Liquid Fuel Emergency Amendment Bill 2017: Second Reading

September 04, 2017

Liquid Fuel Emergency Amendment Bill 2017

Second Reading

Consideration resumed of the motion:

That this bill be now read a second time.

Mr BUTLER (Port Adelaide) (11:47): I rise to speak on behalf of the opposition on the Liquid Fuel Emergency Amendment Bill 2017 and can indicate the opposition's support for this legislation, though I foreshadow we'll be moving a second reading amendment to the bill. The bill deals with Australia's obligations under the International Energy Agency's agreement on an international energy program. It has long been a bipartisan position for the Australian parliament to support the work of the IEA, which was established in the wake of the oil crisis of the 1970s and provides strong policy and industry advice on energy to governments and to the industry across the country. This bill forms part of the government's plan to ensure that Australia complies with the IEA's fuel emergency reserve requirements, which are an important part of that IEA agreement. In particular, there is a requirement, reasonably well understood, I think, across the industry, for Australia and all other members of the IEA who have signed that agreement to have available 90 days worth of emergency fuels—in this case, liquid fuels.

This bill deals with the fact that in Australia over a number of years, through declining domestic production, we have seen a number of refineries shut down, such that we only have four oil refineries still producing in Australia. Also, because of increased demand for liquid fuels through population growth and the mining boom, Australia's stocks are no longer sufficient to meet the 90-day requirement under that agreement and, indeed, Australia has been noncompliant with that stock-holding obligation since about March 2012.

This bill will facilitate processes to allow the government to ensure that we do become compliant with that requirement, particularly by increasing the reserve of fuel by entering into financial contracts that are essentially call options that enable fuel reserves to be held financially, obviating the need to require Australia to hold them physically onshore in Australia, which obviously involves a whole range of logistical costs of fuel transport and storage. In particular, this bill enables the government to enter into commercial oil stockholding contracts with either foreign or Australian entities. These contracts include purchasing rights to access oil stocks, which are known within the industry as ticketing. Ticketing is a type of commercial oil stock contract that is commonly used by IEA member countries, particularly in Europe. Under a ticketing contract, the seller agrees to reserve, on behalf of the buyer—which, in this case, if the legislation passes, would be Australia—a predetermined amount of oil in return for an agreed fee. During the contractual period, the buyer—again, Australia in this case—has the option to purchase those stocks with the price being determined by a market-based rate or, alternatively, could release the stock back into the global oil market. Ticketed stock is able to be held either offshore by a foreign entity or onshore by an Australian entity.

Importantly, this amendment is required to ensure that the government has the legislative authority for the expenditure of funds on oil stockholding contracts or ticketing contracts for the purpose of complying with the principles outlined by the High Court in the Williams decision back in 2013-14. The Australian government plans to purchase, as we are advised, 400 kilotons of offshore tickets through 2018-19 and 2019-20, which will involve the expenditure of $28.3 million over the forward estimates.

As indicated, the opposition supports this bill. The opposition values very highly the IEA's work and places great store in Australia's ongoing ability to comply with the obligations that Australia has signed up to through the various IEA agreements, including the stockholding obligations—the 90-day rule—which is included in the agreement I referred to earlier. This is important for all countries, but particularly important for an island nation situated in an increasingly volatile region of the world. We applaud the government for bringing this legislation to the parliament and indicate, as I said, that we will support it.

I move:

That all the words after ''That'' be omitted with a view to substituting the following words:

''whilst not declining to give the bill a second reading, the House notes:

(1) the government’s lack of national energy policy, which is causing an investment strike in new electricity generation; and

(2) the government’s failure to ensure an adequate and affordable gas supply for Australian industry while Australia becomes the world’s largest LNG exporter''

While this bill is all well and good, there are much bigger, much more influential issues of policy in the energy sector that the government continues to prevaricate over. 

This government knew what it wanted to do by way of dismantling policy but has failed dismally to put in place any replacement energy policy. It is now well understood across Australia that Australia is in the throes of a deep energy crisis caused principally by a lack of policy certainty around energy. Power prices are not only crippling business investment but they are hurting households across the country. Every member in this House, I'm sure, is constantly approached by their constituents about power prices biting their household energy bills and their household budgets more generally.

