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Australian upstream rejects politicians’ call for A$4 gas

Producers insist the costs of producing gas domestically—as well as prevailing spot prices—significantly exceed the historic benchmark price level

The Australian upstream industry is pushing back against the popular notion that currently depressed domestic natural gas prices are here to stay. While prices have collapsed over the past two years, the industry argues the days of cheap gas are gone and expectations that prices will not climb in line with the international market are unrealistic.

The Australian Petroleum Production and Exploration Association (Appea) has pointed to an International Gas Union (IGU) survey of wholesale gas prices as showing that Australia’s average rates are among the lowest in the Asia-Pacific region.

Majors ExxonMobil and Shell, meanwhile, have dismissed a recent recommendation to the government that gas prices of around A$4/GJ ($2.77/GJ) are sustainable, arguing the price is below the cost of production.

The East Coast market enjoyed A$4 gas for many years before the start-up of Queensland’s world-class LNG export projects, which are based on coal-bed methane (CBM), referred to locally as coal-seam gas (CSG). Prices climbed from A$4 in 2014 to a high of A$20 in 2017, prompting outrage from both industrial users and politicians.

Break from reality

The IGU’s Wholesale Gas Price Survey, released on 3 July, shows Australia’s wholesale gas price averaged just US$5.58/mn Btu in 2019, around 40pc less than the wholesale average for Asia-Pacific.

The IGU report noted that producers in countries with the lowest gas prices—regulated markets that include the likes of Turkmenistan, Algeria and Venezuela—often sold the fuel below the cost of production and transportation.

“When prices are being touted that are lower than the cost of getting it out of the ground, they are just not based in the reality of today,” Shell Australia chairman Tony Nunan told newspaper The Australian on 22 June. “The A$4 target, which comes up from time to time, is a price point that is lower than the lifecycle cost of being able to get that gas out of the ground.”

“The [upstream] sector view is that low cost to develop and deliver gas has been exhausted, and any new sources… would be considerably higher cost than [A$4]” Wood, Grattan Institute

“It is dangerous to start at price and then work at any direction,” ExxonMobil’s Australian chairman, Nathan Fay, told rival newspaper The Australian Financial Review on 23 June. “Ultimately price is a function of supply and demand fundamentals, so starting with A$4 a gigajoule and perhaps ignoring some of the realities as to what the actual cost of finding, developing and producing gas is, really puts us at a starting point that is not constructive.”

Both men were referring to the National Covid-19 Coordination Commission’s (NCCC’s) controversial recommendation in May that state support for upstream and midstream projects as well as the introduction of a gas reserve programme could suppress domestic prices over the long run.

Cheap gas has become a rallying call among manufacturers, which complain that higher domestic input costs have left them struggling. The Australian Competition and Consumer Commission (ACCC) acknowledged these challenges in 2019, noting high gas prices had left the sector internationally uncompetitive.

Tony Wood, energy programme director of thinktank the Grattan Institute, tells Petroleum Economist: “The [upstream] sector view is that low cost to develop and deliver gas has been exhausted, and any new sources—conventional or unconventional, local or imported—would be considerably higher cost than [A$4].”

Poor comparison

Industrial buyers and politicians have pointed to the fact that US gas prices plunged following the shale revolution and argue that, with Australia established in the top two largest exporters of LNG along with Qatar, the domestic market should reap some of the rewards.

A$20/GJ - Peak LNG price in 2017

But this comparison misses fundamental differences between the two markets. US shale gas production is largely a function of liquids production, with gas so prevalent that it tanked local prices and turned the country into an exporter that is set to eclipse Australia later this decade. Large-scale development of Australia’s East Coast CBM reserves, meanwhile, was underwritten by long-term sales agreements with Asian buyers—so gas production surged to meet export contracts.

Wood says he thinks A$6-8 would be a more achievable “cheap” gas target, given that this is where spot prices have been recently. “Prices in recent years have been above that level, remembering that there can be a big difference between cost and price.”

He added that while a number of forecasts had projected a price range of A$10-12 for most of the decade, a combination of imports, new domestic production and a “reasonable outcome” on hydraulic fracturing should help deliver lower prices.

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