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The Australian Competition & Consumer Commision’s (ACCC) latest gas report has revealed that domestic gas contract prices for commercial/industrial users in 2022 increased from $6-8/GJ in late 2020 to around $7-9.50 by mid-2021, amidst fears of supply shortfall in southern states. 

Australia’s east coast spot market prices in recent months have been around $10-11/GJ, as record high prices are seen internationally. 

For example, European gas markets have been highly volatile, and as of 28 January 2022 the outlook for prices on the Asian LNG spot market in 2022 was over $36/GJ on average.

The ACCC Gas Inquiry Interim report forecasts that supply shortfall is on the horizon, reporting that across the east coast gas market supply should meet demand in 2022, but there is the risk of a shortfall from 2026. 

The ACCC report said that in the southern states, a shortfall of 10PJ is expected in 2022 and gas will need to be directed from the north to meet demand.

Despite continued high overseas prices, domestic contract offers to commercial and industrial gas users in mid-2021 were below export parity prices. 

The ACCC said this could be due to a range of factors, including expectations of relatively stable oil-linked LNG netback prices at the time, short-term domestic market dynamics and concerns over regulatory intervention.

Continued write-downs of proved and probable (2P) reserves, predominantly by LNG producers in Queensland, has contributed to the forecast supply shortfall, according to the ACCC. 

ACCC Chair, Rod Sims, said, “There is a gas shortage forecast for Australia’s southern states from as soon as this year, which is likely to continue next year and beyond. Southern states will be reliant on gas from Queensland until additional supply from new sources comes on.”

The report shows that LNG producers are forecasting to take more gas out of the market in 2022 than they expect to supply in. However, they forecast to produce an additional 122 PJ of gas that could be supplied into the domestic east coast gas market, rather than international LNG spot markets.

“We’re extremely concerned that LNG producers are currently forecasting to withdraw 27 PJ more gas than they expect to supply into the domestic market this year,” Mr Sims said.

“The uncertain supply situation reinforces the importance of the Australian Government’s Heads of Agreement with LNG producers, which concludes on 1 January 2023.”

The Heads of Agreement requires LNG exporters to offer uncontracted gas to the domestic market on internationally competitive terms before it is exported, and to provide relevant material to the ACCC to demonstrate they are complying with the agreement.

“Compliance with the Heads of Agreement by LNG producers is very important, given that Australia’s southern states may depend on their surplus gas in the coming years,” Mr Sims said.

“LNG producers’ reporting to the ACCC has improved since the July 2021 report, but they can still do more to comply with the Heads of Agreement and make gas available on reasonable terms that users are capable of accepting.”

The ACCC also recommends that the Federal Government consider extending the Heads of Agreement well before it expires on 1 January 2023.

“Additional supply from a southern LNG import terminal from 2023, or more domestic supply from the north, may not be enough to address the projected shortfalls, and it may still be necessary to divert excess gas into the domestic market that would otherwise be exported if new supply can’t be developed rapidly enough,” Mr Sims said.

The report also makes findings from the first stage of the ACCC’s examination of 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.

“The timing of the development of uncontracted reserves is critical for the domestic market but these decisions are largely in the hands of a relatively small number of major gas producers,” Mr Sims said.

“Our review suggests that there are a range of infrastructure, regulatory and capital factors impeding upstream competition and limiting gas supply.”

To address these issues, the ACCC recommends governments implement a range of reforms to encourage greater diversity of suppliers and reduce the barriers faced by producers. 

Gas industry reacts

The Australian Petroleum Production & Exploration Association (APPEA) has said that the new ACCC report showcases the need for more gas investment and exploration. 

APPEA Chief Executive, Andrew McConville, said the price rises outlined in the report were very modest compared to what was going on in international markets.

“The report has reaffirmed for the eleventh straight time there is no shortfall in Australia’s domestic gas market,” Mr McConville said. 

“Domestic prices are still well below international prices, which have increased by 230 per cent between February and August 2021 and have increased further since. Despite an extremely volatile international market, our industry is providing secure supplies of competitively priced gas to customers all over Australia.”

Mr McConville said the report showed the market was working – as further evidenced by the industry signing at least 116 GSAs and other commercial agreements since late 2012.

“Our members are constantly working with customers to meet their energy needs and bring more supply online for domestic customers,” Mr McConville said. 

“They continue to bring more supply online for domestic customers. This includes billions of dollars in new investment to bring more gas into the domestic market.”

However Mr McConville stressed that the competitiveness of investment settings still needed to be strengthened further – encouraging more gas investment, exploration and supply.

“There is a massive economic opportunity for Australia – but it will only happen if the policy settings are right,” Mr McConville said. 

Government comments on report

The Federal Government has commented on the ACCC report, stating that it is consistent with the government’s 2021 National Gas Infrastructure Plan, as the ACCC notes that over the long term, the development of basins such as the Beetaloo (NT), North Bowen (QLD), Galilee (QLD) and Gunnedah (Narrabri, NSW) would help to alleviate the shortfall. 

Treasurer, Josh Frydenberg, said the ACCC acknowledged the government’s measures to bring forward new domestic supply and to protect Australian households and businesses from the kinds of price and supply issues being experienced in other countries.

“The ongoing supply of affordable gas is crucial to helping Australia’s economy as it rebounds from the impact of the COVID pandemic,” Mr Frydenberg said.

Minister for Industry, Energy and Emissions Reduction, Angus Taylor, said, “Australia has been fortunate to escape the devastating price impacts seen in Europe due to its energy crisis. Accelerating the gas-fired recovery is essential to ensure this does not happen here.

“While the report notes some positive signs for infrastructure investment in expanding south-bound capacity, the government will continue to assist industry where needed through our Future Gas Infrastructure Investment Framework.

“It is clear from the ACCC that underinvestment in the gas sector cannot continue. 

“This report is a stark warning that we cannot allow activism to slow gas projects. Without unlocking gas, we will feel the price pressures being experienced overseas.”

Minister for Resources and Water, Keith Pitt, said the report highlighted the need to further develop Australia’s vast gas resources, with the ACCC flagging a tightening east coast domestic supply-demand balance in 2022. 

“The Government recognises the importance of regularly looking for new opportunities to improve gas supply in the east coast market,” Mr Pitt said.

Future plans from the ACCC

The ACCC will report on findings from the second stage of its review of competition in markets for the exploration, production and processing of gas, in 2022. 

The ACCC noted that gas suppliers and large gas users recently agreed to a voluntary industry code of conduct for negotiating and developing gas supply agreements. 

The ACCC will monitor the implementation and operation of the code as part of its gas inquiry.

“The voluntary code is a step in the right direction, and we encourage all gas suppliers to sign up to it. The more signatories there are, the greater the benefits will be for commercial and industrial gas users,” Mr Sims said.

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