This is the sixth interim report of the Australian Competition and Consumer Commission’s (ACCC) inquiry into gas supply arrangements in Australia. The ACCC has continued its focus on the operation of the East Coast Gas Market, where there are immediate and longer-term concerns.
This report provides an update on matters related to the pricing of wholesale gas. The ACCC will report on other aspects of the gas market, including the demand and supply outlook, gas transport and retailer pricing in July 2019.
When the inquiry commenced in April 2017, the gas market was dysfunctional. Those domestic gas buyers in the east coast that could get offers for gas supply were receiving offers at prices that were well in excess of export parity prices. The highest priced offers made by retailers peaked as high as $22/GJ.
Once the ACCC’s September 2017 report highlighted this, the Australian Government reached a Heads of Agreement with the LNG producers. Under the terms of this agreement, the LNG producers committed to offer sufficient gas to the domestic market on reasonable terms.
As the LNG producers made more gas available into the domestic market, domestic price offers reduced substantially and by 2018 converged with LNG netback prices. However, domestic prices remain challenging for commercial and industrial (C&I) gas users.
The latest data shows that the bulk of C&I gas users will be paying at least $9/GJ and some more than $11/GJ for gas in 2019. Smaller C&I gas users who do not have the option of sourcing gas from producers, and instead rely on supply from retailers, face higher prices. Most have had to settle for prices above $10 per gigajoule, and some above $11 per gigajoule. As LNG prices rose over the course of 2018 due to an increase in global demand for gas, so did domestic prices. By August 2018, some offers to large C&I gas users exceeded $12/GJ.
Many C&I gas users have informed the ACCC that at those gas prices, their operations are not sustainable in the medium to longer term. Several C&I gas users recently went into administration, citing rising gas costs as a contributing factor.
Expected LNG netback prices have fallen significantly over the past 6 months. The 2020 average of expected LNG netback prices at Wallumbilla fell from around $11/GJ in October 2018 to around $9/GJ as at the end of April 2019. The ACCC will be monitoring whether gas suppliers revise down prices in their offers to reflect these latest expectations as quickly as they increased the prices when expected LNG netback prices were rising in 2018.
The longer-term supply outlook in the east coast remains uncertain. In late March, AEMO published its 2019 Gas Statement of Opportunities (GSOO), forecasting that a supply gap will emerge in the Southern States from 2024. As the ACCC commented in the December 2018 report, further investment in gas exploration and development as well as key infrastructure is required to guarantee security of supply and sustainable prices for the domestic gas market in the east coast.