This is the July 2021 interim report of the Australian Competition and Consumer Commission’s (ACCC’s) inquiry into gas supply in Australia (the Inquiry).
Gas prices in the east coast gas market through to February 2021 remained low. However, domestic spot and LNG prices have since risen considerably, and the supply outlook for 2022 is the most finely balanced we have reported. There has also been a significant drop in the number of offers for supply being made for 2022 and beyond, which could have serious ramifications for gas users.
At the beginning of 2020, producer and retailer offers for 2022 supply were between $6-11/GJ. Prices trended down to the middle of 2020 and remained stable over the second half of 2020, with most offers falling between $6-8/GJ.
Despite this, C&I users are concerned prices will rise in response to supply uncertainties and users tell us they are most concerned about future supply uncertainty. C&I users are also concerned with more recent increases in domestic spot prices.
While a tightening supply-demand balance could be expected to place upward pressure on prices, we observed prices in offers for supply in 2022 remained relatively low up to February 2021. However, with international oil and gas price expectations for 2022 rising, this may be changing.
In our July 2020 interim report, we cautioned that subdued international and domestic gas and oil prices may dampen investment in domestic production, repeating a pattern we observed in our 2015 inquiry. The forecasts for 2022 supply, following subdued pricing in 2021, appear to support this. While forecast domestic demand (residential, commercial and industrial, as well as GPG) is virtually unchanged from the 2021 forecast, domestic supply is forecast to be 1,981 PJ, down from a forecast 2,012 PJ for 2021.
For the southern states, demand is forecast to be 6 PJ greater than forecast gas production and withdrawals from storage in 2022.
In previous years, potential shortfalls in the southern states could largely be met by flows from Queensland (whether through swaps or transportation on key southern haul pipelines).
However, Queensland producers are currently forecasting to supply only just enough gas into the domestic Queensland market to meet AEMO’s forecast demand for Queensland.
Unless more gas is supplied into the domestic market by Queensland producers there may not be enough gas to meet any shortfall that could arise in southern states.
The ACCC has recommended throughout this inquiry that more needs to be done by governments and industry to ensure sufficient gas is brought to market to avoid a shortfall in the future.
In January 2021, LNG producers signed a new Heads of Agreement with the Australian Government. LNG producers committed to not offer uncontracted gas to the international market unless “equivalent volumes of gas have first been offered with reasonable notice on competitive market terms to the Australian domestic gas market”.
This new Heads of Agreement may be vital to address potential shortfalls in 2022. LNG producers expect to have around 101 PJ of uncontracted gas in Queensland which could be made available to the domestic market. In 2019, LNG producers diverted gas into the domestic market when it was required and this may be needed again in 2022.
The LNG producers also committed to provide relevant material to the ACCC to demonstrate their compliance with the Heads of Agreement. We will be closely monitoring and reporting on how this 101 PJ is offered to the domestic market and whether LNG producers are meeting their commitments.
The information provided to date relating to the previous Heads of Agreement does not yet clearly demonstrate compliance. Some of the offers provided by some LNG exporters to demonstrate that they had offered equivalent volumes to the Australian domestic market ahead of exporting uncontracted gas were not sufficient to substantiate compliance.
We will continue our close monitoring, and expect LNG producers to better demonstrate their compliance over the next 12 months by producing evidence of offers to domestic customers consistent with the volume, timing and pricing commitments in the Heads of Agreement. This compliance is critical, given there is a 2 PJ shortfall forecast for the east coast gas market in 2022 if LNG producers export all of their (101 PJ) forecast surplus production.
C&I users and suppliers have observed that current policy developments are creating further uncertainty in the market. This emphasises the importance of policy processes and decisions being finalised in a timely manner, so that investment decisions can be made and implemented.
The market power of pipeline operators also remains a concern. As supply tightens in southern states, pipelines and storage facilities are likely to play a more prominent role in meeting future demand.
Transmission pipeline capacity for moving gas to the southern states continues to be close to fully contracted. Recently announced expansion initiatives on the SWQP and MSP should help ease this congestion.
We have again observed little change in transportation prices on most pipelines, despite new prices being set in numerous contract variations. This suggests that the monopoly pricing first observed in our 2015 inquiry persists. Recently announced reforms to pipeline regulation will help constrain the market power of pipeline operators and provide greater pricing transparency. These reforms remain to be finalised and are expected to commence in mid-2022.
I expect some relief to come from falling oil and spot LNG prices in Asia in the months ahead though winter will reverse that for a while.
That said, three-quarters of this gas goes to China which can be summarised as a pack of blood-sucking corporations aiding and abetting the rise of tyranny while simultaneously undermine our economic capacity to resistor.
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 founding 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.
