1 October 2012

Government should ensure gas is made available for local manufacturing

The Australian: James Fazzino, Managing Director & CEO, Incitec Pivot

Can you imagine a footy coach giving away a key competitive advantage in the most important game of the season?

That's what is happening to Australian manufacturing.

We are in a fight for survival and our "coach", the Australian government, has conceded to our opponents one of our key competitive national advantages: energy.

Australia has abundant supplies of natural gas but we have the only national government in the world that doesn't give priority to local use, both for downstream processing and for Australian homes.

We have allowed major oil and gas companies to control the use of the gas so that export contracts to Japan and China get priority.

This means that there is either no gas for Australian manufacturing or, at best, gas is made available at up to four times the current price. We are being asked to pay virtually the same price for Australian gas as energy-starved Japan and China.

This is not the global market price because gas is essentially traded in a series of local markets. Only 9 per cent of the world's gas is traded globally. The result is that Australian manufacturing plants will close, hundreds of workers will lose their jobs and Australian household energy bills will skyrocket.

To add to these sad outcomes, Australia has a wonderful vision to be the food bowl of Asia. We know that growing food needs fertiliser. But the lack of gas will destroy Australia's fertiliser manufacturing industry because gas is an essential raw material.

Australia should be building on its strength and using its natural advantage in energy to match our international competitors. China has competitive labour and high-cost energy, so we should have competitive energy and generous working conditions.

The obvious benefit is the downstream value-add. The export of gas creates a three to four times value-add. If we used some of Australia's gas for high value-added manufacturing we would achieve a return on investment, in the case of Incitec Pivot, of up to 20 times and for some others up to 40 times. In Incitec Pivot's case, this value-add equation does not include the further benefit when our products are used in the agriculture and resources industries in Australia.

But it is not either/or. We can have our cake and eat it too - a thriving export gas industry and Australian manufacturing.

We don't need much gas. It is estimated that by 2016, exports of gas through Gladstone will reach 25 million tonnes a year. To manufacture fertilisers and explosives in Queensland, Incitec Pivot needs a tiny 2 per cent of that total.

Other countries have got the balance right. Qatar is currently the world's biggest exporter of gas and has a thriving domestic chemical manufacturing industry built on competitive local gas.

By the end of this decade, Australia is expected to overtake Qatar as the world's biggest gas exporter but our local heavy manufacturing industry will be dead, just when the Australian economy needs a replacement as the mining boom cools.

Other countries throughout the world support local industry first. Our cousins across the Pacific are examples. Canada has a national interest test before gas is exported. In the US, President Barack Obama has committed to create 600,000 jobs by the end of the decade using local gas.

The practical result of the contrasting US and Australian government positions is that the price of gas in the US is currently about $US2 to $US3 per gigajoule compared with an estimated forward contract price of up to $12 per gigajoule in Australia, as estimated in this year's Queensland Gas Market Review.

Incitec Pivot is taking advantage of the US situation by studying the development of a world-scale gas-supplied ammonia plant in Louisiana but, sadly, is not investing in future back-to-gas plants in Australia.

We will not be the only Australian company to take the unfortunate, but necessary, decision to invest overseas, not at home. The situation is urgent because these investment decisions, which will heavily affect Australia's future, are being taken now.

The only government in Australia that has acted is in Western Australia, where some new gas export projects are required to reserve 15 per cent of gas for local use. Federal Energy Minister Martin Ferguson is critical of this approach despite the evidence that suggests it has not affected local exploration and development of gas reserves.

Australian homes will feel the pain, too, as household energy costs skyrocket.

Economic analysis by Port Jackson Partners warned in 2009 that wholesale energy costs could double over five years, citing eastern Australian gas prices approaching world parity price as export LNG gas facilities are developed.

Research released last month by the DomGas Alliance predicted that serious gas shortages and sharply rising gas prices in Queensland could cost the state between $420 million and $1.8 billion in higher energy bills. This is the state which will be exporting 25 million tonnes of gas by 2016.

A recent survey showed a large majority of voters - 63 per cent - agree with government support for a successful manufacturing industry.

At Incitec Pivot, we are not seeking government "support". We need the government to act in the national interest and ensure that gas is made available for local manufacturing. We want our "coach" to support the Aussie team, not the opposition.