According to Australian Competition and Consumer Commission (ACCC) Chairman Rod Sims, the east coast gas market has experienced a triple-whammy of local and international events and changes, posing difficult times ahead for the industry.
“First was the introduction of LNG with its huge impact on the demand for gas,” Mr Sims said.
“Second, oil prices have fallen faster and further than nearly anyone thought, which is reducing the incentive and ability to explore for gas.”
“Third, regulatory uncertainty and exploration moratoria are making life very difficult for the upstream sector,” Mr Sims said.
“In this environment commercial and industrial gas users particularly have had a difficult time.”
Speaking ahead of the ACCC’s formal report to Government, Mr Sims provided key observations on the east coast gas market.
“First, more sources of gas supply for south eastern Australia in particular are needed to constrain gas prices.”
“The key point is that the effect of the level of LNG netback prices on domestic gas prices depends more than is realised on the level of competition in the market,” Mr Sims said.
“With many gas suppliers competing for business their (seller) alternative is to send gas to Queensland for export. With few gas suppliers competing for business you need to ask why would they sell their gas for less than the buyers alternative of buying gas from Queensland?”
“The difference in the domestic price of gas, therefore, depends on the level of competition to supply gas, and can be double the transport cost to Queensland, which is a large amount,” Mr Sims said.
This also illustrates the importance of gas transmission and transport costs.
“Second, therefore, we also have to ensure that regulation, or the threat of regulation, is effective as it applies to natural monopolies like gas transmission pipelines. This currently does not seem to be the case.”
“Likely ineffective regulation of gas transmission pipelines is of particular concern because monopoly pricing can lead to inefficient downstream investment decisions and can limit investment in upstream exploration,” Mr Sims said.
Mr Sims said the ACCC is due to hand its report of the East Coast Gas Inquiry to the Minister for Small Business and the Assistant Treasurer, the Hon Kelly O’Dwyer MP, by 13 April 2016.
“As part of the formal inquiry, we have held more than 30 private and public hearings with gas producers, retailers and customers.”
“We have consulted with over 50 interested parties and received around 73,000 company documents, reports, contracts and other documents,” Mr Sims said.
Mr Sims said the ACCC’s inquiry will highlight inefficiencies which can be addressed and discusses where new policy or better informed policy decisions may be needed.
The Australian Pipeline and Gas Association Chief Executive, Cheryl Cartwright has announced concern over Rod Sim’s statement claiming that there is ineffective regulation of gas transmission pipelines.
“The existing regime has been highly effective in delivering timely investment, something both the Productivity Commission and the Harper Review have acknowledged.
“The Australian Energy Markets Commission (AEMC) has made a number of recommendations for transmission pipelines that should enhance the important role they play in providing a secure gas supply and we support the direction of those recommendations.
“Further regulation of pipelines will do little to increase the supply of natural gas which is key to increasing certainty for users and should assist in moderating prices.
“We were disappointed to see the level of attention paid to the cost of pipeline access in the address and especially in recent media reports. According to the Australian Energy Regulator, transmission pipeline charges account for 3-8 per cent of delivered retail gas prices. This compares very favourably to electricity transmission costs of 5-12 per cent of delivered retail electricity price. For industrial and large users, gas transmission charges comprise 15-20 per cent of delivered gas price.”
Ms Cartwright welcomed Mr Sims’ indication that the ACCC was also focussing on dealing with the main problem for the domestic gas industry – a lack of gas supply.
“No amount of restructuring of the National Gas Law and its impact on gas transportation will help to address the issue of a lack of gas supply,” she said.
“Mr Sims acknowledged that new sources of supply would ameliorate uncertainty for downstream users of gas and put downward pressure on gas prices.
“He also recognises that reforms that would increase liquidity in trading markets require more gas from a wider diversity of sources and that the best designed trading markets will not work without having gas to trade.
“We look forward to seeing recommendations related to increasing gas supply and encouraging the development of new sources of gas in the ACCC’s East Coast Gas Inquiry report.”