Petrodollars: Australia’s domestic tension between domestic and export LNG prices

As the US studies the question of whether it should be able to export surplus gas as LNG, the battle is already fully engaged in Australia. Unlike the US, Australia’s LNG export facilities are in place and operating. What’s going on there is a pitted battle between gas producers and the country’s gas users, as Christine Forster discusses in this week’s Oilgram News column, Petrodollars.

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With Australia enjoying an LNG boom, market participants are in agreement that prices in the domestic natural gas market are heading for export parity—about three times their historic level of $3-4/gigajoule on the east coast.

That prospect and the looming startup of no less than seven new export-oriented LNG projects around the country has underpinned a consistent clamor over the course of 2012—from local gas consumers seeking a domestic gas reserves policy and a decoupling of prices from the international market.

Those calls have so far fallen on deaf ears. In unveiling his long-awaited energy policy in November, federal energy minister Martin Ferguson, who has previously voiced his opposition to the idea of reserving gas for domestic use, was at pains to point out that the market would rule when it came to natural gas.

The new policy “faces up to major challenges such as rising energy prices, pressures in Australia’s gas markets, remaining competitive in the development of our energy resources, maintaining our liquid fuel security and bringing new clean energy technologies to market,” Ferguson said at the time. “To meet these challenges, the Australian government is committed to open and transparent markets that allow competitive pricing, efficient resource allocation and innovation.”

That approach was hailed by the upstream industry, which is overseeing the development of projects that will hike Australia’s LNG capacity from 24 million mt/year to more than 80 million mt/year by 2017. Most of that LNG has been sold under long-term, oil price-linked contracts to buyers in Japan, South Korea and China.

“Only a market-based energy policy framework can enhance Australia’s attractiveness as a place to do business and encourage the tens of billions of dollars worth of gas industry investment still to be approved,” Australian Petroleum Production and Exploration Association Chief Executive David Byers said in response to the new policy.

“It is important that gas is seen no differently to other major export commodities such as iron ore, coal and wheat in that the benefits associated with development are maximized through links to international markets.”

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But the government’s position has not stopped the gas users’ lobby from trying to sway the debate. DomGas Alliance, which represents a group of major gas users in Western Australia, wasted little time after the release of the white paper in unveiling a report by Innovative Energy Consulting which it said showed Australia was lagging behind other OECD countries in maximizing value from natural gas resources.

“Australia has abundant gas resources so there is no reason why prices in energy-poor Japan should dictate prices in Australia,” said DomGas Alliance Executive Director Gavin Goh. “Neither the US nor Canada consider it smart policy to link domestic energy prices to the world’s highest prices in Japan.”

The IEC report warned that the convergence of domestic gas prices to LNG netback first in Western Australia, and now on the east coast, was “clearly not in any party’s best interest except the Australian gas producers.”

The price shift would have serious consequences for the nation, impacting industries such as fertilizer, chemicals, glass, paper and steel manufacturing, as well as the farms and businesses that use those industries’ products, the report added.

“The many unchallenged claims by gas producers across Australia that the domestic market now must compete with exports vis-a-vis gas price reflect a new pinnacle of what has for some time been an escalation of market power and market manipulation,” according to IEC. “Most consultants in Australia echo the producer rhetoric which is another major concern,” the company added.

The report points out that increased gas production and exports normally translate into lower domestic gas prices, such as in the US. In Australia, the opposite has occurred.

“Domestic gas production for domestic gas consumption in a net gas exporting nation or region should be priced on the basis of the availability of supply to that market and, in turn, the marginal costs of indigenous gas production,” IEC said.

“Contrary to the allegations by Australian gas producers, the price received from exports is irrelevant. Any convergence of these two prices, unless under a floor pricing policy for exports, is a symptom of market power abuse and market failure,” it added.

As 2013 unfolds and Australia draws ever nearer to 2016, the year when much of the new LNG export capacity will have started up, and much of the east coast domestic market will be off long-term gas supply contracts, it remains to be seen whether the producers or the consumers will be in the ascendancy in the public debate.

–Christine Forster in Sydney


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