7:30 Thursday 3 November 2022
David Speers: Samantha McCulloch is the chief executive of the Australian Petroleum Production and Exploration Association, which represents gas producers. Samantha McCulloch, welcome to the program.
Samantha McCulloch: Thanks for having me, David.
David Speers: So, the Industry Minister says the problem with gas prices right now is a “glut of greed” by the gas companies. Is he right.
Samantha McCulloch: David, what we’re seeing is high energy prices across the globe. This is the result of a global energy crisis triggered by Russia’s invasion of Ukraine. It’s affecting all energy sources and it’s affecting all countries.
David Speers: But can you explain to me why that should push up the price of Australian gas in Australia?
Samantha McCulloch: We’re seeing very strong demand for gas domestically. This is being driven by a critical role that gas is playing, particular in the electricity sector. Gas is increasingly being called to fill the void when renewables are not available, and when coal fired generation is not available. We saw this over the recent winter, when gas demand increased 55% in May versus May last year. It’s increasing demand for gas that’s driving up these prices, as well as, of course, international pressures. And the key to driving down these prices and putting sustained downward pressure on gas prices is increasing supply. That’s what the industry is seeking to do. But we need a clear runway for more investment to boost supply and put downward pressure on prices.
David Speers: Well, ok, but you did say a few days ago yourself, the domestic market is well supplied. And the agreement that was struck only a – just over a month ago, between the LNG exporters and the government was about boosting supply. So, even more supply. Supply doesn’t appear to be the problem, does it?
Samantha McCulloch: The gas industry is committed to supplying the domestic market, and the domestic market has been well supplied. The heads of agreement that was struck between the three east coast LNG exporters and the federal government committed to ensuring adequate supply for the domestic market –
David Speers: [interjecting] So, what – what’s the –
Samantha McCulloch: – But what we’re seeing –
David Speers: – [interjecting] problem with supply? Is price the problem?
Samantha McCulloch: The problem that we’re seeing is the increasing demand for gas is predominantly in the southern states, for this growing role for gas fired power generation. Yet, we’re not seeing the investment in supply in those states –
David Speers: [interjecting] But you just said there’s – there’s –
Samantha McCulloch: – the cheapest gas –
David Speers: [interjecting] – there’s – we’re well supplied.
Samantha McCulloch: – that is… The cheapest gas is the gas that’s close to the use. So, we need to be building more supply where it’s needed. And that predominately is in Victoria, in NSW, who are major gas using states –
David Speers: [interjecting] Ok, it’s not going to fix –
Samantha McCulloch: – for the east coast market.
David Speers: [interjecting] – the immediate problem. The immediate need is to bring down prices. So, just coming back to what you were saying. You’re saying the price increase, the doubling and more of gas prices in Australia is driven by higher demand for its use in electricity?
Samantha McCulloch: It’s – it’s driven by a number of factors, including those international pressures. But the key is – and this has been acknowledged by the Prime Minister, it’s been acknowledged by the Opposition Leader, the CEO of the Business Council of Australia – bringing on new supply is the key to putting sustained downward pressure on prices –
David Speers: [interjecting] Well, ok, let’s talk about that –
Samantha McCulloch: And that’s what the gas industry is trying to do.
David Speers: Well, alright, if more supply is the answer – one proposal being considered by the government, uh, is to let the three big LNG exporters keep their, um, international contracts in place – no breaching of contracts – but excess gas that’s currently sold on the international spot market would instead be made available in Australia first at a price of no more $10/gigajoule. More than they were getting last year, so they can still get a profit. What’s wrong with that idea?
Samantha McCulloch: David, that uncontracted gas is already being offered to the domestic market first. That was the basis of the heads of agreement that was struck – the deal that was struck between the three –
David Speers: [interjecting] But at very high prices –
Samantha McCulloch: – east coast LNG…
David Speers: [interjecting] But not at $10/gigajoule – a gigajoule. It’s being offered for more than that.
Samantha McCulloch: Well, let’s just be clear on what these gas price caps would do. I know it sounds like a – a easy and quick solution –
David Speers: [interjecting] Yep.
Samantha McCulloch: – but it would – it’s not that simple.
David Speers: Why not?
