THE TRANS-PACIFIC Partnership (TPP), a long negotiated freer trade agreement between 12 nations that have shorelines on the Pacific Ocean, finally surfaced late last year.
But what are its implications for participants in the natural gas business? Here are three initial observations.
The 12 nations include both gas importers and exporters. From the Americas, we have Canada, the US, Mexico, Peru and Chile, and from Asia we have Japan, Malaysia, Brunei, Vietnam, Australia, Singapore and New Zealand. The trade bloc represents 40 per cent of global trade and is as large as the European Union.
The most interesting “missing in action” nations include China, South Korea and Indonesia. With an additional 1.2 billion consumers, they could, however, join at some time in the future.
The scope of trade categories
It’s easy to conclude that the TPP could be just about molecules of gas, but that would be missing the bigger picture. Free trade is about many different and interrelated aspects of trade, including fossil fuels, people and skills, equipment, investment, services, technology and energy markets.
What does it say specific to gas?
Searching for key words like “gas”, “natural gas”, “crude oil”, or “petroleum” doesn’t turn up anything, which means the TPP authors did not single out gas or petroleum for any special tariff treatments (raising, lowering or maintaining). We’re therefore headed into a world where any tariffs are being eliminated for fossil fuels for the region (some exceptions for Mexico and Chile aside), so fasten your seatbelts.
Currency matters more than ever
Most of the input costs to gas, and almost all of the services consumed, are locally sourced and paid for with Australia’s colourful plastic money. Since exported gas is priced in US dollars, and arguably along with many of the other trade elements, the lower the Aussie dollar the more money Australian companies make.
Our low dollar confers an export advantage at the moment because our goods and services are cheaper than the competition.
Get ready for imports
Australia’s gas industry has been rather vocal about the challenges in importing some of the latest technology, know-how and kit from abroad. Services and technology companies will no longer be able to extract rents from the industry through tariffs that create scarcity of equipment and spare parts behind tariff walls.
As a result, I would expect to see a spike of interest in technology imports that can help with cost reduction.
US gas exports
US LNG export projects need approval from the US Department of Energy (DoE) which is concerned whether exports of gas will cause public harm (ie domestic markets will experience shortages or price spikes or the like). DoE legislation does not apply to nations where there is an agreement for free trade, which will include the TPP countries.
By not limiting gas in the TPP, the US is signalling that it now believes it has plenty of gas and will experience little domestic impact from shipping it to TPP nations. If trade tariffs or market limits were causing some project hold ups in the US, we could see those projects unlocked. Markets that were not accessible in the past, such as Japan, are now open territory.
Enabling the free trade of LNG into Asia also means another move to end the gas industry practice of pricing gas relative to the price of oil. By enabling gas exports that are priced relative to the US domestic price, the US is helping to delink the price of gas from the price of oil.
The Australia test
Under the TPP, it would appear that gas reservation could be challenged as being against free trade, since gas reservation blocks a resource owner (either domestic or foreign) from freely accessing available markets (a form of non-tariff barrier).
It would seem that nationally driven agreements like the TPP will run headlong into local state and territory laws that block free trade, like gas reservation.