Orica boss warns Future Gas Strategy leaves local manufacturing at risk without guaranteed lower prices

Orica requires a large amount of gas to manufacture ammonium nitrate at its plant in Newcastle. (Supplied: NSW government)

The boss of Orica, a major explosives manufacturer that relies on gas, says the federal government’s gas strategy won’t assist what remains of Australia’s manufacturing industry unless it caps prices at globally competitive levels.

On Thursday, Resources Minister Madeleine King unveiled the federal government’s Future Gas Strategy — a plan for further investment in gas in Australia “through to 2050 and beyond”.

The plan reveals the government’s intentions to speed up gas projects to prevent energy supply shortages, stating that new gas sources are needed to help Australia’s energy transition process.

Explosives manufacturer Orica uses a large amount of gas in its production process, but its CEO Sanjeev Gandhi warned that the government’s policy would do little to assist struggling manufacturers unless it ensured that gas prices fell.

Currently, wholesale gas prices are capped at $12 per gigajoule after the temporary measure was introduced by the federal government in December 2022. The cap was extended in April last year until 2025 in an attempt to reduce rising energy costs.

The measure also allowed for gas producers and affiliates to apply for a price cap exemption, however Mr Gandhi said that had effectively turned the cap into a minimum price for new contracts.

“Those exemptions have unfortunately turned the $12 cap into a $12 floor today, so nobody is wiling to make offers below $12,” Sanjeev Gandhi told The Business.

“We, at Orica at our Yarwun site in Queensland, just signed a contact for $12. Now, to put it in perspective, I have manufacturing in North America where I can get an equivalent of less than $4 gas.

“So $12 already is more than three times more expensive than what I can source elsewhere in the world.”

Mr Gandhi said that unless the Future Gas Strategy did more to address those pricing issues, particularly for retailers who are distributing gas into pipelines, “then we have a real problem” when it comes to the future of manufacturing in Australia.

“We are losing competitiveness and, if you look around the industry … over the last three to five years you’ve heard of so many closures, manufacturing industry shutting down because they’re not competitive anymore,” he warned.

“That’s a problem because it creates a domino effect.

“Orica is dependent on suppliers … and everything has to work, which means that we need energy costs, gas costs, which make the entire ecosystem competitive.

“Once you have that, you can then start talking about future manufacturing, because we enable that. But if you do not protect your present, the future is at risk.”

The warning by the Orica boss comes as the government prepares to unveil its Future Made in Australia manufacturing blueprint in full in next Tuesday’s budget.

Mr Gandhi said that while Orica is on track to reach its own emission targets in 2025 and 2030, the challenge for his business starts after 2030 “because of policy uncertainty”.

“The ultimate target for Orica is that we should not be consuming any gas, but I still need a raw material. That raw material could potentially be green hydrogen or green ammonia,” he said.

“I cannot get access to cost competitive green hydrogen today. I might need anywhere between three to five to 10 years for that transition.

“For that transition, I need cost competitive gas.”

‘They are not part of the solution’

Analyst Tim Buckley from Clean Energy Finance described the federal government’s gas announcement as “bizarre” and argued it contradicted the government’s decarbonisation ambitions.

“Prime Minister Albanese’s Future Made in Australia is exactly the sort of strategy we need, and then the federal government comes out with this own goal,” he told The Business.

“They’ve taken a massive backward step saying that gas is going to play a strategic transition role for the long term for Australia and for Australia’s trade partners.”

Instead, Mr Buckley considered the strategy as proof of the “absolute power” held by Australia’s gas lobby and gas companies, referring to the group as a “cartel” that has the country’s energy supply in a “stranglehold”.

“They still obviously have huge political clout,” he observed.

Mr Buckley disputed the statement from Resources Minister Madeleine King that the policy was designed to reduce the damage to the economy by turning gas off overnight, and would therefore harm Australia’s efforts to get to net zero by 2050.

“That is ludicrous to suggest that we’re going to turn the gas off tonight or tomorrow morning or even this decade,” he said.

“What I’m suggesting is that we can’t afford to keep building more and more capacity that is going to supply methane gas in 2050 and 2060.”

Mr Buckley said it was unlikely that Australia will get to net zero with gas in the mix until 2050, and said gas was not currently playing a “major role” in the economy given 80 to 90 per cent of it is exported.

“The gas cartel means it’s actually crippling Australians,” he said.

“East Coast Australia has seen an energy cost-of-living crisis in the last two years because the price of methane gas went up 1,000 per cent. They are not part of the solution. They are the core problem.”

He added that the Australian Energy Market Operator (AEMO) has seen gas use in the national electricity market fall by 40 per cent in the past eight years, and it is forecast to drop “another 40 to 50 per cent in the next eight years”.

“So gas will play a critical, small and declining role in firming up the national electricity system of Australia,” Mr Buckley said.

Division remains between government MPs

The future gas policy announcement has caused deep division within the Albanese government, with several Labor backbenchers breaking rank to criticise their party’s policy.

A number of backbenchers told the ABC on Thursday that they were “blindsided” by the policy announcement, with six Labor MPs saying the government should be prioritising the energy transition.

Josh Burns, the federal member for Macnamara in inner Melbourne, said the government’s decision was at odds with his electorate’s expectations.

“I didn’t get into politics to be a support mechanism for the fossil fuel industry,” he told RN Breakfast on Friday.

“I feel a sense of responsibility … that we do everything we can to try and transition our economy from high emissions fossil fuels to low emissions technology, and that needs to happen as soon as possible.

“That is my focus, and that is what I believe the Labor Party needs to focus on as well.”

Mr Burns said his biggest issue with the government’s strategy was that it was open ended — there is no clarity on how long it sees fossil fuels being used as an energy source, and a timeline needs to be put in place to allow the energy transition to take place.

Asked if he expected the government to reverse its decision or would like it to, he said conversations about the policy direction would continue in the party room.

“I know that there is a lot of really important policy that’s coming up in the budget, and in future weeks and months,” he said.

He also pointed to the progress made by the government on fast-tracking renewable energy sources, highlighting the rising number of renewables projects and share of renewable energy in the electricity grid.

“There is good work happening, it’s incredible work that’s happening,” he said.

“The question is, what’s next?”

What cost-of-living measures are you hoping for in the federal budget?