AIG and Shorten lead energy market towards “swaps” mess

The government may be open to facilitating gas swaps, in which export contracts are fulfilled using overseas gas, to keep more for Australia’s domestic supply.

The resources and northern Australia minister, Matt Canavan, told Radio National on Monday evening it was realistic that the government could help private companies arrange swaps and the idea was part of its consultation with industry.

The proposal was suggested by the Australian Industry Group in a letter on Thursday and has been supported by Labor’s Bill Shorten as part of the solution to a looming gas “crisis” he said threatened Australian jobs.

On Tuesday Labor’s climate change spokesman, Mark Butler, said the government should be open to establishing a national gas reservation policy if all other regulatory measures failed.

Ai Group noted “there are large volumes of gas available on international spot LNG markets” at what it called “modest” prices, but domestic supply was “extremely tight”.

It suggested that commitments made by Australian exporters to overseas customers could be met with gas from outside eastern Australia, freeing up local gas to be sold into the domestic market.

Ai Group noted potential barriers to the swap plan including uncertain contract terms, but suggested the government could help overcome these by acting as “a neutral and trusted player able to acquire and collate the necessary information, much of which is highly commercially sensitive”.

Ai Group also favoured a national interest test for gas exports, which Labor took as its policy to the 2016 election.

Shorten said Australia needed to do “everything we reasonably can to ensure Australian manufacturers can access domestic gas at a decent price”.

“The government should help facilitate an arrangement where LNG ventures that are not currently net suppliers to Australia should be able to voluntarily come to arrangements where Australian gas is ‘swapped out’ for international gas, and diverted back to Australian customers.”

Shorten said the plan would mean “cheaper, more secure gas and ensure contracts are honoured”.

“The government must play an active part in a deal that will see gas diverted back to Australian industry.”

On Monday, Canavan said he had not looked at the Ai Group proposal in detail yet, but he accepted that more needed to be done. He said the government had received commitments from producers to boost domestic gas supply and he would get an update this week on their efforts to do so.

“If that doesn’t happen, we have said that we reserve our rights … on powers over exports,” he said, suggesting that a gas reservation policy was still on the tablealthough he said it was not the preferred outcome.

Asked about swap arrangements, Canavan said he “had detailed conversations with gas-producing companies about those types of options”.

So, GLNG would be required to buy spot gas in Asia at (AUD) 7.50Gj and sell it on to customers on oil-linked contracts at AUD$10.70 :

This may work to free up local gas in the short term but seems very convoluted to me. As well, what happens when spot price rockets as it does every winter?

This is a failed market and the preference has to be for a structural fix with some big and dumb new rules to fix it. There has to be a loser and it is either GLNG or it is everyone else, as Credit Suisse argues:

■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5%

■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5% thirdparty gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other thirdparty gas would get extremely close to balancing the market. Clearly these things are far better done by mutual agreement from all parties, rather than a political mandate.

■ GLNG loses but can all be compensated? We estimate that, at a US$65/bbl oil price, GLNG as an entity would lose US$447m p.a. of FCF if they could no longer toll thirdparty volumes. Interestingly, if Kogas and Petronas could recontract their offtake on a slope of 12x (doable in the current LNG market) then their losses as an equity partner are all offset (not equally between the two albeit). Santos would see ~50% of its US$134mn net GLNG loss offset if the Horizon contract could move up to a slope of 8x from 6x. The clear loser would be Total. We wonder whether cheap government debt, a la NAIF, could be provided at the (new, lower volume) project level or even to take/fund an equity stake in it? In reality all parties (domestic buyers included) have some culpability in the situation, so a sharing of pain does not seem unreasonable 02 March 2017 Australia and NZ Market daily 31.

Ban third party exports plus install “use it or lose it laws” and domestic reservation.