this green energy?

  1. If defining green energy as not renewable – but lower CO2 emissions – depends on the benchmark – if more Australians start using gas as rather than coal electricity power – than yes
  2. When looking at the Green energy – focus is on Co2 Emissions – however not pollution – but the measurement of CO2 emissions – side note – in an ideal world – we would all live in a pollutant free world – however this can never be whilst humans exist – especially if people are measuring CO2 as a pollutant – because you are polluting every day by just breathing – the world population is just under 3 billion tonnes of CO2 every year in breathing
    1. However- coal has come a long way in getting pollutants like mercury and other toxins out of the coal – but still produces CO2
    2. So lets compare natural gas co2 emissions per kwh to the other sources of power –
    3. The carbon intensity of electricity varies greatly depending on fuel source – but as a rough guide: coal has a carbon intensity of about 1,000g CO2/kWh, oil/petroleum is 800g CO2/kWh, natural gas is around 500g CO2/kWh, while nuclear, hydro, wind and solar are all less than 50 g CO2/kWh –
    4. So if the plan is to replace more of the coal industry with gas – then yes – it is a step towards a ‘greener’ form of energy
      1. In Australia – Coal accounts for about 75% of our electricity generation – this is then followed by gas at 16%, then hydro at 5% and wind around 2%
    5. This doesn’t include households use of Solar – but what is commercially provided
    6. However – if coal accounts for 75% and is emitting 1,000g CO2/kWh – by replacing this with natural gas – would reduce our CO2 emissions by about 37%
  3. Out of these industries – the one at the greatest level of risk is the coal industry if the policies continue to focus on low CO2 emissions industries for the electricity industry – also important to point out there is a difference in the electricity industry and the transportation/car industries with electric vehicles –
  4. However – The oil/petroleum industry overall isn’t in that much of a risk at this stage – Just to clear one thing up – whilst the energy industry is moving towards solar and wind – and other forms of renewable energy – the petroleum industry isn’t going anywhere –
    1. Petroleumis the main source of energy for transportation – accounts for about 92-95% (depending on the country) in transportation power – will take decades for the majority of cars to be EV – takes time and not everyone can afford an EV at the moment –
    2. However – Even if every car in the world goes to EV – and there is no need for petrol in fuelling cars, trucks or boats in transportation – not going anywhere – part of plastics – if you look around the room – it has been part of the majority of products that are produced – so maybe the petroleum industry adapts –
    3. Even the road that these EV cars will drive on has petroleum in them – asphalt uses about 350k barrels of oil a day – or just under 128m barrels p.a.
  5. So to answer the question on if Natural Gas is green energy –as a measurement of CO2 emissions – compared to coal it is – but compared to nuclear, solar, hydro or wind – it isn’t

 

Moving on to the Australian Government’s plans for a Gas Hub – and if this can provide economic growth

