ACCC remains dubious about gas supply competition on the east coast
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The Australian Competition and Consumer Commission (ACCC) has acknowledged that while gas prices on the east coast have eased, questions still remain about the degree of competition in the supply of gas at both the producer and retailer levels.
It noted that east coast gas prices offered over late 2019 to early 2020 have fallen to between $8 and $11 per gigajole (GJ) from the $9 to $12/GJ range reported in its January 2020 report.
However, this still compared unfavourably with the level of reductions seen in liquefied natural gas (LNG) markets, with producers collectively selling 18 LNG spot cargoes into international markets at prices substantially below domestic gas price offers in that time period.
The ACCC added the ability of LNG producers to increase supply just enough to meet increased domestic demand in 2019 could also point to broader competition and market power concerns.
“Viewed alongside the divergence between LNG netback prices and domestic prices, these sales highlight the need to better understand what is driving the price divergence and the importance of the ACCC’s further work in this area,” the regulator noted.
“It may also be appropriate for the Commonwealth to consider extending and/or strengthening its heads of agreement (HoA) with LNG producers, which is currently due to end in 2020.”
The ACCC also noted that while the low oil price brought about by the COVID-19 pandemic had brought some short-term price relief to domestic users, it also increased the risks and uncertainty surrounding the adequacy of future gas supplies in the east coast to meet demand.
This is due to the impact of low oil prices on upstream investments.
The regulator said that while supply was currently expected to be sufficient to meet demand in 2021 and the outlook was less tight than it was for 2020, uncertainty was higher because a greater proportion of production was forecast to come from undeveloped proved and probable (2P) reserves.
This is an issue particularly in the southern states, with 21 per cent of forecast production in 2021 to come from 2P undeveloped reserves, compared to the 8 per cent forecast for 2020 at this time last year.
Should these reserves be left undeveloped or if their development is delayed, more gas from Queensland and in particular from LNG producers may need to flow south, which will further heighten the risk due to the need to obtain capacity on key transmission pipelines.
State governments have already taken steps to increase the supply of gas into the domestic markets over the medium to longer term, with Victoria ending its moratorium on onshore conventional gas from July 1 and releasing more acreage and Queensland releasing more acreage specifically for domestic supply.
The ACCC recommended that to avoid the risk of a potential gas shortfall in the east coast, the Commonwealth government should extend its HoA with LNG exporters.
This agreement should also be strengthened around the pricing of offers to domestic users so that there is more clarity around what is meant by “competitive market terms”.
The ACCC said governments should also consider whether further measures were needed to ensure that north-south transportation infrastructure or import terminal investment on the east coast occurred in time to avoid potential supply shortfalls.
Over in Western Australia, the state government has moved to tighten its Domestic Gas Policy, which requires LNG project developers to reserve 15 per cent of their gas for domestic use, to ensure security of supply.
Under the updated policy, local WA gas can no longer be exported to the eastern states, while gas used to power ships will not be considered domestic gas.
The government has also given Mitsui and Beach Energy’s (ASX:BPT) Waitsia gas project in-principle support to fill available capacity at the Karratha gas plant and export some of its gas as LNG for a short period of time to help ensure that the project’s second stage proceeds to construction.
“We have seen what’s happened on the east coast with local gas supplies being prioritised for export and we won’t let that happen here,” Premier Mark McGowan said.