ACCC: Investment required for lower gas prices

ACCC, EUAA, gas prices, gas pipelines, GSOO

Gas users’ longer-term concerns about prices in the east coast gas market could be alleviated if there is timely investment in gas development and key infrastructure, according to the Gas Inquiry 2017-20 Interim Report released by the ACCC today.

Suppliers expect to produce sufficient gas in the east coast to meet the expected demand in 2019, but domestic prices remain too high for many gas users.

Prices offered and agreed in mid-2018 for supply in 2019 ranged from $9/GJ to $12/GJ. By August 2018, most offers to large commercial and industrial gas users were at, or above, the mid-$10/GJ level, including some offers above $12/GJ.

ACCC Chair Rod Sims said some commercial and industrial gas users have told the ACCC that, at these prices, which are two to three times higher than historical prices, their operations are not sustainable in the medium to longer term.

“They are increasingly likely to relocate from the east coast or close their operations,” Mr Sims said.

“Once large manufacturers relocate or shut down their plants, they won’t come back.”

In October 2018, the ACCC commenced publishing export parity prices on its website. This data shows that after reaching the peak of around $12.50/GJ in September 2018, the expected LNG netback prices at Wallumbilla for 2019 fell to $9.60/GJ by mid December 2018.

“We will be closely watching to see whether offers made by gas suppliers continue to track export parity prices on the way down, as they did on the way up,” Mr Sims said.

While export parity price is a key factor influencing domestic gas prices in the east coast, it is not the only one. Based on the estimates Core Energy has done for the ACCC, around 99 per cent of all proved and probable reserves in the east coast have a lifecycle cost, including a return on invested capital, of less than $7/GJ.

Related article:ACCC publishes gas export parity prices

As current domestic gas prices are well above these production costs, and international LNG and oil prices are high, there should be significant investment in gas exploration and development to bring this gas to market.

“The market response has been disappointingly slow. While, on aggregate, suppliers plan to increase their investment in gas exploration over the next few years, it will still be well below the levels observed five years ago,” Mr Sims said.

Over 80 per cent of current proved and probable reserves are controlled by the LNG producers in Queensland and a significant quantity of these remains uncontracted.

“The timing of the development of uncontracted proved and probable reserves is critical for the east coast gas market,” Mr Sims said.

“Given the difference between current domestic prices and production costs, we expect gas producers would have a strong commercial incentive to develop those reserves, sooner rather than later. The ACCC will, therefore, be closely monitoring and reporting on decisions made by gas producers on the timing of gas development”.

The Energy Users Association of Australia (EUAA) said the ACCC’s findings reveal the gas crisis still has an iron grip on Australia’s manufacturing, chemicals and food processing industries.

EUAA CEO Andrew Richards said efforts to alleviate the gas crisis by governments and regulators have been insufficient and an accelerated program of gas market reform and targeted assistance is required if the industry is to avoid the worst.

Related article:AEMO releases 2019 WA Gas Statement of Opportunities

“We acknowledge the efforts of governments to assist with gas supply and the Gas Market Reform Group who has done some good initial work,” Mr Richards said.

“However, the Interim Report shows we have more work to do if we are to see the development of a competitive, liquid and transparent domestic gas market.”

The Australian Petroleum Production & Exploration Association (APPEA) said the report confirms customers in New South Wales and Victoria are paying more for their gas because of state government restrictions on developing local gas resources.

“Importing gas from Queensland adds $2-$4/GJ to retail prices in the southern states,” APPEA said in a statement.

“Governments wanting lower gas prices, more investment and more diversity of supply have the solution to hand – follow the Northern Territory’s lead and support the safe, responsible development of the resources in their State.”