Samantha McCulloch: Gas prices – gas price caps would have a chilling effect on new investment. It will undermine investment confidence in new supply. It’ll actually increase demand, while creating structural shortages in supply, which just creates further difficulties –
David Speer: [interjecting] Well –
Samantha McCulloch: – and problems –
David Speer: [interjecting] you talk about a chilling effect –
Samantha McCulloch: – long term.
David Speers: Manufacturers are facing more than a chilling effect with the current gas price. That’s spooking a lot of investors, having to, you know, face double the gas price they were a year ago.
Samantha McCulloch: Let’s – when we’re talking about gas prices, let’s just be clear. This is a complex market and gas pricing is complex. There’s the retail market and then there’s the wholesale market.
David Speers: Yep.
Samantha McCulloch: Now, I’m going – I’m focussed on the wholesale market, because that’s where the gas producers are supplying into. And the realised average price for gas sold in the wholesale market, 90 per cent of which is sold on a long-term contracts, is priced between $6 and $12/gigajoule –
David Speers: [interjecting] Well, that was probably on –
Samantha McCulloch: That’s an international –
David Speers: [interjecting] – contracts written before this price spike though, right?
Samantha McCulloch: That’s the average price being realised –
David Speers: [interjecting] What’s being offered now?
Samantha McCulloch: – in third quarter this year.
David Speers: [interjecting] What’s being offered now, though?
Samantha McCulloch: That’s according…
David Speers: That’s between July and September, and presumably contracts that predate what’s happened with the gas price. What’s being offered now?
Samantha McCulloch: So, David, this is where we need far more transparency in the market –
David Speers: [interjecting] Can’t you tell us?
Samantha McCulloch: – because we’re seeing… Well, we’re seeing claims of very high prices being offered in the market but there’s no –
David Speers: [interjecting] Well, don’t you know?
Samantha McCulloch: – details around that.
David Speers: Why don’t you know?
Samantha McCulloch: No, this is reported to the ACCC. We’ll get more details of this but there’ll be a delay.
David Speers: Can you tell me how much, uh, have the profits of the LNG exporters grown, uh, since the war in Ukraine?
Samantha McCulloch: David, what I can tell you is that the strong demand for our LNG exports is delivering returns for Australian budgets and the Australian people –
David Speers: [interjecting] What about – I’m asking about the profits for the companies though. There are estimates it’s around $26 billion in profit growth.
Samantha McCulloch: I don’t have an estimate for individual companies. They report this on a quarterly basis. But, what I can say is that we’re seeing more returns to the Australian people in the budget –
David Speers: [interjecting] Well –
Samantha McCulloch: – in state government budgets, in the Commonwealth budget –
David Speers: [interjecting] To be clear on that –
Samantha McCulloch: – in last month’s budget –
David Speers: [interjecting] – the petroleum resource rent tax, uh, this financial year is returning very little – $2.6 billion. And that’s barely moved from before the – the gas price spike.
Samantha McCulloch: The petroleum –
David Speers: [interjecting] So, is that really fair given the sort of profits that are estimated to be $26 billion in profit growth?
Samantha McCulloch: The petroleum resource rent tax is projected to provide $11 billion to the federal government budget in the –
David Speers: [interjecting] Over four years –
Samantha McCulloch: – forward estimates.
David Speers: [interjecting] – what are profits over four years?
Samantha McCulloch: Just to be clear these are –
David Speers: [interjecting] What are profits over four years? If you want to use –
Samantha McCulloch: This is already a profits-based tax, uh, of at least 40 per cent. And it’s just one aspect of the financial contribution of the industry to government revenues.
David Speers: Why can’t you tell us the profits they’re breaking in?
Samantha McCulloch: Look, I’m representing the industry – these are international companies too, of course, David. But what I can tell you is the direct contribution that we’re making to the Australian governments and to Australian people will triple this year according to our estimates.
David Speers: Ok.
Samantha McCulloch: That includes royalties, it includes taxes and – and this is good. This is $9 billion extra in government revenues this year that can help to fund hospitals, schools, paid parental leave. The industry is making an enormous direct contribution to Australian government budgets. And, of course, it’s enabling – according to estimates – around $470 billion in economic activity annually.
David Speers: Alright. Samantha McCulloch, we’ll have to leave it there. Thanks for joining us.