Feb 172014

One of the hallmarks of an open and transparent gas market is that the laws of supply and demand pertaining to all pipeline gas supplies connected to the domestic gas market compete in real time to serve that gas demand. Such a model results in price volatility and survival of the fittest, as experienced for decades in North America. Eastern Australia has yet to experience true gas to gas competition and the benefits related thereto to all stakeholders including the upstream sector. Producers would benefit overall by the efficiencies received through competitive reductions in the full cycle, half cycle and operating costs associated with gas resource development.

Not long ago, remote mining projects and large industry such as BHP Steel purchased their gas supply on a delivered basis that was priced as a slight discount to oil or diesel as that was considered to be their alternative energy supply. Now that gas pipeline networks are more mature in eastern Australia and multiple gas supply options exist, the upstream sector is pushing export parity pricing to establish a ‘fair and reasonable’ gas price, arguing, among other things, that their costs are increasing and that the world oil market is a reliable and deep BTU market on which to price the value of domestic gas. They essentially wish to avoid gas to gas competition and set the prevailing ‘market price’ for all gas production to equal the netback price received from LNG sales to customers such as Japan. Of course what they are really saying is that now that oil prices are high, gas pricing linked to world oil prices is the way forward for eastern Australia’s domestic gas market. This is very self serving and strays from the fact that gas prices across the globe are diverging from oil as opposed to converging and that gas as a commodity does not compete with oil in most energy markets and most certainly not in eastern Australia. The LNG netback price received at Gladstone for the sale of LNG reflects the desperation of net energy importing countries such as Japan and is not representative of the value of pipeline gas supplies in a region such as eastern Australia that is awash in gas resources. To suggest that this is market forces working is an insult to one’s intelligence and to the laws of economics as they pertain to gas.

Gas and electricity are the two energy sources that do not participate in a world commodity market since neither ‘commodity’ can be easily transported or stored due to their unique properties. Consequently both are regional commodities and the prevailing price for either gas or electricity in a true open and competitive market is set hourly and daily by supply and demand in a well interconnected region. If and when an inter-state pipeline, an inter-state connector transmission line or LNG export facilities, such as Gladstone, are running at full capacity, the regional market at the end of such infrastructure becomes detached from the rest of eastern Australia and a large price differential will exist between those two markets. Unless the Gladstone LNG facilities were overbuilt (and that is very doubtful given their $60 billion cost) the market served by those facilities is irrelevant vis-a-vis the prevailing gas market price in eastern Australia.