The Reserve Bank governor gave some evidence to the House of Representatives Standing Committee on Economics back on 11 August about the importance of policy certainty in driving down prices for business and for households. Governor Lowe said:

There is uncertainty about the policy environment and that is delaying investment. That is not in dispute. The investment uncertainty is not just in electricity generation; it's affecting investment decisions in other parts of the economy, because businesses aren't sure about the future price of electricity, so it's another reason to wait. We talked right at the beginning, in response to the chair's question, about why business investment isn't picking up. Some businesses say, 'Well, we're not sure what the future price of electricity is, so we'll just wait to see if that works itself out.' The higher prices of electricity are also affecting household budgets, particularly for lower income households, who spend a disproportionately high share of their income on electricity. It's crimping their budgets and having an effect on consumption …

That is what the RBA governor said, and it reflects the fact that, over the four years of this government's tenure, wholesale power prices have doubled, feeding into household prices, which we saw increase on 1 July by as much as 20 per cent in states like New South Wales, following increases elsewhere in the Federation since this government came to power. The Reserve Bank governor was asked in that hearing:

So it would help if the Australian parliament sorted out this issue of a clean energy target and providing some policy certainty …

The governor responded:

… I couldn't disagree with the proposition that providing some certainty about the future structure of the electricity generation industry would be useful for the country, for investment, on prices and on household budgets. Yes.

That just adds to a cacophony of reports and advice—from Alan Finkel, the Chief Scientist, and his panel and many other think tanks and energy market bodies—all saying that this country has got to get some policy certainty around electricity generation to ensure investment flows to replace those ageing generators that are inevitably shutting down because of their age.

Meanwhile, yes, the Prime Minister brought the retailers to Canberra for another meeting last week, or the week before, and we do hope that will yield some behavioural change on the part of the retailers and allow consumers some ability to navigate their way through a very complex retail market, but it is no substitute for policy certainty around investment generation. I point out also that, meanwhile, for all that the Prime Minister professes in his concern about the impact on household budgets of rising electricity prices, he is continuing to press ahead with his intention to remove the energy supplement from 400,000 age pensioners, 109,000 people on the disability support pension and 105,000 carers, who would lose, if they are in a couple household, $550 a year specifically targeted to help them with the impact of energy prices.

In the context of this legislation and our second reading amendment, I particularly want to talk about some of the government's rewriting of history about the gas market over the last several days—and I have heard a couple of interjections from the backbench and from the minister about that again. I think anyone with a passing interest in the energy sector will have noticed manufacturers crying out in distress at the gas prices that they have seen in the market under this government, particularly over the last six to 12 months. There was a reminder only this morning, published on the front page of the Financial Review—a story by Angela Macdonald-Smith indicating that manufacturers are continuing to be subject to contract offers of up to $17 or $18 a gigajoule for firm deliveries. That is still common and about triple the level of the expiring contracts that these manufacturers have been operating under for some time.

Anyone who has studied this at all knows the history of what's happened to the gas market over the past 20 years in Australia, particularly in the eastern Australian market. It was the Howard government, in its first year in office, that abolished export controls over gas. These controls had existed for a long period of time, controlling the export of our gas resources. The export controls were also lifted on a range of other commodities. But, importantly for the current debate, those export controls, lifted by the Howard government in 1997 to plant the seeds of an export industry in LNG, were lifted in the face of opposition from the Labor Party at the time. No controls were put in place. No national interest test was put in place. At the time, there was a consistent rejection of any calls for reservation or other controls on the export of our gas resources to ensure that there would be sufficient and affordable supplies of gas to Australia's manufacturing industry and to Australian households.

The inevitable consequence of opening up Australia to the global gas industry was that you saw price convergence with the global gas price, as you would have with any other internationally traded commodity. I was talking earlier about oil, and Australia pays the global price for oil because we participate in a global market. An inevitable consequence of the Howard government opening up Australia's gas market to the global market was that there was what's called export price parity, or at least the net back version of export price parity—the price paid overseas for our exports, minus the cost of refrigeration and transport. This is not rocket science; this is not something that governments of the day had to receive particular advice about. This is something that a year 10 economics student would be able to tell you, if you asked them.

