Challenging times for procuring gas for fixed price contracting in 2017

As 2017 approaches, it is clear that while there is a lot of competition for electricity contracts, the same cannot be said for gas.

In discussions with market participants Energetics sees an ongoing commitment to supply residential customers, but a definite loss of appetite for servicing large Commercial and Industrial (C&I) businesses. For this market, it is not simply the price of gas which is a problem, but the limited number of gas retailers who are willing or indeed able, to offer prices.  

For large gas users seeking to contract gas for 2017, we consider the convergence of a number of challenges, the further risks we face and how companies can best position themselves.
 

Gas is scarce on the east coast

2016 has proven to be a challenging year in the eastern and south eastern energy markets with rising wholesale electricity costs, record gas spot prices, LNG shipments leaving Gladstone, gas companies pulling out of CSG projects and brown coal fired power shutting down in Port Augusta.

LNG exports from South East Queensland have put upward pressure on domestic gas prices and, as the export industry has grown, concerns have been raised for supply.  The pressure intensified in NSW, following the February 2016 announcement by AGL of its planned withdrawal from its CSG project in Camden by 2023.  That said, few would have forecast the contraction in supply that is now set for 2017.

Looking more closely at the AGL announcement, one would have assumed that AGL could rely on existing supply arrangements, with gas storage facilities and contracts to carry on business as usual. However, in July 2016, AGL further drew headlines when they announced a $35 million hit to their first quarter gas margin in the new financial year.
This loss occurred because AGL bought gas on the spot market to meet customer demand.

Why? It was reported that an AGL gas production facility in Queensland had to curtail supply due to safety concerns.  This event coincided with high gas prices and the need for AGL to fuel the SA Torrens Island Power Station. 

There are some aspects of the situation faced by AGL that are specific to them, however the series of events highlights the supply/demand market forces at play and their growing impact on competition in the C&I retail space at a national level. 

So while there may be a number of retailers with licences across Australia’s gas markets, not all have existing contracts or gas supplies to manage the risk of supplying large C&I customers. 

Where has the market gone?

Through our engagement in the gas market, we have seen that while four or five retailers might be willing to price contracts in Queensland for 2017, your business may only have two or even one gas retailer who can buy or supply in South Australia or New South Wales ready for January 2017.

Even if such a deal could be established, the cost to purchase those contracts in such large volumes so close to the commencement date would be extremely high.

What are my options?

In light of the current state of the gas markets, Energetics recommends large gas users take the following steps:

      ●    Engage with all authorised gas retailers to maximise competitive tension
      ●    If your contract falls due end financial year 2017, consider moving the tendering process forward.
            Better prices are likely to be offered further out from the contract's expiry.   Especially too, because
            at that time of year, domestic gas demand is higher
      ●    If you are a large gas user, assess the risks and opportunities in using alternative channels to
            market and contracting arrangements such as wholesale priced gas contracts (ie. buying gas at the
            variable wholesale price applicable to the relevant gas hubs, now available along the East and
            South East coast gas markets)
      ●    If you have gas-fired cogeneration or trigeneration systems, particularly in commercial buildings,
            review your system control strategies to optimise performance.  In addition, assess the impact of
            rising gas prices in relation to operational costs, NABERS ratings and options to procure green
            power
      ●    Review overall business efficiency opportunities to drive down consumption through both process
            and equipment efficiencies
      ●    Consider the longer term:  review planned energy investments and any changes intended to
            infrastructure and plant, and evaluate options for alternative supply such as solar thermal or biogas
            in the industrial sector (especially suitable for the food manufacturing and beverage industry).

Energetics can provide assistance.  Over the last 15 years, we have developed flexible gas supply contracts tailored to meet the risk and cost management objectives of our clients. Incorporating our understanding of the drivers of natural gas prices into forecasting and modelling, is core business for Energetics. We tender in a large number of natural gas contracts per annum using robust tools and methodologies for examining historical market trends, future price drivers and key developments that influence pricing.

Please contact our experts for advice. 

 

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