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Australian regulator sounds alarm over domestic gas prices

The ACCC is struggling to ensure domestic consumers are offered terms that are even close to those available to export customers

Australia’s competition watchdog has voiced concern over high domestic natural gas prices, arguing the burden of bringing them down should sit with the country’s LNG exporters.

The Australian Competition and Consumer Commission (ACCC) pointed to a growing disparity between LNG netback prices and those paid by domestic consumers, with Australian buyers reportedly paying A$2-5/GJ ($1.4-3.7/GJ) more than their international peers.

One solution would be for the government to extend a heads of agreement (HoA) it signed with LNG producers in October 2017 beyond its 2020 deadline, according to ACCC chairman Rod Sims. This included gas exporters committing to offering enough fuel to cover expected domestic shortfalls in 2018 and 2019 on competitive market terms.

“The ACCC is right to ask about the widening price gap as current market trends suggest that the difference should close in the near term” Wood, Grattan Institute

At first glance, this solution seems like a win-win. Even if LNG producers sell uncontracted gas on the domestic market at marginally above the international rate, local buyers would still pay less. But the question then stands: if this is a workable solution, why is there still such a gap between domestic and export parity prices?

Price concerns

The ACCC stated in its Gas Inquiry 2017-25: interim report, published in mid-August, that prices offered to domestic gas users in late 2019 and early 2020 ranged from A$8-11/GJ. It argues that this was not in line with the “significant and sustained” drop in LNG netback prices, with prices for 2021 delivery having fallen below A$5.50/GJ since May.

There is no easy answer for the disparityeven the ACCC suggests it struggles to understand why producers prefer to sell LNG at a price lower than they could get in the domestic market.

 “I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets, says Sims.

The fact that Queensland spot LNG was sold substantially below domestic price offers emphasises “the importance of our continuing work to understand the drivers behind the price levels we are seeing across the domestic market”, he adds.

Tony Wood, energy programme director for Australian thinktank the Grattan Institute, tells Petroleum Economist he sympathises with the ACCC’s concerns. “The ACCC is right to ask about the widening price gap as current market trends suggest that the difference should close in the near term.”

Manufacturing focus

Australia’s major manufacturers have been complaining for years about the rising cost of gaswhich peaked at A$20/GJ in 2017while historical netback prices show a high of A$11.15/GJ that year.

Industrial plants that were established when gas prices were lower have begun to struggle in the face of higher feedstock costs. Wood notes that large-scale manufacturing accounted for c.40pc of domestic gas consumption, with around a dozen major outfits accounting for approximately half of that figure.

Sims says the widening gap between domestic and export parity prices would have an “inevitable impact” on Australia’s industrial sector. This is especially worrisome to the federal government, which has been deepening its commitment in recent months to a gas-fired manufacturing-led economic recovery in the post-Covid-19 era.

Extending the HoA would be one solution to overly expensive gas. “The ACCC’s call to extend the HoA may yield the desired result, but if it does not then the government may adopt more draconian measures, says Wood. The issue with the HoA, though, is that it ignores certain complex logistical differences between the domestic and international markets.

Logistical headaches

Queensland’s coal-bed methane (CBM) to LNG export projects were underwritten by long-term contracts, with any excess gas to be sold on the spot market. While the ACCC wants to divert this uncontracted supply to the domestic market to help bring prices down, the volumes on offer far exceed those that domestic buyers traditionally buy.

The ACCC highlights that Queensland’s LNG producers sold 18 spot cargoes to international buyers in late 2019 and early 2020“equivalent to more than 10pc of annual domestic east coast demand”, according to Sims.

Pumping this much gas into the local market creates something of a logistical challenge. “There is a degree of inflexibility around large-scale gas producers and consumers and unexpected changes can lead to shocks in the system, says Wood.

He adds that the geological nature of CBM production means developments struggle to ramp production up and down in response to shifting market dynamics.

Up to A$5/GJ – Premium Australian customers pay over international buyers

On the buy side, major domestic purchasers tend to source volumes under long-term contracts while smaller ones are already catered for by domestic-focused producers. For LNG producers, selling gas in 40,000t LNG cargoes is a significantly more attractive option than relatively small calls on their volumes from domestic end-users.

The east coast market’s inability to absorb sizeable CBM volumes appears to have contributed to its price woes. After all, LNG producers are governed by commercial considerations and have not opted to export spot cargoes for a lower per unit price simply on a whim.

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