Last week, I did an interview with David Speers, and he purported to have extracted from me the great revelation that, when the Labour Party were last in government, we had been advised that the Australian gas price would converge with the global price. This was some apparent great revelation. It's not a great revelation. It has been orthodoxy in the gas market for years, as is reflected in a number of statements by the Prime Minister and by different ministers of this government. It has been quite clear that from the time former Prime Minister John Howard opened up the Australian gas industry to the global industry we would see price convergence and Australians would be paying the same price as the global price for gas, as we do for oil and all other internationally traded commodities.

I want to be clear about what I was asked by David Speers, because I want to compare it to some of the narrative from the Prime Minister and other ministers of the government on export price parity. David Speers asked me about the energy white papers that were produced under the Labor government and whether there was any particular advice about the impact on prices and possibilities of supply shortages arising from the LNG operations being built in Gladstone. I said, 'Now, there would be a price impact. I think everyone always had eyes wide open about that, that we would move to the Asian export parity price.' Again, that is an orthodox economic position that a year 10 economic student would be able to tell you about at length, I'm sure. But I went on to say, 'But there were assurances given by the LNG operators that it would not impact supply to the domestic market.' Speers went on to say that our own white paper told us there would be an impact on prices, but I'd said we weren't warned. I responded, 'No. Everyone knew there was going to be an impact on prices, but the problem we are confronting now is that the pricing impact is not just moving into an Asian price, which might be $9 or $10 per gigajoule. The price we're actually seeing in the manufacturing sector is now $15 and even more than $20 a gigajoule because there is scarcity in the market.' I'm not sure whether some people don't understand the difference between export parity pricing and scarcity pricing or deliberately choose not to understand the difference because it makes for political stories, but it is quite clear that I had said we were not warned in the energy white paper about scarcity pricing. It was well understood by everyone who paid even casual attention to what was happening in our gas market that after the Howard government lifted export controls Australia would move to the global price, as we have in every other internationally traded commodity.

The then resources minister, Ian Macfarlane, said in 2014 on the ABC:

Gas is now being sold in Australia at an international price. That's the reality of a world market.

When Senator Canavan, then minister for resources, and the Prime Minister announced the Australian Domestic Gas Security Mechanism on 27 April 2017, Senator Canavan said:

So a more appropriate price would, of course, be what's known technically as the netback price: that is, the price that exists in Asia minus the costs of getting it there.

That is a much more appropriate benchmark.

And he said, importantly:

… in connecting our market up to the world that's what we were expecting and that's what was the promise, but we have not got there at the moment because of this export industry.

Again, there is the distinction between export pricing, export parity pricing and scarcity pricing. For the sake of completeness, on the same day, when the Prime Minister was interviewed about his announcement of a security mechanism by Steve Austin—not the Bionic Man, I don't think; another Steve Austin—he said of the mechanism:

It will ensure that the price of gas in Australia is at levels comparable to that in the international market, because it is a global commodity.

Later, in that same interview, he said:

… the point is, Steve, there is a global market for gas. We all get that.

That is no particular revelation—in spite of the treatment that David Speers and the ABC have given to the interview I did last week. There was no particular advice. I could've got that advice from a year 10 economics student.

What I was asked on Insiders in April earlier this year and during the David Speers interview was not about export parity pricing; it was about scarcity pricing. And that's because these LNG operations, particularly the GLNG operation, have started to impact the domestic market—the local supply of gas which, traditionally, manufacturers, power generators and households have relied upon. I just want to be clear about the interview that I did with Insiders that the ABC, David Speers and the government have said created some sort of conflict in my positions. Barrie Cassidy at this interview was talking to me about the impact of the LNG operations. I said:

… the supply crunch and its impact on gas prices is even worse than anyone had expected.

Barrie Cassidy then asked me:

Yeah, but you say, though that is you saw it coming a couple of years ago.

I had said that. We did when we developed our national interest policy in 2015. He said:

You're in Government about four years ago and you got plenty of advice then that the surge in exports would lead to these sorts of problems.

That was the proposition he put to me when we were talking about the supply crunch that has characterised the gas market over the last 12 months.

