By Kelly Neill
LNG exports have increased the domestic natural gas price in the eastern part of Australia, and domestic gas users are grumbling. But that’s not the whole story and, as is often the case, things are not as simple as they appear.
Around 40 percent of gas used domestically on the east coast is sourced under long-term agreements with LNG export projects in Queensland. Since LNG projects and other nearby producers have the option to export their gas as LNG, domestic buyers negotiating for Queensland gas are generally offered prices in line with expected LNG netback prices. That is, they are offered a price equivalent to LNG prices at the export destination less LNG shipping costs, less liquefaction costs.
But most Australian gas users are in the southern states. If they need to bring gas in from Queensland, they must cover the cost of transporting it: one or two dollars per gigajoule.
Consequently, when buyers negotiate with producers in the south, the price offered is closer to the LNG netback plus the one or two dollars. Sellers know that the buyer’s alternative option is to buy and transport Queensland gas, so they price accordingly.
Industrial gas users are struggling with higher gas prices. Four manufacturers have closed production facilities, three of which are in the south, and others are reviewing their viability.
Meanwhile, plentiful gas in the south could reverse the reliance of domestic gas users on Queensland gas. Indeed, the initial approval for the LNG export projects was predicated on the supposition that plentiful, known, resources in the southern states would be developed. In a best-case scenario, excess gas would flow north in the summer to feed the LNG plants (when demand in Asia is at its winter peak, and demand in Australia is low). Southern gas users might then be expected to pay the LNG netback minus one or two dollars for transport costs.
But southerners are not helping themselves.
Victoria, South Australia and New South Wales (NSW) have all banned onshore gas production to some extent. Victoria has been the most strict, banning all onshore exploration and development since 2014, including a substantial onshore conventional project at Lakes Entrance that was about to enter the development phase. The state will allow exploration for conventional deposits to begin again from mid-2021; but remains unmoved on unconventional gas. For today’s gas users, this may be a case of too little too late.
A project on the North Coast of NSW discovered the largest onshore natural gas resources in the state’s history; conventional and tight resources in the Greater McKellar structure. But in 2014, the NSW government capitulated to an environmental campaign that claimed they were coal seam gas resources which required extensive hydraulic fracturing. More recently, the onshore Narrabri project in NSW has also been the subject of controversy, but appears to be moving forward again. It could reportedly supply up to half the state’s gas use.
Australia’s reliance on gas is also increasing with the promotion of wind and solar electricity, which is intermittent and unreliable, and needs to be backed up. Dispatchable hydroelectric power is scarce, and batteries are expensive, so the main option is peaking natural gas plants. In addition, Australia’s coal-fired generation fleet is ageing and starting to retire. Lower cost gas will not only ensure that replacement baseload capacity is gas rather than coal, but will also lower electricity prices and hasten the switching process.
In the meantime, Australia, as the world’s largest LNG exporter, is facing the awkward reality of several proposals to build LNG import terminals. But LNG imports are not likely to be a low-cost option for Australia’s south. The lowest possible cost of gas from an import terminal would be the LNG netback (as defined above) plus liquefaction costs plus shipping costs plus re-gasification costs, which likely adds to more than one or two dollars above the netback.
State governments can and should let markets work. Currently, governments in the south are constraining gas supply, forcing local gas users to rely on producers in the north, and raising the cost of gas. Instead, these governments can and should greenlight more gas production. Increased access to pipelines and expanded storage options could also reduce the price premium paid in the south. The new pipeline capacity auctions have been a good start, but more effort will be required if reliance on Queensland gas continues. Without a change in approach, the region will continue to see destruction of gas demand, and negative economic consequences.
Kelly Neill is a graduate fellow at the Baker Institute for Public Policy’s Center for Energy Studies and is currently completing her Ph.D. in economics at Rice University.