Australian LNG sours for the locals
Exporters have prioritised foreign markets and the domestic price has spiked, angering consumers back home
Selling a commodity to foreign markets instead of the local one was always going to lift prices in the home market. But no one expected this. Eighteen months after Australia’s LNG-export surge began, local spot gas prices are now triple those paid by Japanese buyers of gas sourced from newly minted Queensland facilities.
The inflation has caught regulators and the government on the hop. It shouldn’t have: large industrial consumers have repeatedly said that gas producers are prioritising long-term LNG-export contracts over the local market and pitching domestic prices at higher-than-international rates to gouge a captive market.
As far back as 2011, when BG sanctioned Queensland Curtis LNG (QCLNG), the first of Queensland’s LNG terminals, large local users complained they were finding it hard to secure gas-supply contracts longer than a year in length and side prices were climbing to reflect global tariffs. Back then, international LNG prices were well above domestic levels.
According to the Australian Energy Regulator, “domestic gas supply contracts are now being struck with reference to global prices, and spot gas prices in eastern Australia have become increasingly volatile”. With domestic gas prices still climbing despite international oil-indexed gas prices falling, some are asking whether the Aussie gas industry is subsidising Queensland’s costly LNG facilities at the expense of local consumers who can’t buy their gas elsewhere.
Quite how much the local market is hidebound to the upstream and export business became apparent in the first week of July, when wholesale gas prices in eastern Australia’s short-term trading market (STTM) spiked above A$20 per gigajoule (about $15 per million British thermal units) – and up to A$29/GJ in Sydney at one point - due to a combination of cold weather and supply shortages.
This is well above the A$9/GJ equivalent being paid in Japan for imported LNG, some of which is sourced from new LNG-export terminals in Queensland. Before the growth of the LNG industry, local wholesale gas prices traded at around A$3-4/GJ.
Analysts say the nub of the issue is the dominance exerted over the upstream market by a small number of gas producers and privately owned network operators that control supply and pipeline availability and so can influence prices in the wholesale market.
Four producers dominate. These include the Gippsland joint venture owned by BHP Billiton and ExxonMobil, which is a major supplier to the southern part of the region’s gas market and exerts considerable power over pricing and supply. Santos and Origin, both separately invested in the LNG-export business, also have considerable market power.
Critics says the Gippsland joint venture was responsible for the July STTM price spike after it withheld supply to the wholesale market. This led to electricity generator AGL, Australia’s largest gas wholesaler, issuing a profit warning after it had to buy spot gas to make up the shortfall.
Some analysts believe certain gas producers may be intentionally withholding supply to manipulate spot prices, giving preference to LNG exporters over domestic users. Santos is known to have been short gas for its GLNG terminal and producers are reportedly giving preference to such contracted LNG contracts that need to be fulfilled.
The lack of a liquid wholesale market is hindering price transparency, while poor regulation of the east coast’s gas transmission network – all privately owned - is unduly influencing the market and making it hard for smaller producers to gain a foothold.
A recent probe by the Australian Competition and Consumer Commission (ACCC) identified the need for tighter network regulation and recommended breaking up the near monopoly operating upstream. ACCC Chairman Rod Sims described the region’s challenges as a “triple-whammy” of local and international events and changes.
Big users are not impressed. Industrial lobby group Manufacturing Australia (MA) has called on the government to mandate that a portion of gas output be set aside for domestic use. It says this would curb the price rises, which are hurting a sector already squeezed by low-cost manufacturing in Asia.
The Australian Petroleum Production & Exploration Association says instead that lifting moratoriums on fracking in Victoria and New South Wales would increase supply.
But a broader risk to supply is looming as low oil prices dissuade companies from drilling. The slump in exploration spending was recently flagged by the Australian Bureau of Statistics, which said that investment in petroleum exploration fell an estimated 35% in 2015 compared with 2014.
In a recent assessment, the Australian Energy Market Operator cautioned that developed gas reserves in eastern and southeastern Australia “are only sufficient to meet forecast gas demand until 2019” and more development is needed by 2019 to maintain adequate supply.
Australia is still ramping up LNG exports and shipped 3.6m tonnes in June, of which 1.4m came out of Queensland. Further growth is expected in the coming six months as Queensland’s GLNG and APLNG come into production and output from Chevron’s Gorgon rises.