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$4 gas price ‘ignores realities’, says Exxon head

ExxonMobil’s most senior representative in Australia has labelled the setting of a $4 a gigajoule price target by the COVID-19 commission’s manufacturing taskforce as “dangerous”, saying it ignores the realities of costs of production.

“It’s dangerous to start at price and then work at any direction,” Exxon’s Australian chairman, Nathan Fay, told The Australian Financial Review, calling for a continuation of a free market in east coast gas to help stimulate needed investment.

“Ultimately price is a function of supply and demand fundamentals, so starting with $4 a gigajoule and perhaps ignoring some of the realities as to what the actual cost of finding, developing and producing gas is, really puts us at a starting point that is not constructive.”

The $4 price target has been seized on by manufacturers including petrochemical producer Qenos as vital to ensure a robust manufacturing sector that can provide the essential products needed to underpin a resilient domestic supply chain.

But gas producers argue that price – which is around current east coast spot prices – would not support the investment needed to bring on new gas fields. In its most recent report in February, the Australian Competition and Consumer Commission pointed to contract offers for gas still in the $9-$12/GJ range although industry sources say they have since softened to $7-$8, depending on delivery terms, still up to double the wished-for price.

Mr Fay earlier told the annual Credit Suisse Australian Energy Conference that the days of $4/GJ gas are “unfortunately behind us”, noting that the cost of gas from the Bass Strait venture’s most recent large development, Kipper, costs five times more per gigajoule than gas from the large Snapper field 30 years earlier.

He said Exxon supported many of the aims of the manufacturing taskforce of the National COVID-19 Co-ordination Commission, including lowering cost of supply, increasing production and reducing red tape.

“But prices ultimately are an output as opposed to slotting in a predetermined figure in and backing it into a solution,” he said, arguing against gas reservation or subsidised pipelines that could create “artificial” market conditions and deter investments, including in LNG import projects.

Still, the head of fertilisers maker Incitec Pivot, Jeanne Johns, said the experience on the east coast over the past decade had shown that increasing production does not improve prices for businesses or households. In the past decade gas production on the east coast has tripled, while prices have also tripled, she said.

“The concern is a lack of equity in how Australian customers are being treated,” Ms Johns told the Financial Review.

“International customers are sold gas on 25-years deals, while Australian industry is only able to secure two to three-year deals at prices that are internationally uncompetitive.”

Ms Johns said the COVID-19 commission outlined the way forward for gas in the economic recovery and jobs and said that was supported by ACCC findings, but the domestic market “is clearly not working for Australian manufacturers and household consumers”.

Qenos chief executive Stephen Bell called for more gas to be brought into the market such as Santos’ $3.6 billion Narrabri project in NSW’s north-west and voiced confidence in Santos’ ability to bring down costs of production and provide affordable gas.

Mr Bell strongly supports the taskforce’s report but said transition measures were needed to help manufacturers over the next few years until prices fell. That would require “give and take” on the part of both manufacturers and gas producers, with the support of government.

Source: Financial Review