  1. Model is similar to what the US has – the aim is to create a transparent and liquid financial gas market –
  2. This is based on the Henry Hub that is based in Louisiana – at the end of the pipelines that flow all the way up to Alberta in Canada
    1. Under these hubs – Gas is available at any time, at a clearly visible price for transfer anywhere around the country. With hedging on offer on futures markets, buyers can take decisions on long-term investments in their own operations knowing that a key fuel will be available and what it will cost.
  3. Now the federal government is taking steps towards delivering an open and competitive hub model like Henry Hub in Wallumbilla near Roma in Queensland, a key point in the east coast gas grid – however pipelines need to be in place for the effective/timely/low cost transportation of natural gas
    1. That is where we have a very long way to go – we lack a lot of the infrastructure – so the governments plans may be able to improve this –
    2. On the pricing side – in Australia- the financial market for natural gas is far less liquid than what exists in the US – give it to Obama on this one – for all his green energy talks – he sure did step back and let the energy/gas industry just do their own thing – in a matter of years they became the energy dominant power on earth
    3. In Australia – industrial customers currently have to deal with opaque pricing models – this is due to the bilateral deals that are made between gas providers and the companies demanding it – there isn’t a market involved – has to do with thelimited choice of supply as well as the difficult negotiations on transportation terms on the sparse pipeline grid
    4. To help conceptualise this – image a share market where you had to go to the company you are wanting to buy shares in and negotiate a price for the share – go to CBA and offer $60 per share – but they want $80 – you negotiate and reach a price in the end – however -under the share market – the supply and demand of these shares gives the market price – at around $69
      1. Also – rather than the shares turning up on a clearing house system – you had to get the certificates delivered to you or go and pick them up from the post office
    5. For Australia – and the Government to implement these plans – the challenge is how this version of a market hub for gas can be created
      1. First – need massive infrastructure in the pipelines as well as increasing the suppliers in the market
      2. Looking at the US – the success of the Henry Hub is largely due to the extensive network of infrastructure that surrounds it – it offers access to both the suppliers and those who demand it across the US as well as Canada and Mexico
      3. Looking at the grid – it has interconnections into nine intrastate and four interstate pipelines that provide the supply to the rest of the country – it also has three storage caverns that allow the storage of additional gas – allows for flexibility in the market – for supply to build up and incentivise the providers to lower prices – as well as providing the gas at short term notice when it is demanded
    6. The US has built a pretty good system – now comparing this to Australia – firstly we have less demand and supply – a lot of this has to do with population sizes – however looking at the infrastructure that is in place –
      1. In Australia – we have about 30 pipelines on the eastern seaboard – which covers around 20,000 km
      2. The US has about 210 pipelines – that are all interconnected – covering about 500,000 km
      3. On top of this – in Australia – for this program to work as intended – need additional sources of gas supplies – as well as on the consumer side – you need a strong buyer base
        1. This can include power plans, commercial consumers as well as individuals in households
      4. How does the Government plan to rectify this – through focusing on three major areas – unlocking supply, making gas transportation more efficient and giving consumers more power in pricing negotiations
        1. Unlocking supply – The Government aims to get more gas into the market by –
          1. Setting new gas supply targets with states and territories and enforce potential “use-it or lose-it” requirements on gas licenses – so if a company has rights to a gas basins – can’t limit the supply artificially – would have to use is – may help to increase supply
          2. Unlocking five key gas basins starting with the Beetaloo Basin in the NT and the North Bowen and Galilee Basin in Queensland, at a cost of $28.3 million for the plans – depends on the regulatory plans – and what the gas levels in these basins are – but still need to the supplies here
  • Avoiding any supply shortfall in the gas market with new agreements with the three east coast LNG exporters that will also strengthen price commitments
  1. Supporting CSIRO’s Gas Industry Social and Environmental Research Alliance with $13.7 million and Exploring options for a prospective gas reservation scheme to ensure Australian gas users get the energy they need at a reasonable price
  1. boost the gas transport network –
    1. Identifying priority pipelines and critical infrastructure as part of an inaugural National Gas Infrastructure Plan (NGIP) worth $10.9 million that will also highlight where the government will step in if the private sector doesn’t invest – Government would also work with state governments through a program worth up to $250 million to accelerate three critical projects – the Marinus Link, Project Energy Connect and VNI West interconnectors
    2. Reforming the regulations on pipeline infrastructure to promote competition and transparency and Improving pipeline access and competition by kick-starting work on a dynamic secondary pipeline capacity market
  2. To better empower gas consumers
    1. Establish an Australian Gas Hub at our most strategically located and connected gas trading hub at Wallumbilla in Queensland (near Roma) to deliver an open, transparent and liquid gas trading system
    2. Level the negotiating playing field for gas producers and consumers through a voluntary industry-led code of conduct, to be delivered by February 2021 – have to wait to see what this looks like
  • Ensure Australians are paying the right price for their gas by working with the ACCC to review the calculation of the LNG netback price which provides a guide on the export parity prices – this does take the free market out of it a little bit – letting the ACCC get involved

 

So that is the plan – and it may work – Australia does have a competitive advantage when it comes to natural gas – Last year – Australia was the largest exporter of LNG – with an export value of $49 billion – so it has been a core part of our export markets

  1. To build upon this competitive advantage isn’t a bad thing – especially if it does as what is intended – through letting producers and consumers get a better market price through the Gas Hub trading system
  2. We have a massive resource of gas – so helping boost this will help to boost the economy if done well –
    1. We are competitive – so our exports should go up – and if the industry grows – through an increased supply – then this should provide more jobs and well as lowing the cost of electricity to consumers
    2. At the moment – the estimates show that the Gas industry supports the manufacturing sector quote a bit – and in total these industries employ over 850,000 Australians – the government estimates that a further 4,000 jobs can be created in the gas industry between working on the infrastructure grid or directly in the gas industry
    3. Flow on industries form this – like petroleum – gas is an essential input in the production of plastics for PPE and fertiliser for food production

When looking at the plan – if it replaces coal – it may be robbing Peter to pay Paul – if we focus on Coal exports still and no jobs are lost in the mining/export industry of coal – may still see some job losses in the coal energy industries – but it is hard to say

  1. As far as economic growth goes – direct affects – if it created more jobs – long term – not just a short term plan to build a pipeline – but through expanding this industry – think this can help
  2. Indirect affects for individuals and companies –
    1. Supply side – lower cost of production of goods – could translate to lower costs of goods/services over time
    2. Demand side – lower power bill price – assuming the prices of electricity actually does go down – will benefit Australian households and businesses – lowering bills means more left-over income – following demand side economics – this could be spent in the economy
  3. Overall – I do like the plan when compared to other proposals or just regulating power prices directly – there is no perfect plan – or solutions to economic problems – there are only compromises – think it is a good compromise to balance the agreed upon CO2 emission reductions whilst not destroying the economy and jobs that go within it – through taking CO2 emissions and increasing electricity prices

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

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