LNG netback price series review1 Sep 2022
The ACCC has undertaken a review of the LNG netback price series as part of the ongoing inquiry into the east coast gas market.
In 2020, the Australian Government announced that the ACCC will undertake a review of the LNG netback price series. The announcement was made as part of a broader range of government-announced measures seeking to increase gas supply, increase efficiencies in transporting gas, and improve the negotiating power of gas consumers in the east coast gas market.
A public review of the LNG netback price series in 2021 reflected:
- significant changes in LNG markets due to growing supply and increased trade in LNG spot markets
- findings from the ACCC review of pricing strategy documents obtained from east coast gas suppliers outlined in the January 2021 interim report.
The ACCC published its final decision paper in September 2021.
On 1 September 2022, the ACCC started to publish additional medium-term LNG netback prices extending to 5 years using an oil index.
In 2022, the ACCC indicated that the LNG netback price series would be reviewed in 2024. Since then, the market has been subject to a number of regulatory reforms, including a revised Heads of Agreement, reforms to the Australian Domestic Gas Security Mechanism and introduction of the Competition and Consumer (Gas Market Emergency Price) Order 2022, and introduction of the Competition and Consumer (Gas Market Code) Regulations 2023 (the Code), which commenced on 11 July 2023.
The Code provides that the Government must initiate a review of the Code by no later than 1 July 2025 and that the ACCC may review ‘reasonable prices’ from 2025. As the LNG netback price series review will be relevant to these reviews, the ACCC will now undertake the review of the LNG netback price series in 2025 to better align the timing of reviews. In the meantime, the ACCC will continue to publish the LNG netback price series.
Issues paper
On 18 March 2021, the ACCC released an issues paper as part of its review of the LNG netback price series.
Submissions to the issues paper were due on 12 April 2021.
Submissions to the issues paper
Draft decision paper
On 1 July 2021, the ACCC released its draft decision paper on the LNG netback price series review.
The ACCC announced that it was seeking feedback on the draft decision paper and the Wood Mackenzie preliminary report. Information on how to provide a submission is contained in the draft decision paper.
Submissions to the draft decision paper were due on 30 July 2021.
Submissions to the draft decision paper
Final decision paper
On 30 September 2021, the ACCC announced that it had finalised the LNG netback price series review. The final decision paper and Wood Mackenzie final report have been published.
The ACCC will consult with stakeholders to implement its final decision.
LNG price estimates methodology discussion paper
The ACCC has decided to publish longer-term forward LNG netback prices, as outlined in the LNG netback review final decision paper.
The ACCC has engaged LNG consultancy GaffneyCline to provide estimates of medium-term LNG prices, expressed as a percentage (or slope) of oil prices, as an input into calculating longer‑term forward LNG netback prices.
On 6 May 2022, the ACCC released a methodology paper prepared by GaffneyCline outlining their intended methodology for estimating medium‑term LNG slopes.
Submissions to the methodology paper
Submissions to the methodology paper for estimating medium-term LNG slopes.
LNG freight rate estimates methodology discussion paper
The ACCC has decided to publish longer-term forward LNG netback prices, as outlined in the LNG netback review final decision paper.
The ACCC has engaged FTI Consulting to provide estimates of forward LNG freight rates out to 5 years, for each year, as an input into calculating longer‑term forward LNG netback prices.
On 30 June 2022, the ACCC released a methodology paper prepared by FTI Consulting outlining their intended methodology for estimating forward LNG freight rates.
Submissions to the methodology paper
Submissions to the methodology paper for estimating forward LNG freight rates.
LNG price and LNG freight rate final methodology papers
On 1 September 2022, the ACCC published final methodology papers by GaffneyCline on LNG price estimates and FTI Consulting on LNG freight rate estimates.
The final methodology papers set out how estimates are derived for:
- medium-term LNG prices, expressed as a percentage (or slope) of oil prices
- forward LNG freight rates out to 5 years, for each year.
Publication of extended LNG netback prices
On 1 September 2022, the ACCC began publishing oil-linked LNG netback prices on its website. This followed the ACCC’s review of its LNG netback price series in 2021, in which we decided to continue publishing export parity prices for two years ahead based on Asian LNG spot prices, and to extend forward LNG netback prices out to five years based on international oil-linked LNG prices.
The review found that netback prices based on both LNG spot prices and oil-linked LNG contract prices are relevant to the domestic market because they reflect LNG producers’ opportunity cost of supplying uncontracted gas to the domestic market over the short and medium term, respectively. Our 2021 review of supplier pricing strategies also found that oil prices had been a key influence on domestic gas prices, in addition to LNG spot prices.
Since we published our decision in September 2021, global energy markets have experienced unprecedented volatility. Rapid movements in commodity prices have had a significant impact on LNG netback prices. Asian LNG spot prices have been sustained at record high levels as a result of the energy crisis in Europe and the surge in demand for LNG coupled with limited new supply. Oil markets have also experienced significant uncertainty, with Brent oil prices remaining above US$100 per barrel for much of 2022.
While oil prices have risen considerably, the increase in LNG spot prices has been much more pronounced. In addition, while prices under medium- to long-term oil-linked LNG contracts have increased, this has been only moderate. This has resulted in a significant divergence between short-term LNG netback prices based on LNG spot prices and medium-term netback prices linked to oil. As of 1 September 2022, the ACCC’s short-term LNG netback prices average around $52.99/GJ over a two-year forward period. In contrast, oil-linked LNG netback prices are around $11.77/GJ over a five-year forward period.
The ACCC’s most recent pricing data has shown that both short- and medium-term netback prices continue to be relevant to the domestic market. In our July 2022 interim report, we found that offers for domestic supply in 2022 and 2023 had generally not followed the significant rise in short-term LNG netback prices. Other than a small number of offers from Queensland producers, most domestic offers have remained at levels consistent with oil-linked LNG netback prices (see charts 1 and 2).
We'll continue to monitor the relationship between LNG netback prices and domestic prices. We'll also continue to monitor developments that may influence the relevance of LNG prices to the domestic market, including the capacity of the Queensland LNG facilities, structural changes in global LNG markets, and the domestic regulatory environment.
Chart 1: Offers for supply in 2023 against JKM and oil-linked netback prices
Source: ACCC analysis of offer information provided by suppliers, S&P Global Commodity Insights data and Intercontinental Exchange data (via Bloomberg).
Chart 2: Offers for supply in 2022 against JKM and oil-linked netback prices
Source: ACCC analysis of offer information provided by suppliers, S&P Global Commodity Insights data and Intercontinental Exchange data (via Bloomberg).