Changes are ahead for Australia’s east coast gas markets

Changes are ahead for Australia’s east coast gas markets
16 Dec 2013Archived News David West Climate Change Matters

Addressing the escalating price of gas has become a priority for Australian business as prices in the eastern half of the country trend towards export parity net-back pricing. In this article we outline the key factors driving Australia’s evolving gas market and the steps business should follow to secure the best gas supply contract.

Gas market dynamics are evolving

Historically Australia’s east coast gas market has been isolated from international markets. However, $50 billion investment committed to building three LNG facilities in Gladstone and associated gas production and pipeline infrastructure (catching up with the $116 billion invested in west coast LNG) has changed all that. The first shipment of LNG to offshore markets is due in late 2014. This represents a key shift in the dynamics of the east coast gas market. Eastern state domestic gas prices will no longer be determined in isolation, but will instead be linked to international prices.  And this means a jump from the low prices that our economy has grown to expect.

Prices are going up

To date the gas market has not been transparent, with prices tending to be based on long-term contracts.

Many of Energetics’ clients are used to seeing gas prices in the range of $3 - $4/GJ (commodity only at the well head, excluding carbon). This compares to markets in our region that are paying around $15/GJ. Countries that import gas experience additional costs to those countries that produce domestically. Liquefying, shipping and then re-gasifying LNG adds around $5 - $6 per GJ.

This means that an export parity price of $9 - $10/GJ is what domestic users of gas may be forced to pay for contracts in the future.

Contracting approaches

The gas market is a seller’s market. There are fewer respondents to gas tenders leading to less room to negotiate favourable terms and conditions. Clients should expect to pay more and that contract terms will tend to be shorter as suppliers adjust to the changing nature of the market.

One solution is to take shorter term contracts that match retailers’ current contracts with their suppliers, which will mostly expire in 2014. Longer term contracts have the expectation of export parity pricing built in. While this may only delay the inevitable large price increases, it allows time for more local volumes of unconventional gas to be proved, especially coal seam gas in NSW and shale gas in Victoria. This is similar to what has happened in the US.

We are also seeing smaller gas producers, who are not aligned to the LNG export project companies, looking to supply consumers directly through the wholesale market and/or establish themselves as gas retailers. Watch for further developments and potential opportunities for your business.

The future of gas markets

The changes coming to Australian gas markets should be considered against the backdrop of the growing global demand for gas. This demand is being met by a major structural change to the gas market - the development of technology allowing the economic extraction of so-called ‘unconventional gas’. The most common types of this are coal seam gas and shale gas. Proven and probable gas reserves in Australia have tripled between 2005 and 2012 – with the majority of this due to coal seam gas. Similar increases in proven reserves have been seen globally, with the US seeing a transformation of its industry due to the discovery and development of vast reserves of shale gas.

The rapidly evolving nature of the gas market will provide an interesting ride over the next decade. A big variable will be whether the US will lift restrictions on exports providing downward pressure on international prices.

Given energy prices are a politically sensitive topic, the extent of government intervention will be keenly watched by market participants. Reservation policies whereby a portion of gas is mandated by law to be sold domestically have been advocated by some in industry. Community concerns over the development of unconventional gas reserves will need to be addressed as will transparency in the market. This is beginning to be introduced but there is more to be done. Future carbon pricing policies will also play their part.

There are many variables – but one certainty in the short to medium term is that prices are increasing. Energetics energy markets experts can provide forecasting and contracting advice and services

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