Some improvements in gas market, but prices still too high

12 December 2017

The ACCC has released its second interim report as part of its inquiry into Australia’s wholesale gas supply arrangements.

The ACCC Gas Inquiry 2017-20 Interim Report – December 2017 follows the ACCC’s September report on the East Coast Gas Market, which found that a substantial shortfall was likely in 2018.

“Despite increased supply providing important short-term improvements in conditions, the market is still not operating as well as it could. Prices remain higher than they would be in a well-functioning and competitive market,” ACCC Chairman Rod Sims said.

Since September, the LNG producers have contracted 42 petajoules (PJ) of gas under long-term gas supply agreements to domestic buyers for supply in 2018. The LNG producers have reduced exports to make this happen.

Prices offered to large commercial and industrial (C&I) users have come down from a peak of $16/GJ in early 2017 to within an $8-12/GJ range since July 2017. While many users were delaying signing contracts at the previous high prices, a number of contracts have now been agreed.

“Queensland’s three LNG producers have delivered more gas into the domestic market, and prices have come down. Commercial and industrial users have also seen an increase in the number of competing offers from suppliers and a decrease in the prices they are being offered,” Mr Sims said.

The ACCC says the picture for smaller C&I users remains bleak; generally facing higher prices than larger users with fewer competing offers. Some smaller C&I users have told the ACCC that they still only have one retailer interested in supplying them, and others claim they continue to have no gas available.

Some retailers have been unwilling to continue to supply long-term customers, putting these C&I users in a difficult and sometimes precarious position.

“We are very concerned that retailers as a whole appear to be placing less importance on commercial and industrial gas users,” Mr Sims said.

“The ACCC believes that recently agreed 2018 prices are at the upper end of, or above, the prices that would be likely in a well-functioning and competitive market. We will continue to closely scrutinise pricing across the entire market, including the behaviour by retailers.”

While there is now a lower likelihood of a supply shortfall in 2018 across the East Coast Gas Market overall, the southern states are still expected to continue using more gas than they produce. This 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.

“The gas shortfall in the southern states can add at least $2/GJ and possibly up to $4/GJ to the prices paid by gas consumers in these states. The various restrictions to onshore gas exploration do have consequences,” Mr Sims said.

Further, the ACCC has found that some suppliers may be finding it difficult to obtain access on the key pipelines used to send gas south. In some cases, the key pipelines are close to being fully contracted in 2018, with most of the capacity held by the two largest retailers.

“Gas users in the southern states already face higher gas costs due to the declining local production and significant limits on new exploration. This is made worse by constraints on pipeline capacity to bring gas down from Queensland. This limits competition in the supply of gas to the southern states.”

The ACCC will continue to monitor the operation of the gas market at all levels of the supply chain. The report is available at Gas Inquiry 2017-20 Interim Report – December 2017.

Notes to editors

The ACCC’s report states recently agreed 2018 prices are at the upper end of, or above, the estimated benchmark prices that the ACCC considers would be likely to prevail in a well-functioning and competitive market. These estimates are based on forecast average spot LNG netback prices for 2018. In Queensland, the estimated benchmark prices for 2018 range between $5.87/GJ and $7.85/GJ and for the southern states, they range between $6.55/GJ and $9.93/GJ, depending on the user’s location. The upper limit applies to Victoria and the lower limit to South Australia.

The ACCC is considering developing an LNG netback price series at Wallumbilla to enhance transparency of gas prices in the East Coast Gas Market. With this report, the ACCC is commencing a consultation process about whether a price series should be developed, and other issues such as its scope and methodology. Interested parties are invited to contact the Inquiry at Gas.Inquiry@accc.gov.au

Background

On 19 April 2017, the Australian Government directed the ACCC to conduct a wide-ranging inquiry into the supply of and demand for wholesale gas in Australia. The ACCC is required to submit interim reports no less frequently than every six months and provide information to the market as appropriate, with a final report to be submitted by 30 April 2020.

The first report, issued in September 2017, found a substantial shortfall for the east coast was likely in 2018.

Under compulsory information-gathering powers the ACCC has issued notices to obtain information and documents from gas producers, LNG exporters, and retailers. The ACCC received over 20 000 documents for this first report. The ACCC has also interviewed over 20 gas users, and consulted with energy market bodies, including AEMO.

Future work of the Inquiry will include:

  • producer-based and retailer-based invoiced gas price series (as reported in September 2017 report)
  • conditions for, and pricing of, access to transportation and storage services
  • retailer pricing, costs, and margins
  • improvements to market transparency and consistency of reporting

The ACCC will continue to make market information available as appropriate and expects to produce the next interim report towards the end first quarter of 2018.

Following the publication of the Inquiry’s first report in September 2017, the Australian Government and Queensland’s three LNG producers signed an agreement. The LNG producers agreed to offer sufficient gas on reasonable terms to meet any domestic market shortfalls over 2018 and 2019.

Release number: 
238/17
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