“Gas is a feedstock to production or largely irreplaceable source of energy for a diverse range of sectors such as mining, manufacturing, chemicals, agriculture and food production.

“With domestic gas commodity prices now edging well in excess of $10/GJ, many C&I gas users are facing very challenging long-term investment decisions. It appears increasingly likely that some C&I gas users will relocate from the east coast or close their operations.”

Setting the marker

The regulator observed “significant” moderation of forward netback prices for 2019 at the pricing hub of Wallumbilla. The Queensland hub netback reached a peak of around $12.50 a gigajoule (GJ) in September 2018 as higher oil prices fed through to oil-linked LNG pricing. But prices fell to $9/GJ by the end of November 2018. Presently the 2019 price is ranging from a January high of $10.51/GJ to a September low of $8.74/GJ.

To be clear, netback is a way of revealing an export-equivalent price. The Wallumbilla price is set after deducting from the export price the costs of piping, processing and shipping gas to the region.

“We are confident the arbitration system can work,” Sims said. “But rest assured the [federal] government will look to other steps if it doesn’t.”

 Nic Walker

The ACCC assesses netback as the point of ambivalence for gas exporters and thus as setting the marker for what might be a “reasonable” price.

The ACCC’s fourth “interim” study of gas markets landed with some new targets among a now familiar roll call of the fathers of market failure. Those usual suspects included pipelines and state governments. And the new ones are the big three gas retailers – AGL, EnergyAustralia and Origin – that are now enduring a focused review of their pricing regimes.

Given the damaging firestorm of retail politics released on this same group of “gentailers” by the ACCC’s review of the electricity sector, this news will doubtless be received as ominous by the battle-scarred big three.

The cautious language of the retail gas review’s announcement would indicate that the ACCC is aware that its assessment lands at a delicate political moment.

The regulator revealed concerns over “material” retail profit margins earned on selling gas between 2014 and 2017. According to the ACCC numbers, the EBITDA margins of the big three were 17 per cent last year. That same competing collective’s margins hit a high of 21 per cent in 2015 and ran at 15 per cent in 2014 and 18 per cent in 2016.

Conciliatory and quietly threatening

In conversation the ACCC chairman Rod Sims rejected the possibility that the expansion of his wholesale market remit to include a retail review might represent mission creep. But his mood was at once conciliatory and quietly threatening.

The chairman repeated qualifications offered in the report, that the margin analysis is based on “highly aggregated preliminary numbers which require further examination”.

The ACCC report noted that analysis had shown a complexity of costs and profit margins that differed across retailers and also across customer types and locations. The regulator said the review aimed “to understand, for each retailer, the trends in the costs incurred, the drivers behind the observed margins and how these flow through to the different customer segments”.

The ACCC wants to understand how margins are affected by supply and demand dynamics, market and customer risk profiles and the state of competition across various parts of the market.

“But if it is confirmed, then I think those margins are just too high,” Sims told The Australian Financial Review.

To the now usual irritation of the pipeliners the ACCC reported that, despite the evolving positives of reforms embedded over the past three years, tariffs continue to be too high. The latest review promoted further efforts at transparency and a new arbitration regime as best-case answers to what it regards as the continuing exercise of monopoly pricing power.

“We are confident the arbitration system can work,” Sims told the Financial Review. “But rest assured the [federal] government will look to other steps if it doesn’t.”

Overcoming the reluctance of some state governments to open the gate to exploration is a wholly more difficult problem.

The ACCC view is uncompromising. The ambivalence and worse of the southern states to conventional and unconventional exploration has constrained investment in gas reserve renewal and that has increased pricing generally but done so with a particular and damaging prejudice in south-east gas markets.

“As we have previously advocated in our reports, more supply and greater diversity of suppliers are needed in the southern states to bring domestic gas prices down,” the report said.

“The most material pricing benefits for domestic gas users are likely to come if additional lower-cost gas is produced in the southern states, rather than gas being transported from Queensland, the Northern Territory or imported via an LNG import terminal.

“For this reason, we continue to urge state governments to adopt policies that consider and manage the risks of individual gas development projects, rather than implementing blanket moratoria and regulatory restrictions.”

The latest installation of a review that will continue through until 2020 also served to illustrate that government intervention in even dysfunctional markets risks perverse outcomes.

Despite the supply-side uncertainty that pushed prices to unprecedented levels through 2016-17, some industrial and commercial gas customers continue to avoid the option of longer term supply and shipment commitments.

Five years ago some heavy-using corners of the gas market opted to stay short in the hope of securing very, very cheap gas through the successive start-ups of three export gas facilities on Gladstone’s Curtis Island. For reasons of timing and tightness of supply, that flood of cheap so-called “ramp gas” never arrived. And, worse, by 2016-17 those supply-short customers were being asked to pay up to $16/GJ for gas when their business cases required prices below $6.

The same cohort of customers that waited in vain for ramp gas are now sitting back and waiting on force gas.

Excessively optimistic

With the Australian Domestic Gas Security Mechanism in its holster, the federal government has convinced the east coast’s three gas export joint ventures to release gas not required to meet LNG contracts back into the domestic market at “reasonable” prices.

As the ACCC identifies over and again, that uncommitted gas is what is keeping east coast supply and demand in balance. But it is arriving at a price that the ACCC says undermines the viability of many.

In the end it is hard to resist the conclusion here that those who are relying on this force gas are hoping that, at a point in the relatively near future, a federal government might move to define what “reasonable” actually is.

There was one other interesting theme to pull out of what is a report of compounding insights and data points.

The ACCC has reinforced a point that we have made in the past about the conversion rate of the proved and probably (2P) reserve and 2C resource measures that secure the occasionally excessively optimistic official views on the state of Australian capacity to service its future east coast gas demands.

Our point has been that second and third-generation coal seam gas expansions will exhibit less rewarding production characteristics than the first-gen stuff that now secures the east coast market.

The ACCC has reinforced the nature of this risk. “Substantial write-downs of CSG reserves over the 12 months to July 2018 indicate that those challenges are continuing,” it said.

Through 2018 the Shell-operated Arrow Energy reclassified a whopping 2933 petajoules of reported reserves into less certain 2C resources. AGL did the same in lesser volumes in permit areas it holds with Arrow. And Shell, Origin and the operator of its LNG project, APLNG, also wrote down reserves in undeveloped areas.

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