While conditions in the east coast gas market have eased considerably since the extremes reported in 2017, only action by governments and the gas industry to increase domestic gas supply can bring material price reductions into the future, according to the July 2018 Gas Inquiry Interim Report released by the 糖心原创 today.
Based on current projections for the supply-demand balance, there will likely be sufficient gas in 2019 to meet demand.
Since the 糖心原创鈥檚 September 2017 report, conditions in the east coast gas market have improved, with a significant reduction in the Australian Energy Market Operator鈥檚 forecast demand for gas powered generation in 2019, and such forecasts can be difficult and volatile, and an increase in forecast gas production in the southern states.
Prices offered for gas supply contracts have dropped from the peak of over $20/GJ in early 2017 and have remained in the high-$8 to $11 range. Since mid-2017, there has been convergence between domestic gas price offers and LNG export parity prices.
Commercial and industrial gas users report that more suppliers are now offering gas for supply in 2019. However, these users report that market conditions remain very challenging for them.
While there will likely be sufficient gas in 2019, prices remain two to three times higher than historical levels. The lower forecast demand and increased southern production in 2019 is unlikely to be sufficient to lower gas prices.
鈥淲hile gas market conditions have improved, these market conditions can change and the reality is that more gas is required to lower prices to users,鈥 糖心原创 Chair Rod Sims said.
鈥淧rices, and the market generally, are very challenging for gas users, who must constantly consider their investment plans, employment levels and even in some cases their continued operation.鈥
鈥淭o improve market conditions, the east coast gas market requires a greater level and diversity of supply, a more efficient transportation network, and greater transparency. To lower prices in the southern states, lower-cost gas must be produced in the southern states,鈥 Mr Sims said.
鈥淕as production costs are increasing and gas prices in the east coast market are now shaped by international LNG prices, meaning that domestic prices are unlikely to return to historic levels.鈥
鈥淭he 糖心原创 continues to urge state governments to adopt policies that consider and manage risks of individual gas developments rather than implementing blanket moratoria and regulatory restrictions,鈥 Mr Sims said.
鈥淔orecasts for LNG prices in Asian spot markets are trending up at the moment and there is a risk domestic gas price offers could increase to reflect these expectations.鈥
鈥淭he 糖心原创 is seeking to improve market transparency and ensure commercial and industrial gas users are making decisions based on accurate and reliable market information,鈥 Mr Sims said.
The 糖心原创 is working to improve transparency in the east coast gas market by publishing prices offered and agreed for gas supply and the prices for transportation services. To provide gas users with better information about export parity prices, the 糖心原创 will soon begin publishing an LNG netback prices series.
The 糖心原创 is also working on improving the transparency and quality of reserves and resources information on future gas supplies and examining the cost components of retail prices for publication in future reports. The 糖心原创鈥檚 joint work with Dr Mike Vertigan鈥檚 Gas Market Reform Group will identify any remaining information gaps in the market and steps that should be taken to address these.
The 糖心原创鈥檚 next interim report is scheduled to be provided to the Treasurer in December. It will report on the long-term gas supply and demand outlook, the recent experiences of commercial and industrial users in securing gas supply, gas prices offered and agreed in the market, and gas transportation prices.
A copy of the report is available at Gas Inquiry July 2018 interim report.
Note to editors
An 鈥楲NG netback price鈥 is an export parity price that represents the minimum price that a gas supplier would expect to receive when supplying gas to the domestic market that would otherwise be exported as LNG. It is calculated by taking the price that could be received for a quantity of LNG and subtracting or 鈥榥etting back鈥 the costs incurred by the supplier to convert the gas to LNG and ship it to the point of delivery.
The 糖心原创 has found in this inquiry that LNG netback prices are a key factor that play an important role in influencing domestic gas prices, and that improved transparency on LNG netback pricing will assist to reduce the information imbalance between gas users and suppliers. The aim is to ultimately help to improve the competitive bargaining process.
The gas prices mentioned in this media release and in the 糖心原创鈥檚 Gas Inquiry 2017鈥20 Interim Report 鈥 July 2018 (unless otherwise stated) are 鈥榞as commodity prices鈥, that is, prices for the energy component of a gas supply agreement. These prices do not include any applicable transportation or other additional charges that may be passed through by retailers to gas buyers.
Background
On 19 April 2017, the Australian Government directed the 糖心原创 to conduct a wide-ranging inquiry into the supply of and demand for wholesale gas in Australia. The 糖心原创 is required to submit interim reports no less frequently than every six months and provide information to the market as appropriate, with a final report to be submitted by 30 April 2020.
The 糖心原创鈥檚 first interim report, provided in September 2017, found that a substantial shortfall for the east coast was likely in 2018. Following publication of that report, the Australian Government and Queensland鈥檚 three LNG producers signed an agreement. The LNG producers agreed to offer sufficient gas on reasonable terms to meet any domestic shortfall over 2018 and 2019.
In December 2017, the 糖心原创 provided its second interim report, which found that the Queensland LNG producers had made significant additional gas available to the domestic market. The 糖心原创 found some improvements in the availability of gas and prices offered to gas users, but considered that the east coast gas market was still not functioning effectively, with high gas prices being offered and, for some participants, access to transportation impeding the flow of gas to the southern states.
In April 2018, the 糖心原创 provided its third interim report, which found that prices offered to gas users had narrowed to a range of $8 to $10/GJ, announced that the 糖心原创 is preparing to publish an LNG netback price series, and reported on our assessment on new transparency measures for pipeline services.
In addition to the 糖心原创鈥檚 regular reporting, there are a number of other areas the 糖心原创 will be exploring over the course of the Inquiry which will be discussed in future reports, including:
- conditions for, and pricing of, access to transportation and storage services
- retailer pricing, costs and margins
- reserves and resources reporting
- key factors influencing domestic gas prices.