Gas supply shortfall three times higher than originally estimated

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New reports by the Australian Energy Market Operator (AEMO) and Australian Competition and Consumer Competition (ACCC) have predicted gas supply shortages will be considerably higher for eastern and south-eastern Australia than what was estimated six months ago.

The AEMO’s update to the 2017 Gas Statement of Opportunities, and ACCC’s Gas Inquiry 2017-20 Interim Report focus on likely supply and demand conditions for 2018. Estimates of gas supply have been compared to estimates of demand in the east coast gas market for 2018, based on estimates of exports obtained from the liquefied natural gas (LNG) producers and the AEMO’s projections of domestic demand.

AEMO Managing Director and Chief Executive Officer, Audrey Zibelman, said, “Based on the most recent information from industry, together with AEMO’s forecast demand, gas supply remains tight in eastern and south-eastern Australia in 2018 and 2019, and there remains a risk of a supply shortfall.

“In real terms and based on no further response to today’s information, the projected shortfall risk for 2018 is between 54 petajoules (PJs) to 107 PJs, and in 2019 between 48 PJs to 102 PJs. To put this into context, total projected demand for domestic gas is expected to be approximately 642 PJs in 2018, and 598 PJs in 2019.

“Projections of aggregated gas production and LNG gas demand vary, based on market conditions and contracting, indicating a dynamic situation that can change rapidly and warrants continued close attention and monitoring.”

Prime Minister, Malcolm Turnbull, said, the government had received the two reports which showed gas shortages “will be considerably higher than that estimated six months ago”.

“It’s estimated there will be a shortfall … of around 110 petajoules of gas – more than three times the figure we were advised earlier in the year.”

Gas shortfall effects prices

Mr Turnbull said the recent rises in the cost of gas are the single biggest factor in the current rise in electricity prices because]gas sets the wholesale electricity price.

“More expensive gas has huge implications for industry and for struggling families but it feeds directly into the electricity market,” Mr Turnbull said.

ACCC Chairman, Rod Sims, said the prices being offered to commercial and industrial customers for 2018 supply are multiples of historical price levels of $3-4/GJ.

“Over a third of the commercial and industrial (C&I) users the ACCC interviewed are considering either reducing production or closure due to high gas prices. For many of these users, gas is a feedstock to production or an essentially irreplaceable source of energy, and with the products they make often supplied on international markets higher gas costs cannot be passed on,” Mr Sims said.

Mr Turnbull said the Government will not let the power bills of Australians rise further and further because of a shortfall of gas on the east coast of Australia.

“It is an indication of how seriously we take our responsibility of ensuring that Australians will not pay more for gas than they need to,” Mr Turnbull said.

Reducing the shortfall

The ACCC reported in 2016, in its East Coast Gas Inquiry, that the Queensland LNG projects caused a significant disruption to the market and the supply-demand balance. In 2018, the LNG projects will together produce over 70 per cent of the east coast’s gas and account for two-thirds of the east coast’s gas demand.

“The expected shortfall could be reduced to a significant extent if the expected sales on international LNG spot markets were instead redirected to the domestic market,” Mr Sims said.

“It is unclear why we are not seeing more steps being taken by the LNG projects to supply more gas into the domestic market. Although we accept some additional coordination costs would be likely and agreement of the joint venture parties of the LNG projects is required.”

Mr Turnbull also attributed the shortfall to the “comprehensive failure” by some state governments to develop gas resources.

“Queensland is producing most of the gas on the east coast of Australia. But both Victoria and New South Wales are not doing enough,” Mr Turnbull said.

“We strongly encourage the NSW Government to approve the development of the Narrabri Gas Project, for example, which will add over 58 petajoules of gas per year. That is critical to the energy security of Australia.”

Mr Turnbull said that NSW imports 95 per cent of the gas it uses “so it needs to produce more gas.”

The gas market in the south and west

Domestic users in the south are facing very high gas prices, largely as a result of the expected supply shortfall in the south and lack of competition between the southern gas suppliers. Prices in the south could be significantly reduced if additional sources of supply are developed in the south to increase the level of supply and diversity of suppliers.

“We are seeing domestic prices on the east coast well in excess of the appropriate benchmark levels and many C&I users needing to re-contract for supply in 2018 and beyond are holding out in the hope of improved conditions. There is a lot of pent-up demand,” Mr Sims said.

“This situation on the east coast is in stark contrast with the situation in Western Australia, which is not connected to the east coast gas market. The west is expected to be well supplied in the short to medium term. For C&I users in the west, there are five suppliers competing for their business and prices are low, in the region of $6/GJ. On the east coast, particularly the southern states, users generally have only one supplier, and price offers in 2017 have generally been in the range of $10-16/GJ.

“The situation in the east coast gas market is serious and options to address the problems in the immediate term are limited,” Mr Sims said.

The need for reforms

“The results of AEMO’s recent analysis and the ever-tighter integration of the electricity and gas markets, together with the increasingly dynamic character of Australia’s energy system, suggest there is a need to look at reforms to improve predictability and stability in energy markets to the benefit of consumers,” Ms Zibelman said.

To help address the shortfalls the Australian Government implemented the Australian Domestic Gas Security Mechanism (ADGSM) in July 2017, which allows for the restriction of LNG exports in an expected shortfall year with the aim of directing those supplies to meet domestic demand.

Mr Turnbull said the gas market was not functioning well and the government’s controversial limits on gas exports are “ready to go” and would be invoked if LNG projects would not show how the shortfall will be met.

He said he had been in talks with the chief executives of major gas exporters and “we expect them to demonstrate to us … [that] they will ensure that there is not a shortage of gas next year on the east coast”.

However, while invoking the ADGSM is a start, Mr Sims said more reform is needed.

“Export controls may go some way to addressing this shortage in the short term. However, further steps are needed to address the underlying problems of lack of gas supply and lack of diversity of suppliers in the east coast gas market. Supply-side solutions are needed to bring more supply and suppliers into the domestic market, particularly in the southern states,” Mr Sims said.

“Blanket moratoria and other restrictions on developing new supply should be replaced by case-by-case assessments to allow for new sources of supply to respond to high domestic prices.”

Continued engagement

“We commend the gas industry for its supportive and collaborative approach throughout our ongoing consultations to date. AEMO recommends that the Commonwealth continue to engage with industry on the findings of this analysis and notes that gas production and LNG gas demand are very dynamic and vary based on market conditions and contracting,” Ms Zibelman said.

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