Australia: Gas supply shortfall possible for east coast market

A supply shortfall in Australia’s east coast gas market is increasingly likely, especially in the southern states, the Australian Competition & Consumer Commission’s (ACCC) latest gas report reveals.

The report, entitled Gas inquiry 2017-2025 and released on 17 August, reveals a finely balanced supply outlook for 2022.

A shortfall of 2 PJ could arise across the entire east coast gas market next year, driven by a shortfall of up to 6 PJ in the southern states, if LNG producers export all of their surplus gas.

This forecast is dependent upon demand from gas powered generators decreasing to record lows, and a material volume of gas from currently undeveloped reserves being supplied.

“The precarious supply situation for next year highlights the importance of the new Heads of Agreement that the Australian government signed with LNG exporters in January 2021,” ACCC Chair Rod Sims said.

Under the Heads of Agreement, LNG exporters must offer uncontracted gas to the domestic market on internationally competitive terms before it is exported, and provide relevant material to the ACCC to demonstrate their compliance.

“The initial material LNG producers provided to us did not adequately demonstrate compliance with the new Heads of Agreement and they will need to lift their game,” Sims added.

“The initial responses from LNG producers were concerning given that in the near future Australia’s southern states may depend on their surplus gas. We expect to see better compliance from LNG exporters over the next 12 months.”

The report shows that prices for contracted gas in the east coast market through to February 2021 remained at the lower levels observed during 2020. However, the tightening supply situation means these prices may not last.

“Domestic spot prices for gas spiked in July but the increase was driven by a particular set of circumstances that won’t necessarily impact offers for long-term contracts. Fortunately, we have subsequently seen some softening of those high spot prices in August,” Sims noted.

The ACCC observed that price offers for supply in 2022 trended from $6-11/GJ at the start of 2020 to $6-8 in the second half of 2020.

Although lower prices were welcomed by commercial and industrial users, many users are struggling to obtain offers for supply beyond 2022. Where supply is offered, prices are often at $9-10/GJ.

“We are also concerned that there have been significantly fewer offers for gas supply being made in the domestic market recently.”

The difficulty in securing offers beyond 2022 may have been partially caused by uncertainty around the Gas Code of Conduct and the ACCC’s LNG netback price series review.

The ACCC’s LNG netback price series review is underway and will be completed by September 2021, following two rounds of public consultation.

The netback price series review has been informed by the findings from a detailed review of gas supplier pricing strategies. Today’s gas report sets out the ACCC’s findings, which includes that oil prices appear to be a key influence on domestic pricing, and competition has been a limited constraint on prices.

Separately, this year the ACCC will examine competition in markets for the exploration, production and processing of gas for the east coast, including the factors affecting when gas is brought to market.