The growing cost of gas on Australia’s east coast

12 Jul 2013Archived News Daisy Correa Climate Change Matters

Gas pricing has been a focus of late for Australian business. 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 but this is about to change. An increase in demand and prices in Asia has driven investment in Australia and the formation of an export industry on the east coast. There is some $50 billion in investment committed on the east coast (with $116 billion on the west coast). The first shipment of east coast gas to offshore markets (from Gladstone, Queensland) is due in 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.

Domestic gas users have already been experiencing price rises. The chart below shows the average cost of offers received for gas in Victoria over the past few months.

Figure 1: Received gas offers Victoria (in 2013 dollars, commodity component only). Cal = calendar year. 

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 direct 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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