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Higher coal seam gas supply to hike gas prices in Australia

Comparisons with the US are ill-founded when it comes to a comparison of domestic demand and production


Australia is increasing its supply of liquefied natural gas – mostly through coal seam gas production. Usually, increasing supply should mean lower prices but for those living in the eastern and southern states the impact will certainly be higher gas prices.

While this seems illogical the reason is because, as the Australia Institute noted in its report, Fracking the Future, the reduction in price would occur only if “all others things are equal”. And very soon all other things in the LNG industry are not going to be equal.

At present, the eastern gas market services domestic consumption only. And there is plenty of supply to meet the demand for both commercial and household use.

But this year this market – which includes Queensland, New South Wales, the Australian Capital Territory, Victoria, Tasmania and South Australia – will become linked to the rest of the world when exports of LNG from Queensland will start.

Once a market becomes connected to an international market, the domestic price will move to the international price because that is the bigger market. Among Asia/Pacific nations (to whom we export) Australia’s consumption of natural gas accounts for only about 4%:

So the market will be completely swamped by the demand from overseas. The Australian energy market operator predicts demand for LPG from overseas will be more than twice the domestic demand by 2017:

And the problem for those living in the eastern states is that the overseas gas price is much higher than the domestic price.

There is no actual “world price” of LNG. The easiest way is to break the prices up into three areas: Europe, Japan and the US:

The boom in prices in the Japan/Asian market since 2003 (ignoring the drop due to the global financial crisis) is the reason for the boom in gas mining in Queensland.

The import price of LNG in Japan is now just above US$16 a gigajoule. By contrast prices in the eastern states of Australia are between US$2-$4 a gigajoule.

There are those who suggest that we can be just like the US, where the price for LNG has dropped drastically since 2008 (when it was roughly the same as Japan and Europe) due to the massive increase in production of shale gas. Thus they argue all we need to do is increase our production of CSG and prices here will also fall.

Alas such misty-eyed views of the gas industry rather fail to acknowledge that the US’s domestic demand for LNG is the biggest in the world. It accounts for nearly 22% of all LNG consumption in the world; Australia accounts for just 0.8%.


Coal Seam Gas A coal seam gas processing plant in the Surat basin, Queensland. Photograph: Dave Hunt/AAP

Australia is increasing its supply of liquefied natural gas – mostly through coal seam gas production. Usually, increasing supply should mean lower prices but for those living in the eastern and southern states the impact will certainly be higher gas prices.

While this seems illogical the reason is because, as the Australia Institute noted in its report, Fracking the Future, the reduction in price would occur only if “all others things are equal”. And very soon all other things in the LNG industry are not going to be equal.

At present, the eastern gas market services domestic consumption only. And there is plenty of supply to meet the demand for both commercial and household use.

But this year this market – which includes Queensland, New South Wales, the Australian Capital Territory, Victoria, Tasmania and South Australia – will become linked to the rest of the world when exports of LNG from Queensland will start.

Once a market becomes connected to an international market, the domestic price will move to the international price because that is the bigger market. Among Asia/Pacific nations (to whom we export) Australia’s consumption of natural gas accounts for only about 4%:

So the market will be completely swamped by the demand from overseas. The Australian energy market operator predicts demand for LPG from overseas will be more than twice the domestic demand by 2017:
 

And the problem for those living in the eastern states is that the overseas gas price is much higher than the domestic price.

There is no actual “world price” of LNG. The easiest way is to break the prices up into three areas: Europe, Japan and the US:

The boom in prices in the Japan/Asian market since 2003 (ignoring the drop due to the global financial crisis) is the reason for the boom in gas mining in Queensland.

The import price of LNG in Japan is now just above US$16 a gigajoule. By contrast prices in the eastern states of Australia are between US$2-$4 a gigajoule.

There are those who suggest that we can be just like the US, where the price for LNG has dropped drastically since 2008 (when it was roughly the same as Japan and Europe) due to the massive increase in production of shale gas. Thus they argue all we need to do is increase our production of CSG and prices here will also fall.

Alas such misty-eyed views of the gas industry rather fail to acknowledge that the US’s domestic demand for LNG is the biggest in the world. It accounts for nearly 22% of all LNG consumption in the world; Australia accounts for just 0.8%.

Similarly the US produces about 21% of all LPG in the world. Australia by contrast produces about 1.5%:

Also very little of the US’s gas is exported – due to significant export restrictions. Thus the US experience would work here in Australia only if, like in the US, our massive increase in CSG was to service just the domestic market.

The Grattan institute last year also looked at the issue of gas and noted that domestic gas prices should not increase all the way up to the Japan price. The Japan price includes the cost of shipping it from here to there – about $5 to $6 a gigajoule. So the “export parity” price would be presently about $11 a gigajoule – still well over double the present price in the eastern network.

The Grattan institute suggested this would see household gas prices in Victoria (the state with the highest household consumption) to rise by about 20% – or about $170 a year for the average household. But given this year NSW gas retailers are already pushing for a 20% increase in gas prices, I’d suggest the $170-a-year increase is on the low side.

The big problem for NSW is it will have a supply problem in a few years – not because of increased domestic demand outstripping supply but because, as the Bureau of Resources and Energy Economics notes, “a large number of wholesale gas supply contracts are set to expire between 2014 and 2018. By 2018, less than 15% of New South Wales’ demand will be met by existing contracts.”

The problem being that suppliers from now on can sell overseas rather than sign another contract at the lower prices being offered in NSW.

So what to do?

Sure we could increase supply through CSG, but it will have no significant impact on prices here, though it may ensure domestic supply – but only if the extra production is not exported. And even then the impact on prices may only be to keep them equal or marginally below the export price.

In WA the government has a policy that reserves supplies of gas for domestic use. This policy has not however kept prices down to eastern network levels, but they remain below the export parity price.

Such a policy in effect subsidises households and gas-consuming businesses. This has the negative impact of allowing inefficient business (and industries) to continue to operate. But keeping the price artificially low also has the impact of reducing the incentive to switch to more expensive renewable energy.

But without a carbon price (and possible changes to the renewable energy target), if the gas price increases, coal-fired electricity will be more economic and our emissions will almost certainly rise.

The Grattan institute recommends against governments reserving supply for domestic use. Rather it recommends allowing the price we pay for gas to be set on the international market much like is the case for petrol.

It acknowledges this will increase costs to consumers and businesses. To compensate it argues that commonwealth and state governments “should ensure that there is an efficient tax regime in place for the gas industry, and that the gains are distributed appropriately”.

A tax on mining to redistribute profits? Anyone care to bet on the likelihood of that occurring?


Source: Grogonomics