Calls for overhaul of Australian gas pricing system after spike in Asian market prices
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Massive volatility in Asian benchmark prices for shipments of LNG (liquefied natural gas) during the recent winter season has led to calls for an overhaul of the pricing system for gas in Australia.
“The wild gyrations in Asian LNG spot prices in December and January show the limitations of these benchmarks for assessing east coast domestic gas prices,” said EnergyQuest, an Adelaide-based energy markets consultancy firm.
Australian domestic gas prices are linked to benchmark prices for cargoes traded in the North Asian market centred on China, Japan and Korea under so-called netback pricing.
“An LNG netback price is a measure of an export parity price that a gas supplier can expect to receive for exporting its gas,” explains the Australian Competition and Consumer Commission (ACCC).
The effect of netback pricing means a significant rise in export prices for Australian LNG cargoes can trigger a similar rise in prices faced by Australian gas customers.
Australia exported a record 78.2 million tonnes of LNG in 2020, up from 77.5 million tonnes in 2019, according to EnergyQuest in its March report.
The energy consultancy forecasts Australia’s LNG exports will hit 80 million tonnes this year as east coast producers increase production levels.
In simple terms, netback pricing means that Australian consumers face gas prices that are being driven by factors thousands of kilometres away in the Northern Hemisphere.
This includes seasonal factors, as demand for gas in the Northern Hemisphere rises during winter time (December to February) when it is summer in the Southern Hemisphere.
Therefore, gas consumers in Australia are effectively paying premium prices during its summer time because of higher gas demand in Asian markets, as the ACCC admits.
“LNG netback prices based on Asian LNG spot prices currently play an important role in influencing gas prices in the east coast market,” said the ACCC.
Netback pricing can lead to some strange economics, such as making it cheaper for Australian gas consumers to import gas from outside Australia instead of using domestic gas.
Despite its abundance of gas, Australia has several LNG import terminal projects dotted around its coastline, particularly in NSW, for which the business case still stacks up.
These import terminals will allow Australian consumers to buy LNG cargoes on the international market during times of low demand in Asian markets and cheap prices.
Typically, this buying opportunity window would open during the spring and summer periods in the Northern Hemisphere which is March to September.
The ACCC is charged with discovering and publishing the level of gas prices in Australia’s opaque domestic market to improve price transparency in the east coast gas market.
The watchdog is currently in the middle of a review of gas pricing in Australia, its Gas Inquiry 2017 to 2025, and is due to publish its recommendations soon.
LNG prices in the Asian seaborne market spiked to $US32.50 per million British Thermal Unit (BTU) in January after a cold snap brought freezing temperatures to China, Japan and Korea.
The cold weather triggered a huge surge in energy consumption by North Asian industrialised countries, and propelled LNG prices to astronomical levels not seen for many years.
“Much of the LNG price spike has been driven by cold weather, supply disruption and a lack of shipping capacity, and delays at the Panama Canal,” Wood Mackenzie vice-president, Massimo Di Odoardo, said at the time.
Wood Mackenzie gas market analysts expect LNG prices will average $US7.60/MMBTU in 2021, around double 2020 levels.
Other factors contributed to the price spike, including China’s aversion to importing cargoes of Australian thermal coal, and logistical and transport difficulties in freezing weather.
LNG prices in the North Asian spot cargo market have now returned to their long-term average of about $US5/MMBtu, but the fallout from the price spike episode is continuing still.
“This volatility raises fundamental questions about the usefulness or not of these estimates for LNG producers, gas buyers and governments,” said EnergyQuest referring to Asian benchmarks for LNG prices.
Often, Australian gas producers will use Asian LNG benchmarks as price reference points for domestic supply contracts to industrial and commercial users in Australia.
For example, the price for domestic gas at the Wallumbilla domestic gas trading hub in Queensland soared from $8.73 per gigajoule in January to $19.62/GJ in February, before dipping to $8.56/GJ in March.
Abrupt changes in prices for spot-traded cargoes of LNG delivered to Asian markets therefore can be shown to directly impact the Australian domestic gas market.