Producers remain committed to the domestic gas market

Australia’s east coast natural gas majors have worked with both Commonwealth and State and Territory Governments to produce a new Heads of Agreement (HoA) that was announced by the Prime Minister late last week. The HoA further secures domestic gas supply on the east coast of Australia through until the end of 2023, ensuring competitive pricing and availability for customers.

The HoA reaffirms the commitments made in 2017 and 2018 and establishes that east coast LNG exporters will not offer gas to the international market unless equivalent volumes of gas have been offered to the local market first, in addition to ensuring that un-contracted gas is offered “on reasonable terms”.

The ACCC has found on eight separate occasions that the natural gas industry already works to ensure gas flows to domestic customers, and the latest HoA will help to solidify these practices through the next two years.

In and around the discussion of the HoA and the government's gas fired recovery more generally, there has been discussion in some quarters that Australia should seek to replicate the success of the United States-based Henry Hub gas network to effect a manufacturing boost. Henry Hub, based in Louisiana, connects an extensive nationwide gas network of more than 210 pipelines across the nation. Its ubiquity has even seen it become the basis for US benchmark prices.

While undoubtedly successful, Henry Hub has grown through extremely different circumstances than those we find here in Australia. Australia has a much lower population than the United States, as well as higher production costs. Although the contiguous United States and Australia are similar in size, the US has roughly 13 times the number of people — 328 million vs. Australia’s nearly 26 million. The resulting disparity between the two countries’ population densities requires different demands for gas; according to 2019 statistics from the US Department of Transportation, the US boasts more than 480,000 kilometres of gas transmission pipelines compared to the roughly 39,000 kilometres in Australia (APGA).

In addition, the US gas market has benefited from a shale gas boom that has helped to foster its continued development over the last decade. It is the liquids rich nature of the output in the US that has meant gas is a very low cost outcome (and in many senses by product) of the liquids being extracted. This, along with infrastructure and demand dynamics makes the economics of domestic gas in the US entirely different to Australia.

Calls for Australian domestic gas prices to match the Henry Hub average are therefore not realistic or even plausible. The United States and Australia are quite simply different markets with different market fundamentals, different products and different requirements. Expecting Australian gas prices to reflect US gas prices is like expecting Australian supermarkets such as Woolworths or Coles to reflect Walmart’s pricing. While we can certainly look to the success of the Henry Hub model as we discuss the continuing development of the Australian gas market, we should not expect to replicate it and we should certainly not seek to price off it.

Instead, we should seek to develop our own more liquid trading hub(s) and even more importantly, capacity closer to demand centres, which historical restrictions in Victoria New South Wales have prevented. The announcement by the Victorian Government that it will allow conventional onshore gas exploration from July 2021 serves as a good start as does the environmental approval for Santos' Narrabri project, but more can be done to encourage responsible exploration and development to generate supplies closer to east coast manufacturing hubs.

The government has invested a great deal of thought into its gas fired recovery and there a raft of policies either being implemented or proposed that must be given time to work. We have already seen with the ADGSM and previous HoAs that the market is working and there is downward pressure on prices. Domestic spot prices for LNG are currently at their lowest levels since 2015–2016, according to information from the Australian Energy Regulator (AER), and the industry remains committed to ensuring Australian customers are well placed to benefit through ongoing collaborations with the Commonwealth government. The AER also found that a strong, competitive spot market allowed participants to source gas at cheaper prices.

We must not forget that in addition to the HoA and ADGSM we have the ongoing ACCC gas market inquiry which has produced nine reports already and which runs out to 2025, we have proposals for a national domestic reservation (and with a form of reservation already operating in Queensland, in WA and a commitment for Narrabri gas to be made available 100% to the domestic market), we have several strategic basin reviews announced or underway, there is the soon to be finalised ACCC transparency review and the government is committed to the development of a more liquid trading hub at Wallumbilla.

Collectively these measures will continue to transform the domestic gas market and they must be given time to work (as we have seen with the ADGSM and previous HoAs). Proposals from some quarters for price intervention would nullify any prospect of these measures working effectively and would only guarantee an outcome that would see prices actually increase as a consequence of reduced investment reflecting higher sovereign risk. Reduced investment would stall exploration and development, short supply and in the medium to long term at best increase prices and at worst destroy one of Australia's most important energy sources and export industries - the very opposite of what a short term sugar hit of pricing regulation would seek to do.

In this vein, APPEA believes that the best way to ensure prices in Australia remain competitive in support of the roughly 225,000 manufacturing industry employees reliant on gas is by securing more supply, not less. And supply comes from encouraging investment and development, not choking it through ill-conceived market intervention.