It’s been a hectic few weeks in the gas policy space. We’ve seen two meetings between the Prime Minister and the major gas producers and heard from the government about the Australian Domestic Gas Security Mechanism. In addition, the ACCC has been instructed to examine the major players’ gas purchase contracts. We’ve had confirmed what we already knew, that LNG exporters are the villains causing the price rises, and we’ve now heard that all three LNG exporters are going to commence selling more gas within Australia than they export from it. To cap everything off we’ve also heard about two potential new pipelines to bring cheap gas to the east coast market, one from Western Australia and one from the Northern Territories. So with prices reportedly hitting up to an eye popping $20/GJ1 it’s all good news for some sharp and overdue price reductions, right?
The crippling prices that we’re seeing for new contracts are hardly news. From an already elevated base prices started to increase rapidly last winter. At the same time several of the large suppliers ceased quoting to business customers, making the problem worse. Also, customers who don’t regularly keep up with current gas prices might be getting a shock when they realise just how far prices have risen since signing their last contract. There’s been plenty of press comment about what is behind these price rises, so I’m only going to touch on these here.
Firstly, LNG exports have driven up demand for domestically produced gas fourfold since the early 2010s, and yes, the magnitude of these exports is truly staggering and represents a major opportunity to boost national income at a time when the long term future of coal exports is looking cloudy. But that gas has to come from somewhere. Whilst two of the three east coast LNG exporters have developed sufficient new fields to cover the majority of their export volumes, the Gladstone LNG project led by Santos doesn’t have anywhere near enough of its own gas. By way of example, The Australian2 reports that in the first quarter of this year GLNG purchases from third parties were equivalent to a whopping 44% of east coast domestic demand. Not a small amount by any means.
What’s more, the extra demand isn’t coming only from the LNG players. All of those wind farms and rooftop solar installations are having an impact on the gas market as well as on the electricity market. With renewable sources providing close to 50% of all power generated in South Australia this is stressing the remaining fossil generators during periods when wind output is low. With the state having closed the last of its coal fired generators only gas fired generation remains to pick up the load at these times, which leads to even more demand for gas. Engie has recently purchased an additional 16PJ of gas to allow it to run the second unit at its Pelican Point station. In response to multiple power interruptions over the last summer, some of the responsibility for which came back to the performance of renewable generation3, the SA government also proposes to build a new 350MW gas fired power station to guarantee power supplies into the future.
And it’s not just limited to renewables in South Australia. In Victoria the 1,600MW Hazelwood Power Station closed its doors at the end of March. A study undertaken by Intelligent Energy Systems shortly after the closure announcement showed that the main beneficiary will be gas fired stations, which will expand their output to fill the gap left by Hazelwood4. All told none of this augers well for gas prices going forwards. So what is the government doing about it?
There’s been two real results from the recent talks between the Prime Minister and the major gas producers.
Firstly, the PM has extracted promises from each of the three east coast LNG exporters to sell more gas into the domestic market than they purchase from it. In the case of two of these that was easy as they are already taking most if not all of their domestic gas from new fields in Queensland dedicated to this purpose. For Santos’ GLNG project however, this will be more difficult. GLNG was never envisaged as taking all of its requirements from new fields. One possibility that could have led to that outcome was successful development of Santos’ CSG resources around Narrabri in NSW. Whilst that project isn’t dead yet, the NSW government’s antipathy to unconventional gas means that under current policy it’s highly unlikely to get up, and Santos itself no longer sees it as a key investment. That being so, exactly how GLNG is going to meet its commitment to the PM is unclear.
Secondly, the newly announced Australian Domestic Gas Security Mechanism is intended to be the way in which the government is going to hold the LNG exporters to their commitments and ensure supply to domestic customers. Under it the government will have the power to impose export controls on gas companies that export more gas than they sell into the domestic market. Other than that not a lot is known about this initiative, but it is targeted to be in by the start of the new financial year. At the time of its announcement press comment on the scheme was mixed. Some fears were raised by several sources of a potential negative impact on investment5.
Overall the recent government initiatives are a step in the right direction and they demonstrate that the government is taking the problem seriously enough to try and do something about it. What is unclear is how far and how fast this will go. The underlying problem, which the government’s actions do not address, is too much demand and not enough gas. To bring the market back into balance one of the following would have to happen:
- The LNG exporters pull back on export volumes - This is the alternative that the government is seeking to deliver, and it’s the only one that can be implemented quickly. How far exactly the LNG players will go in pulling back on production and how great the effect on price will be is uncertain, as is how far the government will go if they don’t.
- More gas is produced domestically on the east coast - This would require either another large find offshore, or the states would have to lift their bans or moratoriums on further coal seam gas development. Both would be good outcomes, but neither would deliver any new gas to the market in the near term.
Cheaper gas is delivered by new pipelines either from WA or from an extension to Jemena’s NT to Queensland pipeline shortly to begin construction. These have been covered extensively in the press, but either would be a medium term solution. Furthermore, the cost of transporting gas through long distance transmission pipelines can be prohibitively expensive, so the economics of delivering gas from the NT or WA may not help the problem much6.
The real solution is more gas, and that means more exploration and development. Without more gas someone is going to have to lose out. In the longer term there are some glimmers of hope. Currently there is an excess of LNG supply worldwide and international prices are expected to fall going into next year7. This should lessen the incentive on the domestic LNG players to sell more abroad, but it won’t affect quantities that are already contracted.
For domestic gas consumers’ things are likely to remain uncertain and lower prices could take considerably longer to deliver than implied by the recent government announcements. In the meantime our experience is that customers that have held off entering into new contracts have commonly been disappointed with the prices that they finally achieved. This is particularly relevant to those with contracts expiring at the end of this calendar year. With many retail contracts expiring at this time the demand for new contracts may then be excessive, delivering more power into the hands of a small number of suppliers. Also, with winter approaching, increased demand for gas will put increased upwards pressure on prices. We recommend that rather than waiting in the hope of a better price that may never come, that customers with contracts expiring over the remainder of this year should consider going to market now. Once their gas supply is secured they should then concentrate on obtaining savings through increased energy efficiency measures.
1 Gas majors resist PM’s crisis call. The AFR 12 April 2017
2 Santos taps outsiders to fill export gas orders. The Australian 21 April 2017
5 Fears Turnbull’s gas reform may close investment doors. The Australian 28 April 2017
6 Gas industry cool on WA-SA pipeline. The AFR 11 May 2017
7 Queensland exporters at risk in ‘LNG wars’. The AFR 15 May 2017