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Australia ‘at risk’ from global energy crunch

Australia faces pressure on gas prices as a global crunch spreads to the nation’s energy sector in a move that could further strain manufacturers and heavy industry, top industry executives have warned.

Spot LNG prices in Asia have soared to a fresh all-time record amid a global scramble to secure supplies, with China rushing to grab volumes to fix its energy crisis and low inventories in Europe spurring competition for the fossil fuel.

Australia’s east coast gas market, tied to Asia through Queensland’s LNG export industry, has yet to see any significant price inflation from the crisis.

AGL Energy said the spike in both internationally traded LNG and thermal coal prices, both used heavily for power generation, could lead to higher energy costs for the fossil fuels in Australia.

“The shorter term is where it’s pushed up the prices of gas and where it’s pushed up the prices of energy coal, it obviously has the potential to push up the cost of thermal generation in this country,” AGL chief executive Graeme Hunt told a business conference on Monday. “If fuel costs go up, energy costs go up.”

Santos said soaring international LNG prices, if sustained, could lead to a hike for domestic users.

“You are seeing LNG prices I didn’t think I’d ever see in my life in the international market today,” Santos chief executive Kevin Gallagher told the conference. “I don’t think Australia will be immune to it.”

The massive jump in LNG spot prices may also raise concerns for Australia’s gas hungry manufacturers, with the nation’s east coast domestic gas price now linked to international LNG prices due to Queensland’s export industry.

The Australian Competition & Consumer Commission’s LNG netback series – a local LNG price that takes out the cost of processing and shipping gas to Asian customers – is currently just under $36 a gigajoule for November, quadruple the price most local industry normally pays.

While most big buyers secure gas on long-term contracts rather than pay for supplies on the spot market, Santos said any cost inflation could cause issues for the large manufacturers who rely on the fuel for their operations.

“We know what the complaints from the manufacturers were here on the east coast when prices approached double figures, not $US50 or $US60 per million British thermal units,” Mr Gallagher said, referring to current price records. “Even approaching $10MBtu, we saw the price and the pain that those price points were causing here in Australia. So you can only imagine what that would mean for us here in terms of the difficulty to economically run those same manufacturing businesses, if they’re exposed to those same international prices.”

The Australian Energy Market Operator, which runs the country’s electricity grid, also expects global price pressures to filter through despite Australia being the world’s biggest LNG exporter and not at risk of the same supply tensions in Europe and Asia.

“Energy pricing is obviously global and we haven’t yet seen significant price increases in Australia as a result of what’s happening in Europe and around the world. But we should be aware that these could weave their way through the system quite soon,” AEMO chief executive Daniel Westerman said.

Global engineering group Worley said a “perfect storm” led to international energy crises, although he batted back suggestions the crunch had been caused by countries transitioning too rapidly to renewables from fossil fuels.

“If you look at some of the challenges in the UK I think it’s a perfect storm and it’s happening in a number of locations around the world,” Worley chief executive Chris Ashton said.

“But I don’t think that the gas price in the UK or the coal shortage in China are attributed to the energy transition.

“I think what they do point to is the value of having a diverse source of energy and power such that if one source becomes expensive or there is a lack of it, there is resilience in the energy system to make up the supply from other sources.”

Two major oil price crashes in the past five years dented the energy industry and led to a period of low investment in new projects globally, partly contributing to the current energy jitters according to the Santos chief.

“We have two one-in-100 year price crashes in the last five years,” Mr Gallagher said.

“In addition to the environmental, social and governance pressures which are natural market forces slow down investment during those down cycles. And in such a short period of time, it slows down investment.”

Nations moving too quickly to renewables may be part of the issue, Santos said. “You rely on someone being able to turn a tap on somewhere to cover the shortfall,” Mr Gallagher said. “And I think in Europe right now the tap has not been turned off as fast as some would have liked it to in energy and you’ve got shortages, and then we can see how that plays out in prices.”

Source: The Australian