ACCC: Gas cartel gouging happily on

The ACCC is out with its latest gas failed market report:

This is the third interim report of the Australian Competition and Consumer Commission’s (ACCC) inquiry (‘the 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 covers three topics:

 an update on gas prices, which confirms the recent fall in gas commodity price offers for 2018 and 2019 and that prices struck under gas supply agreements (GSAs) remain generally higher in the Southern States than in Queensland

 our decision to publish on our website an LNG netback price series to improve gas price transparency and assist commercial and industrial (C&I) users in negotiating for gas supply

 our assessment of new reporting in relation to transportation services for non-scheme pipelines, which questions whether early information on standing offers and standing price methodologies is adequately addressing the objective of reducing information asymmetry between pipeline operators and users of pipeline services.

Gas price offers are well below the 2017 peak

With the information collected from suppliers since November 2017, the ACCC now has a more complete picture of the prices expected to be paid for gas supply in 2018, as well as the evolution of price offers for 2018 supply. The ACCC is now also reporting on prices offered and agreed for 2019 supply.

Latest data on gas commodity price offers

After reaching a peak of over $20/GJ in early 2017, gas commodity prices 3 in offers for 2018 supply across the East Coast Gas Market fell to around $8–12/GJ between July and November 2017. The range of gas price offers narrowed further over subsequent months, with most offers between November 2017 and January 2018 being made between $8–10/GJ, as shown in chart 1.

This could reflect a less uncertain gas supply-demand outlook for 2018 and 2019 following the commitment made by the Queensland LNG producers under the Heads of Agreement with the Australian Government to make additional quantities of gas available to the domestic market. ACCC monitoring and close attention to specific deals may also have had an effect. The ACCC’s monitoring and public reporting can inhibit some of the exercise of market power in gas price negotiations.

While large C&I gas users had chosen to delay entering into 2018 gas supply contracts while price offers were at their peak in early 2017, as price offers declined, C&I users became more willing to enter into GSAs. Between July and November 2017, around 12 large C&I users accepted offers, and this continued up to the end of December with around nine additional users securing 2018 supply.

The evolution of offers for 2019 gas supply has followed a similar pattern to that of offers for 2018 supply. After a peak of over $20/GJ in early 2017 (that coincided with a period when there was some uncertainty about gas supply over 2018 and 2019), gas commodity price offers for 2019 supply had mostly fallen to the high $8 to mid-$10/GJ range between November 2017 and January 2018. There have been fewer contracts entered into for 2019 supply so far, but this is expected to change over the course of this year, as many of the single-year GSAs recently executed near their expiry and users enter into negotiations for 2019 supply.

Latest data on gas commodity prices under contract

The average gas commodity prices under GSAs struck at the end of 2017 for gas supply in 2018 and 2019 are similar to the average prices under the GSAs struck earlier in the year. This is because not many contracts were entered into when offers were at their peak.

Prices have also continued to vary between locations. In Queensland, only short-term (seasonal) GSAs were executed towards the end of 2017, with an average price of around mid-$8/GJ. In the Southern States, several long-term GSAs were executed between November 2017 and January 2018 at prices ranging around $9–10/GJ, as shown in table 1.

The ACCC will publish LNG netback prices

The ACCC’s 2015 inquiry found that the East Coast Gas Market lacks transparency across the supply chain, including in relation to reserves and resources, current and expected production, gas supply and transportation prices, and the level and availability of storage.

The ACCC considers that this lack of transparency impairs competitive bargaining for gas supply and infrastructure services. Given recently offered gas prices across the East Coast Gas Market are significantly higher than historic gas prices and there remains uncertainty about future domestic gas prices, the ACCC considers that the need to address these gaps in transparency is heightened.

In this Inquiry so far, the ACCC has implemented the recommendation made in its 2015 inquiry and commenced publishing a series of actual gas commodity prices paid in the East Coast Gas Market, based on invoices obtained from suppliers. The ACCC has also begun publishing information on actual prices paid for firm forward haul services on major east coast pipelines, based on invoices obtained from pipeline operators. In addition, the ACCC has reported on a range of other information including prices offered and agreed for gas commodity, and the availability and utilisation of key east coast pipelines. The ACCC will continue to make this information available to the market.

