Gas prices in Australia: Gladstone coal seam gas LNG exports to raise Australian gas price to $12/GJ, 2012 to 2040?

Actual average Southeast Australia daily weighted prices by quarter - falling since start of pool

Oil-price-linked gas price; the gas-sellers wish-list.

Oil price in $US
Oil linked gas price
$65
$5GJ
$85
$7GJ
$105
$10GJ
This would make the current gas price over $10GJ as the OPEC reported world price per barrel was April 2012 at $118.18 and March 2012 to $122.97. The year-to-date price $117.66.

The gas-price-curve: down in the USA and down in Australia

Australia gas investors want to link Australian domestic gas price in the three Australian gas markets to the oil price; for example:

  1. if the oil price is US $105 a barrel; then
  2. investors want the gas price at $10 a GJ;
  3. in short, gas to vary as oil price varies.

Price impact of oil-linked domestic gas contracts: This would increase recession-impact of high oil price on Australian consumers, at a gain to energy investors; and present a gain to State and Federal Governments, where energy royalties are profit-linked.
The economic downside: A domestic gas price, linked to oil price - (if oil price stays high); may

  1. remove competition between gas suppliers;
  2. reduce consumer bargaining power;
  3. transfer income to investors;
  4. increase domestic recession impacts of high oil price.
  1. So far, one Australia contract has appeared at the oil-linked price 9 believed near $10 GJ); and yet
  2. coal seam gas was reported - as produced - in Queensland;
  3. for as low as $0.30c/GJ and contracted elsewhere, at $0.95/GJ.

Origin LNG sells to QCLNG at oil-linked price: The first domestic gas contract at LNG price was made in May 2012 when Origin contracted to sell CSG to an LNG rival, at oil-linked LNG export prices.

Competition for gas and for expert oil and gas employees: The reason the rival - QCLNG - paid, was it had LNG contracts it had to meet and was short of coal seam gas. Local landholders had joined the Lock the Gate movement. Even the scone-making Country Women's Association had marched in the street - the first time in 90 years - to protest land impact of coal seam gas drilling. The boom had also created a high demand for oil and gas and engineering experts; wages were high, rents stupendous - a form of local inflation - as LNG and coal seam gas firms and coal mines competed for high paid workers.

2012 world commodity prices show coal price down, US gas price down, world oil price up

US, Japan and Chinese, Australia  investor and management bonus wish-list;   more money from Australian gas if Australian gas contracts linked to oil price.
US, Japan and Chinese, Australia investor and management bonus wish-list; more money from Australian gas if Australian gas contracts linked to oil price.

International gas prices

US gas price down but Australian gas price up

As US domestic gas prices fall, with the advent of more domestic shale gas and coal seam gas, in Australia gas price may rise. The US Henry Hub price for example has fallen about 15% a month on average for the last four months - but the oil price rose. If that US gas price - was linked to the the oil price - US gas price would be four times higher, and rising - and domestic gas price would not respond to competition.

What Australian investors want: If gas-supply investors lobby-efforts succeed, Australia's domestic gas price - for electricity generation, city and industrial gas - may rise to match LNG export price. The winners here, energy investors. Lots of blokes will get great bonus payments as share prices rise with the gas price.

All gas priced like oil - that's the plan: Energy investors lobbied-hard for a world gas price linked to oil price. For example, Origin Energy's big dream was that Australian domestic gas price would rise to the same level as LNG contracts - that is, get linked to oil price fluctuations.

