Gas prices in eastern Australia are going to rise substantially. These price rises are not driven by a lack of supply but rather by an increase in demand. Once the eastern Australian gas market is connected to the world gas market, domestic gas producers will be able to sell at the world netback price – also known as the export parity price – which is substantially higher than current gas prices.
This link will occur with the completion of the Gladstone liquefied natural gas (LNG) facilities. Gas prices will then rise and gas production will become far more profitable. Because of this it is understandable that gas companies are keen to expand production.
Wholesale gas prices will go up from around $3 to $4 per gigajoule to the world netback price of $9 per gigajoule. This is because Australian gas producers will have the option to sell to the Japanese who are willing to pay $15 per gigajoule. This doubling or tripling of wholesale gas prices is going to increase consumers’ gas bills dramatically.
Ironically it is not a lack of supply that is going to drive up gas prices but, rather, the introduction of CSG as a new form of supply. Without this additional supply it is unlikely that gas production would have been large enough in the eastern market to justify the construction of LNG facilities.
This higher price has made the gas industry eager to increase its supply; gas is about to become far more profitable. In particular it has been attempting to expand coal seam gas (CSG) exploration. Public concern about extracting CSG has meant that, in New South Wales, further restrictions have been placed upon the location of CSG wells. This has upset the gas industry, but its claims that restrictions on CSG production are the cause of price increases are not correct. Increases or decreases in domestic gas supply will have almost no impact on the price of gas. Once the eastern Australian gas market is linked with the world market, domestic gas prices will be subject to movements in the world price and domestic production will have little influence on price.
With gas becoming far more profitable, it is not surprising that gas producers are keen to expand their supply. Their strategy of blaming CSG restrictions for coming price rises is designed to turn public support against those restrictions and increase pressure on the New South Wales state government to remove them. But these claims are little more than posturing and bear no resemblance to what is actually happening in the market.
If business or government are serious about attempting to prevent or substantially reduce the rise in gas prices there are few options available to them. A gas reserve policy similar to the one in Western Australia could work. There would be implementation problems due to the fact that the eastern gas market is made up of five states and one territory that would all have to agree. The Commonwealth government could also introduce restrictions on the export of gas.
Without large scale government intervention, gas prices are going to rise substantially in the next couple of years, and increases or decreases in domestic supply are going to have almost no impact on the price rise.