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Supply the biggest issue in the east coast gas market - AFR -14 May 2017

Date: 14 May 2017
Australian Financial Review
Mark Abernethy

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Supply the biggest issue in the east coast gas market, says industry

The federal government's intention to limit gas exports if the domestic market has shortfalls is not the major issue around natural gas, according to the Australian Petroleum Production and Exploration Association (APPEA).

Malcolm Roberts, chief executive of APPEA, says the major problem in the east coast gas market is supply, and the issues about prices are often simplified.

"The prices that are quoted as indicative are unreliable because most supply agreements are bilateral and they're confidential," says Roberts, who says APPEA is still working with the federal and state governments to ensure a workable domestic market and a viable export industry for LNG.

He says the prices that Chinese, Korean and Japanese customers are paying for Australian LNG have to be taken in context.

"A lot of the prices we see quoted are contract prices compared with spot prices, and we see one set of prices taken out, not the average," says Roberts. "It's apples with oranges. The international gas union survey of world prices has Australia in the middle of the pack, and lower than Japan and Korea."

He says the current commodity price for gas is around $45; when the projects that freeze and compress the gas into LNG were finalised the price was $10.

"We're in a commodity price trough at the moment, and in two years we expect an improvement."

Roberts also says that the fear of LNG exporters taking all the gas from domestic users is unlikely to happen and that the three projects at Curtis Island in Gladstone are operating but not at full capacity.

"The federal government has placed a limit on exports under certain conditions, but it is a short-term measure."

Roberts says most of the concern about gas supply shortfalls in 2019 arose from an Australia Energy Market Operator document. "They forecast gas shortfalls in 2019 but they calculated that on the Curtis Island trains operating at capacity. They are not.

"It's a tight market and prices are high – but gas is available."

He says the major problem on the east coast is constrained supply at a time when conventional gas is diminishing. The states need to exploit unconventional gas sources – coal seam gas, mostly – to offset the ageing conventional fields at Gippsland and Cooper Basin.

"We need $50 billion invested in gas to 2030, to bring new supply to both export and domestic markets," Roberts says.

He says while the federal government restricts exports it also acknowledges the real drivers with its 2017 budget commitment to new projects. "The Commonwealth's new $28.7 million East Coast Gas Development Program will help pull forward new gas supply projects. A similar program by the South Australian government has accelerated the development of five projects supplying the local market, with a second round of projects to be announced later this year."

The LNG industry in Australia over the last eight years has seen around $200 billion invested and the involvement of major oil and gas companies.

Roberts says that, at a time when Victoria has a moratorium on gas exploration and NSW has switched to a new environmental protection regime for unconventional gas (coal seam and shale) that is prolonging the development process, the east coast has become more reliant on unconventional gas.

"Ninety per cent of the gas produced on the east coast is unconventional gas, and 40 per cent of gas consumed on the east coast is unconventional. There is no more cheap gas in this market. Victoria needs to lift its moratorium."

Roberts says the Metgasco decision to pull out of its development of gas fields in the NSW Northern Rivers region in 2015, because of ongoing protests – and the NSW government's $25 million compensation package for Metgasco to suspend operations – had been a blow to the expected supply of gas.

It came as NSW rejigged its development approval system for unconventional gas exploration and extraction, which placed the Environmental Protection Authority at the head of the process.

Roberts says that leaves the Santos Narrabri project as the last large unconventional gas project in NSW, under a new approval system.

"The consultation phase has been extended twice," he says, "so it started at 30 days and is now 90 days. The longer the process takes the more we see the costs and risks increase."

Roberts says the Australian gas industry transformed into what will be the world's largest exporter of gas in around eight years with unprecedented investment.

"The costs and risk of unconventional gas exploration are already greater than conventional gas," he says. "If we add sovereign risk to that equation it might be too risky for some investors."

Roberts says the east coast market will be improved by the planned interconnector with the Northern Territory fields, and that along with the completed projects at Gladstone there are still projects to come online in Western Australia, including the Prelude floating LNG (FLNG) project.

"We've done $24 billion in exports this year and more projects coming online," Roberts says. "The problem is in developing onshore unconventional gas projects – and that is largely a government issue."

Moreover, Roberts says there are longer-term issues such as transitioning to a carbon-reduced economy.

"The role of gas generation in transitioning from coal-fired electricity is accepted," he says, "yet at the moment we're going backwards. We're down to 8 per cent of power coming from gas, where is was at 13 per cent a few years ago."

Roberts says Australian gas exploration is at a 30-year low. "The only genuine, lasting solution to the tight east coast gas market is more supply."

The main industry body affected by gas supply is Chemistry Australia, which represents the manufacturers and associated industries around the chemicals industry.

It is a large user of natural gas, to power processes and also as a feedstock, for example in the manufacture of polyethylene.

Chief executive of Chemistry Australia, Samantha Read, says the problems with gas prices and supply have now been affecting the industry for at least four years.

"There's no doubt that there is a gas crisis in our industry, and it's a crisis that we predicted," Read says.

She says the Deloitte Access report form 2014 – Gas Market Transformations – estimated the price and supply dynamics created by a large LNG export industry based in WA and Queensland would create around $118 billon in lost income to 2021 based on gas price rises and supply uncertainty.

"While the gas and construction sectors are expected to benefit from the development of a new east coast LNG industry, almost all other sectors within Australia's economy are likely to experience losses in income," said the report. "Greater input costs associated with higher gas prices and greater risk arising from a more difficult gas contracting environment will have adverse consequences for many regions and states.

"The most severely-impacted sectors of the economy are those engaged in manufacturing, given they are generally large gas users and are trade-exposed."

The Deloitte report was based on $8 per gigajoule but there is anecdotal information some companies across the manufacturing sector could be paying between $14 and $16 for their gas supplies.

She says there has to be a coordinated government policy approach to the gas supply issue, not only to keep businesses viable but to ensure future investment.

"We operate in a global capital market and we compete against other markets for the investment," she says. "We have cases where the uncertain gas supply is making investors rethink. It is not a good scenario for Australia."

She says state governments on the east coast had to ensure supply by encouraging development and the federal government could look into market and infrastructure transparency and competition issues, especially as they related to pipeline use, processing hubs and pricing.

She said it had become unsustainable when the gas industry had an historic low in its commodity price and Australian consumers were paying very high rates.

"Why is this happening? It's the $118 billion question," Read says.

She says the pricing confusion partly goes back to long-term contracts that underpinned development of the gas fields and LNG trains, as opposed to the spot price – which varied with world events – and then pegged to the global oil price.

She said the COAG Energy Council had commissioned a report and recommendations from its Gas Market Reform Group – led by Dr Mike Vertigan – are expected to be released this year.


Chemistry Australia Media contacts:
Krista Imberger – [email protected] or 0439 318 290
Claire Selby – [email protected] or 0448 028 876

Chemistry Australia is the pre-eminent national body representing the $40 billion Australian chemistry industry, one of the largest manufacturing sectors in the country. The industry employs more than 60,000 people and contributes more than $11.6 billion to GDP in industry value add. Members of Chemistry Australia are positioned across the entire value chain including manufacturers, importers and distributors, logistics and supply chain partners, raw material suppliers, fabricators, compounders, recyclers, research, academia and service providers to the industry. These businesses range from small family-owned companies to leading national and multinational enterprises.




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