Driving this surge in price is the uncertainty surrounding future domestic gas production and international prices.
The possibility of supply shortfalls is an acute worry, notably in Eastern Australia, where coal seam gas (CSG) is, for the first time, being used for LNG exports. As of 2013, Queensland’s CSG-to-LNG projects had combined future annual export obligations of 1,518 peta-joules (PJs)—twice the entire demand of Eastern Australia for 2012. Should delays in CSG production occur, these projects will have to source their gas from traditional fields, leaving many wondering how much gas will be left for domestic consumers and at what price.
Faced with rising prices, some in Eastern Australia have called gas reservations akin to those in Western Australia, where LNG producers have to secure 15% of gas production for domestic markets if they want to export (the policy is to be reviewed by 2015) . While this may seem like an easy fix, it only delays the problem: earmarking part of the production would artificially lower the price, thus reducing investment in the upstream sector and limiting, in turn, the total gas supply.
Far better would be to increase supply, address market inefficiencies and improve storage to reduce price volatility.
Clear CSG regulations at the national level will be key; such regulations would help address community concerns and reduce friction between communities and producers as production expands.
On the market side, price discovery and market efficiency can be supported by continuing the efforts to establish gas trading hubs—for example, the Wallumbilla energy hub in Queensland, which has traded more than 400 terajoules since it began operations in March 2014. Gas pipeline capacity trading could also be encouraged to facilitate the efficient transfer of capacity rights between buyers and sellers—as opposed to the current arrangement of relying on the pipeline owner to be the middleman.
Another aspect that unnecessarily tightens the domestic market is joint marketing arrangements that enable different producers to act as a single entity when selling gas—even when they’re not part of a joint venture. Such arrangements reduce competition, especially in areas, Western Australia is one, where consumers have a limited number of producers to choose from.
In Eastern Australia, increased investment in storage capacity and expanding the pipeline capacity between New South Wales and Victoria could also help reduce price volatility. Brisbane, which has access to only one pipeline, often experiences higher and more volatile prices than Sydney or Melbourne, for example.
The price of natural gas in Australia is unlikely to rise much further, however. In the short term, the cost of converting LNG and shipping it will protect the $5-6/GJ price against Asian LNG prices (which are at three-year lows because of high gas storage levels in Europe and South Korea). In the longer term, should China succeed in shale gas production, LNG prices could tumble. Australia could also find itself drowning in gas if its shale proves to be as bountiful as America’s or if greater international LNG competition leads firms to scrap their Australian LNG export plans.
Meanwhile, the prospect of high domestic gas prices and no government white knight appearing with plans for the earmarking of production are expected to lead firms to invest in more gas production and greater energy efficiency; what is also expected is efforts to reduce consumption and to make input substitution in power production. Stanwell Power Corporation, which provides 45% of Queensland’s electricity, has already taken advantage of the arbitrage between the cheap gas provided by its old long-term contracts and the higher international prices by mothballing one of its gas power plants in Brisbane, selling its gas and restarting its coal-burning plants to produce electricity.
Given the Australian government’s recent decision to eliminate its carbon tax, the rise of LNG exports may inadvertently lift Australia’s old energy standby, coal.
This was reposted from TheEconomist.com.