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East Coast gas supply uncertain, despite large-scale LNG projects

17th September 2015

By: Esmarie Iannucci

Creamer Media Senior Deputy Editor: Australasia

  

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PERTH (miningweekly.com) – Early indications from the Australian Competition and Consumer Commission’s (ACCCs) inquiry into the East Coast gas market has indicated that the arrival of major liquefied natural gas (LNG) projects has likely upended the market permanently.

The ACCC East Coast gas inquiry would consider the competitiveness of wholesale gas prices and the structure of the upstream, processing, transportation, storage and marketing segments of the gas industry. The inquiry started in April and its results would be reported to the government by April 2016.

“As we all know, Queensland Curtis LNG has commenced production from both its trains and Gladstone LNG and Australian Pacific LNG are ramping up their initial trains towards production. Already LNG demand equals the total domestic demand of the East Coast gas market,” said ACCC chairperson Rod Sims.

“By the time all six trains are operating, East Coast gas production will need to have tripled to meet both LNG and domestic demand from industrial, commercial and household customers and remaining gas-powered generation.”

Sims said this burst in demand for gas over a very short timeframe was effectively upending the East Coast gas market.

“To meet these changing market dynamics, transmission pipelines are being interconnected and flows being made bidirectional. In other words, the transmission network is being prepared to enable some gas to flow north out of southern production areas and into Queensland.”

Sims noted that there was originally a strong presumption that coal-seam gas (CSG) with some incremental supply from the Cooper Basin would largely supply LNG demand.

However, he said that, despite this early expectation of a gas production boom, the East Coast market seemed to be perhaps one of the few gas markets in the world which was now living under the shadow of supply uncertainty.

Further, Sims stated that gas user complaints about a dearth of offers for the supply of gas in recent years were largely true.

“It is clear from our work so far that the claims by gas users that there was a marked change in the gas market after the final investment decisions by the LNG projects in 2010/1, and that there was then a dearth of offers for the supply of gas, are largely true.”

“We have evidence that many domestic users went from a market where they received, say, three to five offers of supply on terms that were able to be negotiated, to one where they received zero or one true offer, on largely take-it-or-leave-it, inflexible terms.”

Sims said that, from 2012 to 2014, it was hard to find signs of an effective domestic gas market.

“When you look at some of the gas deals that were struck during this period, it is clear that a number were related-party transactions with the LNG projects shoring up supply positions or other deals between suppliers.”

“It does appear, however, that during 2014 and into this year, there may be some more offers in the market. This has coincided with some slippage in the LNG project timeframes, which has freed up some gas for the domestic market, coupled with early CSG ramp gas also being available.”

However, Sims pointed out that there were changes in the terms and conditions of gas supply.

“Gas supply contracts now tend to be for considerably shorter duration and at higher prices. The current contracts also have much less flexibility around some of the delivery conditions.”

The Australian Petroleum Production & Exploration Association (Appea) has, meanwhile, said regulatory failure remained the biggest risk to a more competitive gas market on the Australian East Coast.

“The greatest risk to the market is regulatory failure, not market failure,” said Appea CEO Malcolm Roberts.

“Australia has ample gas resources to supply domestic and export markets. But, at a time of unprecedented demand, recent government policies risk creating an artificial shortage of gas and higher prices.

“Removing unnecessary government restrictions on exploration and development is the most effective way to enhance supply and put downward pressure on prices.”

Roberts expressed Appea’s hope that the ACCC, in its inquiry, would highlight the need for “sensible” policy changes to assist both producers and users.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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