Market Dynamics

It’s fair to say that the biggest change in the east coast gas market was in 2015 with the onset of Liquified Natural Gas (LNG) exports from Gladstone. Prior to this, gas produced on the east coast of Australia was consumed locally and gas users enjoyed a decade of affordable and available natural gas. Over this decade, gas demand was met from the legacy Cooper Basin and Victorian offshore reserves, and the commercial production of Coal Seam Gas (CSG) from Queensland.

The export of LNG has linked the local gas market to international gas prices. This occurred at the same time as onshore moratoria in Victoria and New South Wales, regulatory challenges, and a shortage of skilled workers which impeded the industry’s ability to bring a competitive supply of new gas quickly to market. Due to these changes, the supply demand equilibrium, which was in balance up until 2015, is now tighter with the marginal cost of supply having a greater influence over the market price.

The significant changes in market dynamics has caused different responses from government, regulators and industry. This does not mean there are major supply issues in the gas market itself; rather that there are competing priorities between domestic and international markets. However, with each new reaction to the changing market there are potential opportunities for end-use consumers. If you know where to look, you can reduce costs and create value in the gas supply chain.

Gas Sources

With the rise of LNG exports, local gas consumers have become exposed to the impacts of the international oil price and foreign exchange rates, which both influence the price at which LNG is sold. Recently, both the Commonwealth and Queensland Governments implemented approaches to try and rebalance the supply challenge for domestic consumers.

At the federal level, the Commonwealth Government imposed the Australian Domestic Gas Security Mechanism (ADGSM) on 1 July 2017 to make sure LNG exporters were also continuing to offer supply contracts to Australian gas consumers. The ADGSM allows for the implementation of LNG export controls should there be a forecast shortfall of supply to the domestic market. Since coming into effect, the ADGSM hasn’t been triggered as enough supply offers have been tabled to prevent a market shortfall. However, the price at which the supply offers are made is not a criterion under the ADGSM that determines whether there is a shortfall.

"If you know where to look, you can reduce costs and create value in the gas supply chain."

The recently elected Centre Alliance Political Party (formerly the Nick Xenophon Team) believes that the missing component of the ADGSM is price control and has sought to revise the mechanism as part of their recent support for the Commonwealth Government’s tax package. The exact details of how this price control would be implemented are unknown, however there is an indication that the policy will focus on both the cost of production and pipeline transportation. Advisian will continue to monitor the situation on behalf of our clients. This potential evolution of the ADGSM may have a positive effect on the cost of gas to the domestic consumer.

In Queensland, the Government is competitively tendering for new exploration and production tenure. The gas produced from these tenements must be supplied into the domestic gas market. This policy commenced in 2017 with Senex’s award of a Petroleum Licence near the town of Miles, known to the market as Project Atlas. So far Senex has committed to the production and sale of up to 14.85 petajoules of gas from the project to three local manufacturers.

This Queensland Government policy is designed to quarantine gas produced from selected exploration projects for domestic consumers. In June 2019, the Queensland Government awarded Australia’s first-ever tenure exclusively set aside for the supply of gas to manufacturing customers. A joint venture between APLNG Pty Limited and Armour Energy Limited is anticipated to produce its first gas in mid-2021.

Another area of interest that may offer an alternative gas source is synthetic gas, otherwise known as ‘Syngas’. Syngas is produced within gasifiers through pyrolysis, which is the thermal decomposition of carbon-based materials at elevated temperatures in an inert atmosphere. Generally, this means plant material or coal, however new techniques are emerging such as the chemical recycling of plastics. Syngas has the potential to meet the specifications required for the Australian gas market. The use of gasifiers for the generation of gas from organic material such as plant waste or coal is not a new technology and could be turned to the current problem of plastics waste management. Tougher quality controls on plastic recycling and outright termination of agreements to ship recycling to our Asian neighbours means that this is also an option to resolve Australia’s current recycling issues.

