Protección de la Red de Dispersión y Equipo de Abonado

Box 7.3 Studies used to support calls for domestic gas reservation

Some gas market stakeholders have commissioned studies that estimate the effect of the expansion of LNG exports on economywide outcomes.4 BIS Shrapnel (2014) estimated that a 73.5 petajoule shortfall in gas supply to the manufacturing sector in 2023 would, relative to a scenario where there is no supply shortfall, decrease GDP in 2023 by up to 2.2 per cent. The National Institute of Economic and Industry Research (2012) estimated that expansion of LNG exports from the eastern Australian gas market would, relative to a scenario where there are no LNG exports, reduce GDP in 2040 by around $22 billion (2009 dollars).

These studies have mainly relied on ‘input-output multipliers’ to estimate the effects of the expansion of the LNG industry. However, multiplier analysis tends to overestimate the benefits of domestic gas reservation. This is because the assumptions underpinning multiplier analysis do not account for a number of important economic effects.

• Labour, land and capital resources released by a decline in gas-intensive domestic industries would be reallocated to other industries over time. Multiplier analysis underestimates the amount of production in the absence of domestic gas reservation by not accounting for increased production in other industries from a reallocation of resources.

• Higher gas prices would encourage greater production and investment in gas exploration and development. Multiplier analysis underestimates the amount of production in the absence of domestic gas reservation by not accounting for increased gas production.

• Higher gas prices would prompt some gas-intensive users to substitute to other energy inputs or adopt more energy efficient production methods, and some users of output produced by gas-intensive industries would substitute to other supply sources. Multiplier analysis overestimates the decline in production in the above industries in the absence of domestic gas reservation by not accounting for these effects.

• In the short term, reduced output in gas-intensive industries would free up inputs such as labour and land, putting downward pressure on the prices of those inputs. Over the longer term, lower input prices would help to facilitate the expansion of other industries. Multiplier analysis underestimates the amount of production in the absence of domestic gas reservation by not accounting for increased production in other industries due to decreased input prices. Domestic gas reservation may ultimately be costly but ineffective in preventing wholesale gas prices for domestic users in the eastern market from rising in the future. By reducing the return on new supply sources, reservation would decrease incentives to invest in gas exploration and development. The gap created between domestic prices in the eastern market and export prices likely under such a policy would especially weaken incentives to invest in projects that would produce solely for the eastern market, given that all of a domestic project’s production would be sold at prices below the market level.5

4 Some other empirical studies estimate the effect of the expansion of LNG exports on particular sectors of the economy, such as manufacturing (AEC Group 2012; Deloitte Access Economics 2014).

5 BIS Shrapnel (2014) argued that increased gas exploration and development expenditure in Western Australia following the introduction of its formal reservation policy in 2006 is evidence that reservation does not inhibit supply. However, changes in expenditure over time do not provide evidence as to whether expenditure is higher or lower than what it would have otherwise been, and do not account for other factors

A BROAD PERSPECTIVE 129 The potential effects of domestic gas reservation on supply highlights that such policies are administratively difficult for governments to implement. It would be difficult to forecast the precise amount of gas needed to achieve policy aims, and this amount of gas would change over time due to fluctuations in expected demand. This creates the difficulty of recalibrating the policy on the basis of accurate and updated forecasts of domestic supply and demand without imposing further uncertainty and costs on gas producers. Results from the Commission’s model illustrate some of these difficulties, with the effects of reservation on prices and output highly sensitive to the reservation requirement and LNG prices.

7.2 Market power and policy reform

Some gas market stakeholders have argued that gas producers in the eastern Australian gas market have market power, and that the exercise of this power is affecting market outcomes. For example, BIS Shrapnel (2014) said that the market power of gas producers has led to high gas producer profits. The Energy Users Association of Australia (EUAA) said:

Input from EUAA members indicates a strong bias toward the inability to contract competitive terms for gas purchases … The source of this inability appears to be the manoeuvring by major gas producers to hoard gas and escalate margins using their market power and disproportionate influence. (2014, p. 1)

A number of large industrial gas users have indicated that they are unable to secure contracts at any price (or that there is a risk of this happening) (AAC et al. 2014; Dow Chemical 2014; Manufacturing Australia 2012). Some users have suggested that this too is a manifestation of the exercise of market power (AAC et al. 2014). The AIG (2013) undertook a survey of business gas users in the eastern market and found that of businesses looking for new gas contracts, 10 per cent reported they could not get an offer at all (chapter 2). Manufacturing Australia argued:

Australian manufacturers are currently facing export-level prices for future gas contracts, which are approximately double the production cost, with a further risk that gas is not even available for domestic use at any price. Short-to-medium term pressure on domestic pricing is threatening the competitiveness of domestic manufacturers and the high level of value-add provided by these manufacturers. (2012, p. 2)

A comprehensive assessment of the existence and exercise of market power in upstream gas markets is outside the scope of this project. The Commission has not sought to determine, nor has received sufficient evidence to reach any conclusions regarding the existence and exercise of market power in any part of the gas supply chain, and some caution is warranted in drawing firm conclusions on the extent of market power based on evidence that has been put forward to date. However, the Commission has taken on board concerns raised by project participants and others about a lack of effective competition in gas markets, and used

affecting investment, such as exploration costs. Also, the policy would have likely influenced investment before it was formalised in 2006, through the inclusion of supply obligations in state agreements (box 7.1).