Wednesday, December 18, 2013

Fracking scares impede wealth creation

The probable reserves of unconventional coal-seam and shale gas in Victoria, NSW and Queensland dwarf the conventional gas reserves in offshore Victoria and the Cooper Basin and may approach the magnitudes found off the North West Shelf.

The unconventional gas is extracted by fracturing rock — fracking — to allow gas and oil to escape.  This is a process with a 60-year history throughout which it has never resulted in public harm.

Reserves of gas are, of course, valuable only if governments allow them to be extracted.

Although it is politically irresponsible for governments to prevent wealth creation on the basis of counterfeit scares, the Napthine and O'Farrell governments in Victoria and NSW have bowed to such scares.  These scares are based on specious allegations that extracting coal-seam and shale gas through fracking will create environmental problems, especially groundwater pollution.  The Coalition governments in both states face opposition to gas development from some of their own supporters as well as from the Labor Party seeking to tap a vein of voters with strongly held views and casting an anxious look at Greens rivals.  That does not condone the vetoes.

The Victorian government has completely forbidden development of any unconventional gas reserves in the state.

In NSW, where radio shock jock Alan Jones spearheads the campaign against fracking, the government has banned mining close to towns and in prime agricultural land.

It claims the exclusion zones comprise about 20 per cent of the state but they contain the lowest cost prospects.

Regulatory impediments in NSW have meant the state, though having similar potential to Queensland, collected a mere $120,000 in gas royalties last year, compared with $850 million north of the Tweed.

Victoria commissioned Peter Reith to head an inquiry into the activity.  Like every other responsible study, this found fears of inadvertent harm were groundless and any risks were easily prevented — indeed, there is already a commonwealth-state 18-point leading practice framework.

The Reith report also advised that Victoria has an urgent need for future supplies and fracking should be allowed to proceed immediately.  It pointed out that the minerals belong to the crown and value in them is shared under a known royalty regime between the government and the discoverer, with landowners being fully compensated for any damage, inconvenience and disturbance from the activity.

In addition it warned that a gas reservation policy for local consumption would simply divert the product to firms seeking below-cost inputs and deter exploration.

Unfortunately, reports of this nature invariably raise other agenda items.  Reith's report is no exception.  He felt the need to call for a new regulatory authority, the gas commissioner.  Designed to promote better acceptance of drilling and fracking, this also incorporates an "independent water science program" to scrutinise and report on whatever it fancies, new guidelines, bans on certain chemicals, full disclosure of the chemicals being used and independent monitoring.

The report also advocates further and unnecessary government resources to forecast consumer demand for gas and transportation capacity.

To placate different interests, Reith also recommended siphoning off some of the royalties to a regional fund and doubling the de facto royalty paid to the landowner to $20,000 a well.

Offsetting this, the report advocates a lower royalty rate and a royalty holiday — measures that are surely unnecessary for an industry anxious to start exploration on established terms.

The Reith report also advocates requiring the Exxon-BHP joint venture to cease selling as a single unit.  The objective is to force the two firms to compete with each other in the hope that this will drive down prices.  Whether or not this would eventuate, and be desirable in the light of the report claiming that prices need to rise, a forced divestiture sets ugly precedents for future joint ventures.

The tragedy, though, is that just as the Reith report sensibly concluded fracking should go ahead, a timid Victorian government put in place a further review process, leaving bans in place until after the next election.

The government optimistically thinks a further pause will buy it time to make the right decision.  However, ahead of the next election it will face pressure to maintain the moratorium — which, on its present record, it is unlikely to resist.

The corporatist state is so pervasively within the business decision making framework that it is paralysing innovation.  We need to find ways that allow decisions to move forward under the rule of law without parties having only an incidental interest in developments being able to recruit regulatory barriers to block them.

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