A natural resources consultancy company has released an overview of the dynamics shaping the gas market, looking into domestic gas demand and how gas flows are likely to impact price dynamics.
Wood Mackenzie’s Australia East Coast Gas Market Outlook 2018-2032 explores the pace and scale of transformation in the east Australian gas market.
Nicholas Browne, director and LNG research at Wood Mackenzie, said that the Queensland LNG export projects have shattered the east coast’s “cheap gas forever” mentality.
“We believe Australia’s domestic gas price is now inextricably linked to the global LNG price,” Mr Browne said.
With the introduction of the Australian Domestic Gas Security Mechanism (ADGSM) on 1 July 2017, the Federal Government has the power to restrict gas exports to ensure there is adequate gas supply to meet domestic demand. The ADGSM ceases on 1 January 2023, but it is possible that similar policies will be maintained.
“The Australian government has already indicated its unease with gas being purchased for export in competition with domestic market buyers. However, this competition between domestic buyers and the Asian markets for available gas is likely to continue,” Mr Browne said.
“The mature, conventional fields in Victoria, New South Wales and South Australia are declining. Given this, we believe extra gas will need to be diverted from LNG into the southern domestic markets from as early as 2025. Diversions could even be earlier than this to meet winter demand.
“The third-party gas purchased by Queensland’s LNG projects looks to be the most at risk of diversion, and, as such, the LNG projects are likely to come under pressure to reduce these purchases.”
According to Mr Browne, the ongoing call on Queensland gas for both export and the domestic market will keep the supply-demand balance in a precariously tight but supplied position through to 2028.
“Based on our supply forecast, from 2028 there is not enough gas to meet both LNG contracts and demand. More gas will need to be developed and commercialised, or LNG imported, to meet the needs of both the domestic market and to fulfil LNG contracts.
“However, no new easy and economical sources of supply are currently available to the market. While there is more than 13,000PJ of undeveloped gas resources in east Australia and the Northern Territory, this is either uneconomic to develop, unproven to be developed at scale, or stranded from existing infrastructure.
“On top of this, pipeline bottlenecks during winter will start to constrain the physical delivery of Queensland gas into the southern states from 2026. Unless additional pipeline capacity becomes available, LNG imports will be the only physical and commercial alternative to ensure security of supply, at least in winter,” Mr Browne said.
This shift in the east coast gas market will also see pricing mechanisms change. Wood Mackenzie expects Asian LNG netback pricing will form the basis of east Australian domestic gas prices, with Queensland emerging as the market’s marginal supply option.
“The reported price range for new gas contracts in Victoria, New South Wales and South Australia in 2019 is in the $A8.50 to $A11/GJ range,” Mr Browne said.
“We expect a price range will be maintained through our forecast due to different end markets, cost structures and differing interpretations and expectations of LNG netback pricing.
“While LNG spot prices may soften over the next three years, $US70-80 oil prices would keep LNG netbacks high and sustain contract prices at between $A8.50 and $A11.50/GJ.”
The Asian LNG market is expected to tighten from 2021, which could see domestic contract prices nudge up to between $A10.70 and $A12.70/GJ by 2025.
“From 2026, with more expensive gas from Queensland setting the marginal price and limited pipeline capacity to enable flows south, prices would rise further and LNG imports become economic, and effectively set a ceiling for gas prices in the winter,” Mr Browne added.
By 2030, in the absence of additional pipeline infrastructure, LNG could feasibly be imported in larger quantities and set the floor of the domestic price in the southern states.
Without further upstream developments and reduced upstream costs, prices could reach between $A14.30 and $A15.90/GJ by 2030 and continue to grow after that, depending on international oil prices.