Queensland must be punished for its fossil fuel heresy. Yes, yes. The S&P 500 closed at 1924. It’s relentlessly inching its way to 2000. But the action that matters for Australia is in the energy markets. And it’s not just financial. It’s spiritual.
I’ll get back to the spiritual part in moment, and the punishment of Queensland. But first, let’s review the relevant facts. A new era of South Pacific dominance in the liquid natural gas industry unofficially began last week. ExxonMobil’s $19 billion Papua New Guinea liquid natural gas project (PNG LNG) shipped its first gas to Japan’s Tokyo Electric Power. Let the production phase of the LNG boom begin!
Over $195 billion worth of LNG projects in Australia are set to come on-line beginning this year. You have onshore coal seam gas (CSG) projects in Queensland like the $22 billion Queensland Curtis LNG project, the $23 billion Asia Pacific LNG project, and the $22 billion Gladstone project. Once those projects start humming, the Queensland state government is counting on them to deliver around $450 million in annual royalties, beginning in 2016.
For a state government that’s accumulated $80 billion in debt, every little $450 million helps. In a recent budget update, the government downgraded coal royalties by almost $600 million. Welfare state advocates who think that mining royalties grow on trees don’t have to panic just yet, though. Coal generates $2 billion in annual revenues.
But it’s LNG that could have the biggest macroeconomic impact for all of Australia. In off-shore conventional LNG, you have the $52 billion Gorgon project in Western Australia, the $34 billion Icthys LNG project, and the $29 billion Wheatstone project. The investment boom phase of the LNG boom created jobs and supported the Australian dollar. The production phase should generate earnings for LNG producers and shareholders. But there is a big debate about its impact on the rest of the economy.
For example, Westpac chief currency strategist Robert Rennie reckons the LNG export boom could drive the Aussie dollar back toward parity with the US dollar. Not only that, but it could also turn a structural trade deficit — where Australia imports capital and capital goods in order to export raw commodities — into a trade surplus. In other words, LNG is the new iron ore!
But what you do with a boom matters. The PNG LNG project could double the GDP of Papua New Guinea, according to a recent Wall Street Journal article. ‘It’s great for Papua New Guinea,’ says Jenny Hayward-Jones of the Lowy Institute. But it’s not ALL great. She says, ‘The big problem is whether the country uses the revenue from PNG LNG to improve living standards here and equally distribute the benefits.’
The benefits from a boom are rarely evenly distributed. Everyone lines up like a pig at the trough. Australia had a $200 billion LNG boom, for example, yet electricity prices have risen for most people and the government came out of the boom with more debt. Imagine that. You have a one-time boom and forget to get rich!
But maybe the LNG boom will turn things around. A dollar that stays stronger for longer has implications for the tourist industry, for manufacturing, and for retail spending. But investors can’t go past the immediate consequences for energy shares. Take shares of Oil Search Limited (ASX:OSH). The company owns 29% of the project, which is expected to produce 9 trillion cubic feet of LNG over 30 years. Its shares are up 177% since the October 2008 low, and that’s not including dividends.
Or take Karoon Gas (ASX:KAR). The company’s shares were up 44% yesterday. The company told the ASX it had sold two exploration permits in Western Australia’s Browse Basin to Origin Energy (ASX:ORG) for $864 million. Origin’s shares were down 3.6% as shareholders digested the deal.
A simple take on the news is that it’s more lucrative to punt on exploration stocks than producers. In this case, that appears obvious. But there’s more to the long-term story. Origin appears to be hedging its bets on expanding the $22 billion CSG project in Queensland, where it’s partnered with ConocoPhillips. It’s going with off-shore conventional LNG exploration in WA instead of on-shore unconventional gas in Queensland. Why?
Why the Green Inquisition of course!
State governments in New South Wales and Victoria have all bowed meekly before the strident protests of anti-gas protesters. The New South Wales government halted exploratory (conventional!) drilling by Metgasco (ASX:MEL) at Bentley, near Lismore. It did so at the recommendation of a local council that said Metgasco hadn’t been sufficiently consultative with the local community. The Victorian government has extended a ban on on-shore coal-seam-gas exploration until after the next election. Queensland remains generally friendly to oil and gas development. But you never know how long that will last.
Now, one way of viewing the push-back against coal-seam-gas is that it’s a triumph of grass roots democracy over evil oil and gas companies. These companies are intent on polluting the water and the ground for the sake of making a profit over collective resources. That’s generally the way the story is presented.
But let me suggest to you another idea. The idea is that the anti-gas protest groups are fighting a guerrilla war against the modern world. Their target is the elimination of all fossil fuels. The concern over the safety of ground water (which is always addressed in the environment permitting phase of these projects) is just a cover for a deep-seated and almost religious-like animosity to hydrocarbons.
It reminds me of the Catholic Church’s reaction to what it called the Cathar Heresy in the 12th century. The Cathars chose to believe that there are two Gods, one good and one evil. The evil God is Satan, who rules over the sinful world of things, the temporal world we must live in without sinful bodies. The Good God — the Cathars called their adherents the Good Men — devoted themselves to getting to a better world without sin, temptation, and the body.
The Catholics couldn’t leave well enough alone. That is, you obviously can’t have two gods in a monotheistic religion. It creates all sorts of philosophical problems and moral confusion. The Inquisition was launched to put the Cathars in their place, which from time to time involved burning the sin out of them (and sending them, ironically, to their Good God).
The modern progressive movement — especially the anti-fossil fuel agenda of Australia’s greens — has all the elements of a religious belief system. The Greens are like the Cathars in that everyone is either sinful or good. There is no room for disagreement. Diversity and tolerance mean people from all different backgrounds agreeing on the same beliefs. Different views are not to be tolerated.
But the modern progressives have a bit of the Inquisition in them as well. Any science suggesting that coal-seam-gas production and/or hydraulic fracturing can be done safely without polluting ground water must be heretical. When New South Wales chief scientist and engineer Mary O’Kane concludes that ‘Water quality issues can largely be managed through treatment works,’ she must clearly be possessed by the devil or Clive Palmer.
In their rejection of science and engineering, the progressives are more like the Catholics than the Cathars. Reason is an affront to belief when it undermines political power. Belief-based energy policy allows you to manipulate the emotion of the people to your own ideological ends. It’s pretty clever.
But let’s also call it what it is. And let’s not forget the words of the world’s most infamous national socialist. He said, ‘How fortunate for governments that the people they administer don’t think.’ My advice? Keep thinking. It’s good for your brain. More tomorrow.
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