Transmission Pipelines

Australia has very long transmission pipelines to move gas from where it is produced and processed to end-users. How these pipelines are managed is quite complex, with different suppliers and end-users vying for capacity. To help drive more efficient market outcomes, a pipeline capacity trading reform package was implemented in March 2019.

"While the gas market does not have the liquidity of the National Electricity Market, this increase in trading of volumes through the physical and financial gas markets shines some light into a space that has previously been difficult to observe."

Through this, the holders of unutilised capacity on pipelines are incentivised to trade pipeline capacity under a ‘use it or lose it’ scenario. While still in its early days, this approach should improve the utilisation of pipeline capacity and therefore provide a more economical outcome for end-users.

Gas Markets

Gas markets exist to assist in balancing the daily physical supply and demand of major gas usage zones such as capital cities. These markets take the form of the Declared Wholesale Gas Market (DWGM) in Victoria, and the Short Term Trading Markets (STTM) in Sydney, Brisbane and Adelaide.

For the Victorian DWGM there is an associated financial product which is traded through the Australian Securities Exchange (ASX). The DWGM ASX Futures product mitigates the physical supply risk for a buyer of gas that may be inherent in a ‘traditional’ bilateral supply agreement with a producer. In a normal retail supply agreement this risk is managed by the retailer. This Futures product has experienced more trading over the past 12 months than at any time in its history. While volumes are relatively low compared to the physical market, it now provides greater insights into gas market trends.

The Gas Supply Hubs at Moomba, Wallumbilla and Southeast Queensland all have increased volumes of gas trading which also provide insights into short term wholesale gas prices.

While the gas market does not have the liquidity of the National Electricity Market, this increase in trading of volumes through the physical and financial gas markets shines some light into a space that has previously been difficult to observe.

"Historically, commercial and industrial end-users have sat at the end of the gas supply chain with retailers managing all procurement, transport and supply components upstream of the site meter... However, the evolution of the gas supply chain is providing more options for end-use customers to consider."

LNG Import and Export

In 2018 over 1,000 petajoules of LNG was exported from Gladstone. While this is a significant volume in comparison to the east coast’s domestic consumption of approximately 600 petajoules, the LNG export facilities only ran at 82% capacity. This may indicate that a competitive gas supply for export was not always available in 2018, or that there was not enough gas production in the market to satisfy both the export requirements and the LNG producers’ obligations under the ADGSM.

This lack of a local competitive gas supply is also a driver for LNG import projects. Five LNG import projects have been announced for the east coast market. The two most advanced projects are the AGL Crib Point facility in Victoria and Australian Industrial Energy facility at Port Kembla in New South Wales. AGL’s timeline for first gas to be imported is in the first half of 2022, while Australian Industrial Energy’s looks likely to be late 2020. The LNG netback price (which is the export parity price that a producer could expect to receive for the gas if they were to export it, minus the cost incurred by the producer to convert the gas to LNG and ship it to the customer) is calculated by the Australian Competition and Consumer Commission with the current average 2020 price set at AUD8.55/GJ. This indicates that LNG imports may be competitive against a current local market price of approximately $10/GJ.

Summary for End-Use Customers

Historically, commercial and industrial end-users have sat at the end of the gas supply chain with retailers managing all procurement, transport and supply components upstream of the site meter. This often leaves end-users with few options to negotiate better deals than those on offer from the retailers. However, the evolution of the gas supply chain is providing more options for end-use customers to consider.

On the customer side of the meter, i.e. behind the meter, the right contract terms and conditions, portfolio demand optimisation and review of network tariffs can all reduce costs to the end-user. Fuel switching, where renewables, synthetic gas or hydrogen is used to offset gas consumption, can reduce costs while mitigating exposure to potential emissions costs. While the gas market may look opaque, if you know where to look there are many potential options where your business could benefit, saving you real money.

Read Part 2 of Demystifying the gas market: south-eastern Australia’s gas supply chain: https://www.advisian.com/en-us/global-perspectives/demystifying-the-gas-market-part-2-southeastern-australias-gas-supply-chain.

If you would like more information about how your business can reduce costs and create value from the gas supply chain, please contact Tim Ammundsen.