CoPS/IMPACT Working Paper Number G-250

Title: The Impact of LNG Export Expansion in Queensland, with special emphasis on the effects of increased gas prices

Author: Philip Adams

Abstract

The large Queensland LNG projects currently under construction will begin production over the next two years. Exploiting previously unused reserves of coal seam gas, the LNG produced will be sold at an international price which far exceeds the current price of natural gas in Eastern Australia. The new exports of LNG will therefore boost Australia's exports and terms of trade, leading to increased real GDP and welfare for the national economy.

But this is only one part of the overall impacts of the new projects. Through competitive pressures, the price premium received for unconventional Queensland gas will lead to increased prices for gas throughout Eastern Australia. This will increase costs of production for energy-intensive industries. For those industries (and regions) which cannot pass on the cost increases, production will fall.

In this paper, using the Victoria University Regional Model (VURM), we report on simulations designed to provide a balanced assessment of the costs and benefits of the new LNG projects. Key findings are:

• During construction, the projects boost real GDP and national welfare, and have a positive impact on most industries and most regional economies;
• During the mature, production phase, the national impacts are marginal. Real GDP is stimulated slightly, while national welfare is hardly affected.
• Some industries gain production, particularly electricity-related sectors that benefit from favourable price-induced substitution effects. Other industries lose production, due to the adverse cost impacts of increased gas and electricity prices.
• Because some industries gain, while other industries lose, so some regions gain real GSP and employment (Queensland), while other regions lose (notably Victoria and South Australia).
• The projects will lead to higher CO2-e emissions, due to the stimulus to coal-fired electricity.

JEL classification: C68, D58, F43, O40.

Keywords: CGE modelling, Gas production, LNG exports, Australian economy.

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