Investment required for lower priced gas

Gas users’ longer-term concerns about prices in the east coast gas market could be alleviated if there is timely investment in gas development and key infrastructure, according to the Gas Inquiry 2017-20 Interim Report released by the ACCC today.

Suppliers expect to produce sufficient gas in the east coast to meet the expected demand in 2019, but domestic prices remain too high for many gas users.

Prices offered and agreed in mid-2018 for supply in 2019 ranged from $9/GJ to $12/GJ. By August 2018, most offers to large commercial and industrial gas users were at, or above, the mid-$10/GJ level, including some offers above $12/GJ.

“Some commercial and industrial gas users have told us that, at these prices, which are two to three times higher than historical prices, their operations are not sustainable in the medium to longer term. They are increasingly likely to relocate from the east coast or close their operations,” ACCC Chair Rod Sims said.

Gas is a raw material to production or largely irreplaceable source of energy for a diverse range of sectors such as mining, manufacturing, chemicals, agriculture and food production. Rising domestic gas prices are putting gas users which are exposed to global markets under strain, as they cannot pass on the increases in their costs.

“Once large manufacturers relocate or shut down their plants, they won’t come back,” Mr Sims said.

In October 2018, the ACCC commenced publishing export parity prices on its website. This data shows that after reaching the peak of around $12.50/GJ in September 2018, the expected LNG netback prices at Wallumbilla for 2019 fell to $9.60/GJ by mid December 2018.

“We will be closely watching to see whether offers made by gas suppliers continue to track export parity prices on the way down, as they did on the way up,” Mr Sims said.

While export parity price is a key factor influencing domestic gas prices in the east coast, it is not the only one. Based on the estimates Core Energy has done for the ACCC, around 99 per cent of all proved and probable reserves in the east coast have a lifecycle cost, including a return on invested capital, of less than $7/GJ.

As current domestic gas prices are well above these production costs, and international LNG and oil prices are high, there should be significant investment in gas exploration and development to bring this gas to market.

“The market response has been disappointingly slow. While, on aggregate, suppliers plan to increase their investment in gas exploration over the next few years, it will still be well below the levels observed five years ago,” Mr Sims said.

Over 80 per cent of current proved and probable reserves are controlled by the LNG producers in Queensland and a significant quantity of these remains uncontracted.

“The timing of the development of uncontracted proved and probable reserves is critical for the east coast gas market,” Mr Sims said.

“Given the difference between current domestic prices and production costs, we expect gas producers would have a strong commercial incentive to develop those reserves, sooner rather than later. The ACCC will, therefore, be closely monitoring and reporting on decisions made by gas producers on the timing of gas development”.

Bringing on additional gas supply remains a critical issue for the east coast and particularly for domestic gas users in the southern states.

For the remainder of the Inquiry, the ACCC will be monitoring whether gas producers are developing gas in a timely manner. The ACCC will also monitor actions of market participants across the rest of the supply chain.

The ACCC will also continue to conduct a review of the costs and margins of the three largest retailers in the east coast: AGL, EnergyAustralia and Origin. Preliminary analysis shows that the average EBITDA earned by these retailers over the period from 2014 to 2017 ranged from $1.60/GJ to $2.29/GJ and accounted for 15 to 21 per cent of the delivered price of gas.

“It is too early for us to comment on the significance of these results as the findings are highly aggregated and require further examination,” Mr Sims said.

“As part of our continuing review, we will examine if there are any barriers impeding effective competition at the retail level. Many commercial and industrial gas users are not large enough to negotiate directly with gas producers and depend on gas supply from retailers. These users rely on effective competition between retailers to keep their prices down.”

The ACCC will provide its next interim report to the Treasurer in April 2019. In this report, the ACCC will provide an update on gas prices offered and agreed in the market.

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