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The ����ԭ�� proposes to further increase transparency in Australia’s east coast gas market by including longer-term prices in its widely-followed Liquefied Natural Gas (LNG) netback price series, under a draft decision released today.

The ����ԭ�� publishes LNG netback prices to add transparency to the gas market, and is currently reviewing the price series as part of its ongoing gas market inquiry.

The development of three LNG projects in Queensland connected the east coast gas market to international markets. As there is insufficient gas production on the east coast to fully utilise the LNG plants, LNG producers can sell any uncontracted gas either domestically or overseas. As long as this remains the case, LNG prices in international markets will continue to influence Australia’s domestic gas prices.

The ����ԭ��’s netback price series is an indicator of the prices Australian gas suppliers can expect to receive for exporting their gas, and therefore what a domestic gas user will need to pay to secure gas. It is the price level at which an LNG producer should be indifferent about supplying uncontracted gas domestically or to export markets.

“Our LNG netback prices reflect commercial realities and bring essential transparency to the east coast gas market. The price series helps to address information asymmetry between gas buyers and sellers, and to improve the balance between the relative bargaining positions of parties,” ����ԭ�� Commissioner Anna Brakey said.  

“The published prices do not represent the ����ԭ��’s view of a fair price for sellers or buyers, or a regulated price cap.”

“In reviewing this price series we have carefully considered the views of a range of stakeholders. Major gas users, industry bodies, gas suppliers and market analysts all gave us their views about how LNG netback prices should be calculated,” Ms Brakey said.  

The ����ԭ�� has reviewed all aspects of the LNG netback price series, including the period for which forward prices are published, the choice of international reference price used, and the costs that should be deducted when calculating the netback price.

“We engaged Wood Mackenzie Consultancy to provide expert advice on how international LNG markets are developing, and the relevance of different international reference prices to Australia’s east coast gas market,” Ms Brakey said.

Following this review, the ����ԭ�� has proposed that the current methodology for the netback price series should remain the same, but that prices extending out to five years should also be published.

The ����ԭ�� is seeking feedback on this draft decision.

The ����ԭ��’s draft decision is to:

• continue to publish historical and short-term forward LNG netback prices extending to two years, based on the Japan Korea Marker (JKM), a measure of Asian LNG spot prices
• publish longer-term forward LNG netback prices extending to five years based on an oil index, with estimates of the appropriate percentage to apply to oil indexes to calculate LNG prices sourced from a consultant
• maintain the current approach to estimating export costs in calculating LNG netback prices
• source longer-term LNG freight cost estimates from a consultant.

“Our review found that for LNG producers on the east coast, exporting to Asia remains the main alternative to supplying the domestic Australian market,” Ms Brakey said.

“Therefore Asian LNG prices, linked to JKM or an oil index, are the most relevant benchmark for calculating LNG netback prices for the east coast gas market.”

“Our draft decision to publish a longer term oil-linked LNG netback price series considered our recent examination of gas suppliers’ internal documents on their pricing strategies. These documents showed that prices in medium-term LNG contracts influence prices in the east coast gas market. We are very interested to hear parties’ views on this new proposal,” Ms Brakey said.

“We believe it’s appropriate to continue our current approach of only deducting avoidable costs when calculating LNG netback prices.”

“Deducting the historical costs of building LNG plants is not appropriate as this is not something LNG producers would have regard to in the choice between selling uncontracted excess gas domestically and internationally,” Ms Brakey said.

The ����ԭ�� is now seeking feedback on its draft decision. Stakeholders are invited to provide submissions on the ����ԭ��’s draft decision by Friday 30 July 2021.

A roundtable that brings gas producers, buyers and government together will be held on Tuesday 20 July 2021.

The ����ԭ��’s final decision paper will be published by 30 September 2021.

A further review of the LNG netback price series is proposed to take place in 2024.

Background

The ����ԭ�� began publishing LNG netback prices in 2018 to improve price transparency in the east coast gas market. The current approach uses JKM (Japan Korea Marker) as a reference price as it is a measure of Asian LNG spot prices.

In 2020, the Australian Government requested the ����ԭ�� undertake a review of the LNG netback price series to assess whether the current methodology remains appropriate.

LNG netback prices are a measure of the opportunity cost to LNG producers of supplying uncontracted gas to the domestic market, rather than to LNG markets. It is calculated by taking the price that could be received for LNG and subtracting or ‘netting back’ the costs incurred by the supplier to convert the gas to LNG and ship it to the destination port.