PRESSURE ON: Gas produced at Shell's QGC facility helps supply the domestic market.
PRESSURE ON: Gas produced at Shell's QGC facility helps supply the domestic market. Murray WareGladstone

Gas market still suffers after Curtis Island LNG sacrifices

AUSTRALIA'S gas market is yet to adapt to changes caused by the $70billion development of three LNG sites at Curtis Island.

In the Australian Competition and Consumer Commission's second inquiry into gas supply arrangements, it said LNG producers had contracted 42 petajoules (PJ) of gas under long-term gas supply agreements to domestic buyers for 2018.

In the past six months, the three LNG producers at Curtis Island - Santos's GLNG, Origin Energy's Australia Pacific LNG and Shell's QGC - all sacrificed some of their exports to help provide more gas to Australian customers.

While the increased domestic supply has dampened worries of a shortfall next year, the gas market is still not operating as well as it could, with some buyers still paying more than they should for gas.

"Despite increased supply providing important short-term improvements in conditions, the market is still not operating as well as it could," ACCC Chairman Rod Sims said.

"Prices remain higher than they would be in a well-functioning and competitive market."

The ACCC said long-term issues had not been solved.

ACCC chairman Rod Sims. Picture Kym Smith
ACCC chairman Rod Sims. Picture Kym Smith

"While increases in gas prices from historically low levels were always likely, the effects of the transition have been exacerbated by a combination of ongoing market uncertainty about the supply-demand outlook, lower investment levels in exploration and development (affected by reduced oil prices and government policies) and infrastructure constraints," the report said.

Prices offered to large commercial and industrial (C&I) users have come down from a peak of $16/GJ in early 2017 to within an $8-12/GJ range since July 2017.

While many users were delaying signing contracts at the previous high prices, a number of contracts have now been agreed.

"Queensland's three LNG producers have delivered more gas into the domestic market, and prices have come down. Commercial and industrial users have also seen an increase in the number of competing offers from suppliers and a decrease in the prices they are being offered," Mr Sims said.

While there is now a lower likelihood of a supply shortfall in 2018 across the East Coast Gas Market overall, the southern states are still expected to continue using more gas than they produce.

This means that gas produced in Queensland will need to be sent to the southern states to meet the needs of gas users in those states.

"The gas shortfall in the southern states can add at least $2/GJ and possibly up to $4/GJ to the prices paid by gas consumers in these states," Mr Sims said.

"The various restrictions to onshore gas exploration do have consequences."

The $2-4/GJ for travel costs are on top of the exposure Gladstone's LNG producers have to the international LNG markets, which also put an upward pressure on prices.

"With the construction of the Queensland LNG facilities, domestic prices are now influenced by the higher and more volatile international LNG and oil prices," the report said.

"The current oversupply in the LNG market is keeping LNG spot prices relatively low by historical standards, so if these prices increase in the future, domestic gas prices are likely to increase further with them."

This is the second interim report of this inquiry, which will operate for three years, with a final report due in April 2020.