Tight markets drawing noose around East Coast gas prices

International gas markets are expected to remain tight over the next two years as years of underinvestment continue to wreck havoc on gas prices.

EnergyQuest noted in its latest LNG monthly report that while global gas prices have softened – with Asian and European prices dropping below US$30 per million British Thermal Units (MMBtu) – they still remained extremely high by historical standards.

It added that just 12 million tonnes per annum (MMtpa) of new liquefied natural gas (LNG) production came into production in 2021 and while this will increase by 19.9MMtpa this year, it will drop to a paltry 5.8Mtpa increase in 2023.

LNG might only really be able to ease global gas supply concerns from 2024 when an expected 21.9MMtpa of new production is expected to come on stream. A further 44.4MMtpa is anticipated to enter the market in 2025 followed by another 46MMtpa in 2026.

Gas risks and game-changers

The energy consultancy also highlighted a number of key risks for the broader gas market in 2022.

It noted that while the northern winter this year has been warmer than usual, this could change quickly and cause havoc in gas markets like it did in the northern winter of 2020-21.

EnergyQuest also highlighted that while a number of new LNG projects are expected to come online in the US – such as Sabine Pass T6 and Calcasieu Pass T1- 10, Indonesia and Mozambique – any delays would add to the market tightening.

The same is true of any operational issues such as the timing of the Prelude LNG restart, any further issues at the Gorgon project and natural decline at the North West Shelf.

Geopolitical developments involving Russia, Europe and/or the US regarding the Ukraine could also have a major impact while approval of Nordstream 2 pipeline that is needed to significantly increase European gas storage is reported to be hanging in the balance.

European gas production could also be impacted by the looming shutdown of the giant Groningen gas field in the Netherlands.

On the flip side, Chinese LNG demand in 2022 is expected to be lower than in 2021 though imports in the fourth quarter of 2021 were still up 15% on 2020 levels.

Separately, The Institute of Energy Economics, Japan has noted that global natural gas and LNG markets are expected to see steady demand growth in 2022.

No respite for Australian east coast

EnergyQuest points out that the tight international gas market is a positive for Australia’s LNG export earnings with the Federal Government flagging that it will more than double to $63bn in the 2021-22 financial year.

It does, however, come with a price.

East coast prices rose in 2021 though admittedly not to levels seen in the rest of the world with the Wallumbilla spot price averaging $8.89 per gigajoule in 2021, nearly twice the $4.89/GJ in 2020 but only slightly higher than $8.15/GJ in 2019.

However, the strong international gas prices are a strong incentive for Australia LNG exporters to ship more spot cargoes. And the energy consultancy believes that more gas is likely to flow towards Queensland through the remainder of summer and autumn.

This is certainly not helped by the increasing linkages between the east coast and the international market, which was highlighted in May 2021 when Origin Energy reached a four-year deal to supply 91 petajoules of gas to the domestic market at prices linked to the Japan Korea Marker (JKM).

To make it worse, Bass Strait gas production is expected to fall further from the winter of 2023, raising the spectre of LNG imports to meet demand.

All this means that there is considerable upside risk from current gas prices of about $10/GJ.

We told you so.