ACCC: extended LNG netback price series will improve transparency

APLNG Curtis Island plant (Curtis LNG gas)

The ACCC will publish additional and more relevant information about LNG netback pricing in the east coast gas market to help improve the negotiating power of commercial and industrial (C&I) gas users seeking longer-term supply contracts, in a decision announced today.

Last year, the Australian Government asked the ACCC to review its Liquefied Natural Gas (LNG) netback price series, which it publishes to improve transparency in Australia’s east coast gas market. The ACCC has decided to continue publishing export parity prices for two years based on Asian LNG spot market prices, and will extend the forward LNG netback price series to five years based on international oil-linked prices.

“The ACCC’s LNG netback price series helps to reduce bargaining power imbalances in the gas market by giving C&I users the same information that gas producers use when deciding  what prices to offer to the domestic gas market,” ACCC Commissioner Anna Brakey said. 

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“The current LNG netback price series is a useful benchmark for gas producers and C&I users negotiating domestic contracts for two years or more. However, C&I users told us that they routinely seek contracts that run longer than two years. Extending the price series will help them negotiate longer-term contracts with gas producers.”

The development of three Queensland LNG export plants significantly changed the east coast gas market by connecting it to international markets. Asian LNG prices influence Australian gas prices as east coast gas that supplies domestic customers now also supplies international LNG users, predominantly in Asia.

The ACCC’s LNG netback price series represents the prices east coast LNG producers could expect to receive for exporting their uncontracted gas to Asia under current market circumstances. For domestic gas buyers, these are the prices they can expect to pay when LNG producers have spare capacity and are in a position to sell their uncontracted gas either to the Australian market or overseas.

“During the review, many C&I users recommended we use Henry Hub prices to calculate LNG netback prices, as the Henry Hub is a deep trading market within the US and is an increasingly important global gas marker. Users also suggested that we deduct the capital costs required to build the Queensland LNG plants,” Brakey said.

“We carefully considered these arguments, and while we recognise the potential benefits of using a gas price marker, Henry Hub prices are not yet influencing Asian prices to a degree that enables it to be a proxy for forward Asian LNG prices, which we use to calculate LNG netback prices.”

“We found that the Japan Korea Marker (JKM) remains a suitable measure of Asian LNG spot prices, and that the majority of contracts for supply into Asia for terms of three to five years were linked to oil prices, and therefore decided it was appropriate to use an oil index for longer-term forward LNG netback prices,” Brakey said.

The ACCC’s final decision is to:

  • continue to publish historical and short-term forward LNG netback prices extending to two years, based on JKM
  • publish longer-term forward LNG netback prices extending to five years based on an oil index, with estimates of the appropriate percentage to apply to oil indexes to calculate LNG prices sourced from a consultant
  • maintain the current approach to estimating export costs in calculating LNG netback prices
  • source longer-term LNG freight cost estimates from a consultant
  • undertake another review of the LNG netback price series when market developments  warrant doing so, or by no later than 2024.

“In calculating LNG netback prices, we deduct only the costs that LNG producers avoid by supplying uncontracted gas to the domestic market. As the Queensland LNG plants continue to have unutilised liquefaction capacity, we don’t believe it’s appropriate to deduct fixed export costs such as LNG plant capital costs,” Brakey said.

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“Deducting fixed costs would mean our LNG netback prices no longer represent the current commercial reality facing LNG producers when deciding whether to supply gas domestically or overseas.”

“We recognise that if the LNG plants do reach capacity, we would need to review our approach to estimating export costs,” Brakey said.

The ACCC will monitor the spare liquefaction capacity of the Queensland LNG plants and developments in the international LNG markets through its east coast gas market inquiry, to ensure the LNG netback price series methodology remains appropriate.

“The decisions we made in this review reflect the realities of the east coast gas market and global LNG markets now. However, market dynamics continually change and we will undertake another review of the LNG netback price series before 2024 if we need to,” Brakey said.