Market operator forecast gas price $10/GJ at 2030; but actual curve at 2012 much lower, between $0 and $5Gj

AEMO gas price forecasts are high compared with actual; and the actual 2012 price in south was less than half this AEMO commissioned forecast, above.
AEMO gas price forecasts are high compared with actual; and the actual 2012 price in south was less than half this AEMO commissioned forecast, above. | Source

The wholesale gas price curve Australian gas sellers want

Australian coal seam gas developers aim to get gas cheaply in and sell it at international LNG prices.This shows the Origin gas price wish-list for the years ahead.
Australian coal seam gas developers aim to get gas cheaply in and sell it at international LNG prices.This shows the Origin gas price wish-list for the years ahead. | Source

Australia gas price curve for the South East to March 2012

Sydney and Adelaide (in 2010) and Brisbane (in 2011) started a short term trading market (STTM) for gas spot prices
Sydney and Adelaide (in 2010) and Brisbane (in 2011) started a short term trading market (STTM) for gas spot prices

Sydney, Adelaide and Melbourne spot gas prices for the past two years

When the new NSW market opened, price fell; In the first month wholesale gas prices at the Sydney hub fell from just under $4.5/GJ to $2.3/GJ. At the same time, wholesale gas prices were $2.47/GJ in Victoria and $3.61/GJ in South Australia.


For this chart, above;

  1. Sydney, Adelaide and Brisbane data are weekly averages of the ex ante daily price in each hub;
  2. Melbourne prices are estimated weekly averages for the metropolitan area, based on Victorian wholesale spot gas prices, plus the current transmission withdrawal tariff for the Melbourne metropolitan zones.
  3. Sydney, Adelaide and Brisbane prices are aligned.
  4. Victoria price was up: Daily Melbourne metropolitan gas prices for the nine months to 31 March 2012 averaged $3.37 per gigajoule, compared with $2.48 in the corresponding period last year.
  5. In the short term trading market, prices for the nine months to 31 March 2012 averaged:
  6. $3.08 per gigajoule in Sydney (compared with $2.59 in the corresponding period last year); and
  7. $3.65 per gigajoule in Adelaide (compared to $2.91 per).
  8. Brisbane prices averaged $3.13 per gigajoule in the first four months of market operation from 1 December 2011 to 31 March 2012.

Australian energy flow diagram; two new LNG exports trains to double gas demand in SE Australia

What's about to change: The plan to convert Australia's huge coal seam gas reserves to LNG exports brings a huge change to Australian energy flows. The abrupt change will alter the flow diagram shown here. This data in petajoules, for 2008 - 09.
What's about to change: The plan to convert Australia's huge coal seam gas reserves to LNG exports brings a huge change to Australian energy flows. The abrupt change will alter the flow diagram shown here. This data in petajoules, for 2008 - 09. | Source

Australian Treasury forecast Australia gas price curve to 2050; data influenced by clever lobbying? Implies oil-linked domestic gas price

Treasury Australian gas price curve shows a price-bump in Queensland as LNG exports start from about 2014. Then, Tgas prices rise to world parity.  Av price includes Western Australia which already has some gas contracts near $12G.
Treasury Australian gas price curve shows a price-bump in Queensland as LNG exports start from about 2014. Then, Tgas prices rise to world parity. Av price includes Western Australia which already has some gas contracts near $12G. | Source

How Australia's domestic gas price may rise

Six energy market changes could raise gas price;

  1. LNG exports from 2014; from Queensland and Western Australia: and
  2. carbon price from 2012;
  3. Middle East oil flow constraints and high oil price through to 2017;
  4. natural disaster impact on world energy flows. For example, March Japan 2011 earthquake and tsunami melt down of four nuclear plants. This increases LNG demand. Note that 50 Japan nuclear plants are now closed after public outrage about safety. No nuclear reactor is online. The summer season lies ahead and blackouts probable in high temps. Japan has an unusual trade deficit. It has a high need for LNG and coal;
  5. lobbying by gas sellers to change market expectation in sellers' favor - for example through influence of media and Federal and State Treasury modeling presumptions and inputs;
  6. mergers unsuccessfully opposed by the Australian Competition and Consumer Commission. For example gas transmission rates may rise in NSW, SA and Queensland if APA gets permission to takeover the Westpac Bank-owned Hastings. The three SE Australia pipeline owners are Jemena, Hastings and APA.

Gas price rise trend in NSW?

