East coast gas market supply imbalance needs to be addressed

28 February 2018

Australia’s east coast gas market remains incredibly tight and users are paying for this with high prices and limited sources of competing supply.

The east coast gas market is at a crossroads and the only real choice is to address the fundamental supply problem, particularly in the south.

The supply situation is most stark in the case of the southern part of the east coast, with the ACCC’s gas inquiry finding that there is not enough production forecast in the southern states to meet southern demand in 2018.

This is expected to continue in the medium term, resulting in higher prices for commercial and industrial users, as well as putting additional financial pressure on households as winter approaches.

Across the east coast, wholesale gas prices remain generally higher than the Asian LNG spot netback prices.

And gas prices in southern states are potentially $2-4 per gigajoule (GJ) higher than would be likely to prevail if there was sufficient supply and diversity of suppliers in the south.

The ACCC is increasing the transparency of the market through publishing LNG netback prices and is currently consulting on the establishment of an LNG spot netback series.

One reason for the demand/supply imbalance is that the Gippsland Basin Joint Venture (GBJV) legacy fields, the biggest offshore producer in south east Australia, are reaching the end of their life after over 45 years of operation. The GBJV is forecasting a significant decline in production in 2018 compared with record production levels in 2016 and 2017. The Gippsland basin decline is not being offset by new onshore development, as moratoria and other regulatory restrictions in NSW, Victoria and Tasmania are preventing or impeding onshore gas exploration and development.

The ACCC will continue to shine a light, bringing more transparency to the market and investigating anti-competitive behaviour, but, without addressing the supply problem, we will not be able to get to the competitive market that should be available for domestic users of gas. This is an issue that governments can act on now.

Quotes attributable to ACCC Chairman Rod Sims

“High gas prices are a threat to Australian industry’s competitiveness, and can be very stark for low income households relying on gas to heat their homes.”

“A blanket ban which captures all potential projects, including conventional reserves, has consequences in the form of significantly higher gas costs for consumers and industrial users of gas in these states. It also acts as a brake on exploration and precludes industry even confirming gas reserves that on a robust cost benefit analysis would improve consumer outcomes."

“The ACCC will continue to advocate and recommend changes to laws where we think they are needed to improve the workings of the gas market.”

“This southern shortfall means that gas produced in Queensland will need to be sent to the southern states to meet the needs of gas users in those states, adding costs of transport and weakening southern buyers’ bargaining power to secure gas. We are at a critical point for government policy making in addressing the issues faced in the east coast gas market.”

“The fundamental problem of a lack of both sufficient and divergent sources of supply, particularly in the south, needs to be addressed. This needs to happen soon, given the lags in bringing supply to market.”

“Without addressing the supply problem, we will not be able to get to the competitive market that should be available for domestic users of gas.”

Details on the ACCC’s gas inquiry are available at Gas inquiry 2017-2020

Nicole Ross, Director ACCC Gas Inquiry Unit, delivered a speech at the 6th Annual Australian Domestic Gas Outlook Conference outlining what the ACCC is doing to help bring about a more competitive east coast gas market. A copy of the speech is available at ACCC initiatives addressing the Australian domestic gas market.

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