As an additional measure, the ACCC has decided to publish an LNG netback price series on its website as a trial measure throughout this Inquiry. The publication of this series does not represent the ACCC setting a level of domestic gas prices nor the ACCC’s forecast of domestic gas prices. The primary purpose of the publication is to improve transparency of a key factor that plays an important role in influencing domestic gas prices.

The publication, which will commence in the coming months, will include LNG netback prices based on measures of recent and historic Asian LNG spot prices and a forward LNG netback price indicator extending to the end of the following calendar year. The ACCC will also publish accompanying documentation that will explain the concept of LNG netback pricing, the formula used to derive LNG netback prices and provide guidance on its interpretation. At the conclusion of the Inquiry, the ACCC will assess the merits of the publication and will make a recommendation on whether it should continue.

As discussed in chapter 2, there is a need for greater price transparency in the East Coast Gas Market. Availability of an indicative price and information about the factors that are driving domestic gas prices would greatly assist C&I users in negotiations for gas supply.

Absence of this information inhibits competitive bargaining and makes it more difficult for C&I users to make informed long-term investment decisions.

The ACCC considers that the publication of an LNG netback price series is an important step towards improving transparency of pricing as LNG netback prices currently play an important role in influencing domestic gas price in the East Coast Gas Market. However, the LNG netback price is not sufficient on its own – there is potentially a range of factors that can influence prices offered to domestic gas buyers. The final price a particular domestic C&I user may need to pay to acquire gas could also vary considerably from the LNG netback price due to a range of factors specific to the C&I user’s individual circumstances. This includes the cost of transporting gas to the user’s location and non-price terms they request in their GSA.

The ACCC is currently exploring the key factors that may influence domestic gas prices in the East Coast Gas Market. The ACCC will discuss its findings in future interim reports. The ACCC will also consider whether to include this information alongside the LNG netback price publication on its website.

Some progress there but it’s starting to price out alternative supply as well. LNG imports and a transcontinental pipeline won’t be viable at $8Gj (without public subsidy).

$8-10 is still double the prices needed. WA’s hard domestic reservation delivers $3-4Gj. Do-nothing Malcolm’s corrupt reservation has delivered double that.

The ACCC is still barking up the wrong tree with export net-back prices too. We don’t want net-bank to be the benchmark for a functional market. That is agreeing to pay virtually the same price for the gas as our Asian customers do. No other energy producer does that. We need to dislocate the local gas market entirely from international pricing.

Hard domestic reservation and price fixing if necessary will do it. It only means holding back 10% of export volumes, all of which is third party gas that the cartel acquired after lying about having enough of its own gas to fill the Curtis Island white elephants.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Producers (Vic and SA)

    Does SA have gas or not?

    http://www.adelaidenow.com.au/business/sa-business-journal/beach-energy-has-discovered-a-new-gas-field-in-the-south-east-of-sa/news-story/9122d173fa12cb0f72466e00c90ad16a

    If it does, can it have gas reservation like WA does? Especially from brand new fields.

    WA’s hard domestic reservation delivers $3-4Gj.

    LNG imports and a transcontinental pipeline won’t be viable at $8Gj

    Not sure what you mean by viable. If gas in WA retails for $4/GJ, will the pipeline be so expensive that the retail price in Adelaide needs to be over $8/GJ to recoup the cost of the pipeline?

    • “Not sure what you mean by viable. If gas in WA retails for $4/GJ, will the pipeline be so expensive that the retail price in Adelaide needs to be over $8/GJ to recoup the cost of the pipeline?” – pretty much ! But don’t worry, a trans-continent pipeline isn’t going to happen. More chance we’ll see regasification infrastructure built on the East coast.

      although, none of this would be required if Malcolm had the figs to reserve gas for the East coast domestic market, as explained above