The ACCC has warned Sydney, NSW gas prices may rise if APA was allowed to own the Moomba-Sydney pipeline. NSW, the State where the most people live in Australia, needs more gas, says its Energy Minister, Chris Hartcher. In the new gas pool, for example, in the first week of February 2012, Sydney industrial gas pool price rose, to $4GJ, higher than other regions. However coal seam gas was reported as produced - in Queensland - for as low as $0.30c/GJ and contracted at $0.95/GJ.
NSW a gas importer:
NSW imports from Queensland and South Australia.

What NSW gas-fuelled electricity generators pay for gas

Delivered natural gas costs in 2009-10 for NSW gas-fuelled electricity generators was a range of:
- $3.80, $4.19, $6.22 and $7.42 per gigajoule (GJ);
- for Tallawarra, Smithfield, Uranquinty and Colongra stations, respectively;
- delivered natural gas cost in Victoria was lower than NSW at $3.87-$5 per GJ. ;
- costs for South Australia were between Victoria and NSW at $3.98-$6.61 per GJ. ;
- Queensland, however, which has both.

  • natural gas; $4.70-$6.67 per GJ, as compared to; had
  • delivered gas costs for CSG based power plants at $0.95-$4.24 per GJ.

IP view: Impact of LNG export start, carbon price, and higher gas price on wholesale electricity price as gas replaces coal

International Power, (IP) controls 40 per cent of whole sale electricity in South Australia and Victoria. In the deal of the century it expects to gain $1.7 billion in compensation for the impact of carbon price on its dirtier coal plants.
International Power, (IP) controls 40 per cent of wholesale electricity in South Australia and Victoria. In the deal of the century it expects to gain $1.7 billion in compensation for the impact of carbon price on its dirtier coal plants. | Source

Wholesale gas supply and demand in South East Australia at 24 January 2012

LNG is used in the Victoria domestic market as is cavern gas, and offshore gas.  Queensland used coal seam gas.  When LNG exports start it flows East from port of Gladstone. Domestic gas price may rise from around 2016 as LNG exports start.
LNG is used in the Victoria domestic market as is cavern gas, and offshore gas. Queensland used coal seam gas. When LNG exports start it flows East from port of Gladstone. Domestic gas price may rise from around 2016 as LNG exports start. | Source

Forecast wholesale gas price for south east Australia

Two forecasts of Australian gas prices:

  1. The energy market operator (AEMO) forecast gas price $10/GJ at 2030, and
  2. Treasury forecast $12/GJ by 2040

Treasury forecast: The Treasury gas price data and the AEMO data both covered Western Australia, Queensland, NSW, ACT, Victoria, South Australia, and Tasmania. The two Australian forecasts were from:

  1. an Australia Federal government study of the impact on carbon price on electricity price in Australian markets from 2012; and the contribution of gas price to that change; and
  2. an Australian Energy Market Operator (AEMO) commissioned report of forecast gas prices for Australia's south east grid.

Coal seam gas compressed for export as LNG

The Commonwealth Treasury forecasts show a noticeable bump in the Queensland gas price around 2015.
That represents the impact of four committed LNG trains at the port of Gladstone, Queensland; the first export of LNG from Queensland.
LNG exports raise Australian domestic gas price:
The scenarios show LNG exports raise the gas price in the domestic Queensland market, as large volumes of coal seam gas flow to meet the LNG export contracts with China, Korea and Japan. Until that time, 'ramp-up" gas keeps south east Australia gas price low; and also may lower wholesale electricity prices.

Gas map for Queensland shows gas flow directions and volumes 14 February 2012

A network in rapid growth as coal seam gas drilling  spread over the landscape. Mine rights are owned by the Government. Drillers can drill on  farm land. A strong resistance movement called "Lock the Gate" has evolved.
A network in rapid growth as coal seam gas drilling spread over the landscape. Mine rights are owned by the Government. Drillers can drill on farm land. A strong resistance movement called "Lock the Gate" has evolved.

