Australians are paying more for their gas than the Japanese again. Asian spot prices are today at approximately $9Gj. On the east coast of Australia they are approximately $10Gj.
Under the terms of the Australian Domestic Gas Security Mechanism (ADGSM) the local export net-back and spot price should now be $7Gj. Though we should also note that the gap is not so large for the much bigger contract market even if local prices are still too high.
In theory, LNG imports could stop this gouge by enforcing regional prices onto local. But the maths does not add up. The ADGSM export net-back benchmark is roughly the regional price minus the cost of liquifaction and shipping which is about $2Gj. LNG imports, on the other hand, will by definition only be able buy gas at Asian prices then have to add the cost of building and running the re-gasification plant, plus a margin, plus distribution costs which would also add up to about $2Gj. In other words, despite Asian gas trading at a significant discount to local today, LNG imports would be even more expensive than they already are.
This is the horrible truth of LNG imports. They will not add any downwards pressure to local gas prices. They will fix local prices well above the export net-back target of the ADGSM. And ti will get much worse as the AUD weakens.
Sure, LNG imports they will prevent the kinds of contract price super-spikes miles above Asian prices that we have seen in recent years. But the ADGSM already does a much better job of that.
In short, LNG imports are simply an attempt to kill domestic gas reservation, nothing more, nothing less, to the benefit of a gas import cartel.
We must add one more point to this unfolding disaster. There is also a very good reason why electricity producers like AGL want gas imports, via the AFR:
AGL Energy says it will press ahead with Australia’s first LNG import plant to help fill a forecast gas supply squeeze on the east coast and conceded its relationship with the Morrison government has at times been “turbulent” due to a raft of contentious energy policies.
Despite delays, AGL (AGL) says the case for constructing the Crib Point project in Victoria remains robust.
The company cites a lack of gas discoveries in the state’s once prolific Bass Strait, moratoriums on onshore development and projections of tight supply on the eastern seaboard.
Those assumptions include ongoing gas exports at maximum volumes. Crimp those with a tougher ADGSM and there is oodles of gas. AGL does not want that to happen because it benefits enormously from higher gas prices in the power market. Remember that gas sets the marginal cost of electricity as well, and the more it used the higher the electricity price. Thus utilities like AGL, which carry a legacy portfolio of low cost coal and renewable assets, benefit enormously from bloated margins if the gas price is held high.
It makes perfect sense for AGL to try to control the flow of gas into the east coast power market to protect these power production rents. Indeed, it can even clip the gas ticket on the way through as well. Where it makes no sense at, indeed complete nonsense, is for every other Australian.
Labor needn’t ban LNG imports. If it toughens the ADGSM by lowering the price target to $6Gj, and enforces it with something more potent than the captured and intellectually bankrupt ACCC, then LNG imports will die because they can’t compete. AGL’s great power gouge will end as well because electricity prices will crash.
The public interest in these failed markets is clear to anyone with eyes still in their head.