I said:

No, we didn't get that advice. We were given assurances by the industry that the establishment of export operations at Gladstone would not impact …

Then he interrupted my answer. I went on to say that we, indeed, were given express assurances from the gas industry that they would not impact local supply. Indeed, the LNG operations at Gladstone would be using so-called new gas. I said to Barrie Cassidy:

… they would be using new gas for exports and not impacting the existing gas supply to manufacturers and households …

Again, there is a distinction between export parity pricing and scarcity pricing that has arisen because of a supply impact being critically important.

There is some dealing with this in The Australian newspaper this morning, particularly about what it was that Santos, or GLNG, in its environmental impact statement indicated about what its operations might or might not do to local supply—old gas, if you like—that manufacturers, power generators and households had for many years depended upon. I will read an extract from Santos's EIS from, I think, 2010. It said that the project, being the GLNG project at Gladstone:

… may initially supply domestic gas markets, but it is not diverting gas from local markets to export markets. … Therefore the project has no direct implications for domestic gas prices. The gas to supply the LNG facility will come from newly developed CSG fields.

That was the advice provided to the previous Labor government, consistent with the advice expressed in the narratives that I read out from former Minister Macfarlane, former Minister—perhaps again to be minister one day—Canavan and the Prime Minister, when he was announcing the domestic security mechanism.

It started to become pretty clear to the manufacturing industry—and, increasingly, to Labor—over the past couple of years that those promises, particularly made by Santos, had not come to pass. One of the LNG operators in particular had found itself too short of so-called new gas to be able to satisfy its overseas contracts. We then developed as a policy a national interest test that would ensure that new gas operations would be subject to a national interest analysis. It was something rejected as far back as 1997, when the Howard government lifted export controls on gas and other commodities, and was again rejected in the 2004 energy white paper that was released by John Howard. Indeed, our position to adopt a national interest test was rubbished by the Prime Minister, who said that we were being leftist and raising potential sovereign risk issues around the gas operations that had been developed at the LNG.

In the energy white paper that was released in the same year—in 2015—by this government, again, any idea of a national interest test or domestic gas reservation was roundly rejected by a government who continued to try to reassure the manufacturing industry of Australia that there was no problem, that it was all fine. Of course, there was export parity pricing, but there was no shortage of supply and there would be no scarcity pricing in the market. Indeed, in 2016, the then environment minister approved, through an EIS process, a whole range of new CSG fields for Santos to be able to develop and divert to LNG export operations without any analysis of whether there was a shortage in the domestic market and whether that gas, instead, should be diverted to the domestic market rather than refrigerated and shipped overseas.

We're not going to take lectures from this government about a position that we've been articulating for two years now and to which we had to drag this Prime Minister and his government kicking and screaming. We hope that the domestic gas security mechanism, if it's ever triggered, does provide some relief to manufacturers, power generators and households in Australia. There is a reasonable assumption in this country that we will have secure and affordable supply to our own gas to continue those operations that employ many tens of thousands of Australians, provide electricity to Australian households and businesses and, through gas, provide direct energy to Australian households—particularly in gas-heavy states that you would be familiar with, Deputy Speaker Goodenough, like Victoria.

I do note, though, that the ADGSM, the Domestic Gas Security Mechanism, through its regulations, is supposed to be triggered 30 days from 1 July and no later than 60 days from 1 July. We are currently 65 days from 1 July, and there is still no indication as to when this government will deal with the gas crisis and decide whether or not it will trigger the security mechanism for 2018.

We and, I think, industry are concerned that this has become inextricably intertwined with the future of the Deputy Prime Minister, who—given the decision by Senator Canavan to step aside—now has authority for the implementation of this security mechanism. All of the questions that have been debated over the last couple of weeks by constitutional scholars over whether any decisions taken by the Deputy Prime Minister might be invalid if the High Court ultimately decides that his election was invalid raise even more uncertainty for manufacturing industries and many other users of gas in Australia.

Australia is in a deep energy crisis. The quotes from the Reserve Bank governor are only one contribution to a debate that is now, I think, genuinely a barbeque stopper in Australia, and it's certainly hurting business investment across many different sectors of the economy. The government have shown over the last few days—pretty true to form, I have to say, unfortunately—that their tactic is a blame game. They will just try to rewrite history, try to finally pass pretty orthodox statements about how the gas market operates and try to shift blame and any responsibility for taking some hard decisions themselves in their party room and implementing some very clear blueprints that have been provided to this parliament, this government and this nation about how we get out of this energy crisis.