First Gladstone LNG export 2014?

The flow of coal seam gas to LNG export constrains supply to domestic use; primarily electricity generation.
World price expected from 2020: The gas prices for the standard LNG scenario derived from the model were input into by NEM region until the 2020 import parity date.
So in the Treasury model, eastern Australian gas prices were modified by the year on year change of the world gas price.

  • "The graph shows the final form of gas prices used for new contracts in eastern Australia for the core policy case - a $20 tonne carbon price.
  • The variation in gas price between the carbon price scenarios was at most 15per cent, so these gas prices are fairly representative of the gas price profile for all scenarios".

LNG exports from Gladstone, Queensland forecast to raise domestic gas price

$6/GJ and $9/GJ for new base load contracts

This data covers SE and SW Australia: Gas prices in the Western Australia market - the WEM - are not widely published and are often confidential. The model assumed that prices range between $6/GJ and $9/GJ for new base load contracts.
Australian domestic gas prices in 2012 above world prices: To balance the data - not all forecasts come to pass. LNG parity for gas is on the wish list of the gas suppliers. They have promoted this idea of "LNG Parity" in all sorts of forums for the past 4 years.
Treasury views may reflect supplier bias: Existing contracts are at assumed contract price levels. The prices are assumed to change in line with the Treasury's forecasts of world energy prices. The Australian gas industry was keen for Australian domestic prices to match world prices; but prices were below world prices in 2012. This was due to the very high volume of coal seam gas, marketed on shorter term contacts to gas generators, the prime demand-driver for, gas in Australia.

Australia carbon price raises wholesale electricity price

The addition of the carbon price will change the electricity price. See futures curve.  As $17 billion on compensation is offered to to one single coal generator to exist, gas will replace coal here
The addition of the carbon price will change the electricity price. See futures curve. As $17 billion on compensation is offered to to one single coal generator to exist, gas will replace coal here | Source

Government to pay coal generation to close; this will raise domestic gas demand and price

Australia has set a low fixed carbon price until 2015; and after that Australian polluters may import overseas credits.
These will have a lower price. These low carbon prices will probably allow coal to fuel power stations for many years. Power stations which own coal mines - mine-mouth coal, will retain low prices. The Australian government was to pay coal power plants to close by 2016. Coal plant owners were to bid for the payouts. To succeed, a bid for closure had to show up in AEMO modeling as creating "no blackouts" in the region.
This suggests coal plant owners would rapidly plan new gas plant, funded by coal plant closure compensation. This would raise gas demand and price.
Based on a starting carbon price of $20/CO2-e from 2012; The carbon price was set to rise, in the model - at 4 per cent a year.

Australian Energy Market Operator (AEMO) report of forecast gas prices for the south east grid.

The Australian Energy Market Operator (AEMO) had commissioned a report of forecast gas prices for the south east grid.
Low domestic gas price for electricity generation: AEMO's advisors argued electricity investors could rely on low price gas for twenty years; and prices may trends lower due to lower costs of equity.
Moomba Hub proxy for generation gas price:
Electricity generation gas price scenarios commissioned by the Australian Energy Market Operator (AEMO) used the central Australia Moomba Hub as the proxy for electricity generation gas price. All scenarios gave a similar gas price curve for the coal seam gas which flows to Moomba from Queensland.
Same price for all runs:
The modelling showed little price sensitivity to the seven gas powered generation gas demand sensitivity runs.
The Moomba hub gas price varied only marginally between the 7 runs.
Reasons:

  1. large volume of (coal seam gas) reserves available; and
  2. moderate differences in supply costs between the reserve classes (characterised by 1P, 2P, 3P, contingent and exploration type reserves).
  3. In other words there was ample gas and the cost of supply is fairly constant over the known reserves;
  4. volumes of gas contained in these reserves are large compared to the difference in gas powered generation demand between all of the runs; and
  5. influence of LNG netback prices which were independent of the costs of production.


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Source

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