This briefing paper provides an overview of wholesale and retail gas prices in
New South Wales and more broadly in the eastern Australian Market. The specific
causes of gas price movements over recent years are discussed, as are
consumption and supply forecasts.
Note that this paper does not deal with debates around the environmental and
social impacts of the gas industry.
This is the second of a series of companion briefing papers on utilities.
The first related to electricity; the next two deal with water and renewable
energy sources.
East Coast gas markets
The two predominant wholesale gas markets on the East Coast are the Declared
Wholesale Gas Market (DWGM) in Victoria; and the Short Term Trading Market
(STTM) which caters for the supply of gas into, or via, Adelaide, Brisbane or
Sydney.
A new voluntary gas trading exchange was developed in early 2014 by the
Australian Energy Market Operator (AEMO) in Wallumbilla, Queensland.
The primary purpose of these markets is to enable participants to trade gas
supply imbalances that arise on a day because their actual demand for gas
differs from their contracted supply. These markets may therefore be viewed as
a market-based balancing mechanism that overlays the bilateral contracting
arrangements. [2]
Wholesale gas prices
The capital-intensive nature of gas supply infrastructure, combined with a
desire for long-term supply certainty from major gas users, has meant that the
bilateral contract market has been the preferred vehicle to trade gas and
manage long-term risks.
Until approximately 2010 new gas contracts were available in eastern
Australia at price levels that had remained steady in real terms over the
previous decade or longer.
A significant proportion of the long-term gas contracts in the eastern
market have expired within the last five years, and more are due to expire in
the next five years. The competition for gas supply from Queensland liquefied
natural gas (LNG) developments creates an incentive for producers to seek to
rollover contracts at higher short run prices rather than renegotiate them at
long run prices. [3.1]
Gas spot prices (which respond in the short term to the balance of supply
capacity) trended higher between the end of 2010 (from around $2-3 per
gigajoule (GJ)) and mid-2013 (to around $6-7/GJ).
According to Jacobs SKM (2014), the upward trend in spot prices suggests
that the spot markets are signalling future increases in the value of gas.
While this may be the case, the signals have recently weakened, with spot
prices falling back to average contract price levels. [3.2]
In the short to medium term, eastern market gas prices will be significantly
influenced by the expansion of LNG exports out of Queensland, with the
connection to export markets projected to increase demand and result in a
convergence to the LNG netback price (which is the LNG sale price, less the
costs incurred in producing and transporting the LNG to the point of sale).
Despite the general expectation of a price rise in the short term, followed
by stabilisation in the medium to longer term, there is considerable
uncertainty in the outlook because of variability in key price drivers such as
oil prices, LNG export volumes and costs of gas production. [3.3]
Retail gas prices
At March 2014, the gas price index was highest for Adelaide (132.9) and
Melbourne (127.2), followed by Sydney (125.8), Brisbane (121.8) and Perth
(119.2). Perth has experienced the highest rate of growth in gas prices over
the last decade, with the index more than doubling since June 2004 at an
average quarterly rate of 2.2 per cent; compared to Sydney gas prices which
grew at an average quarterly rate of 1.6 per cent. [4]
The Independent Pricing and Regulatory Tribunal (IPART) is responsible for
regulating retail gas prices for around 28 per cent of residential and small
business customers in New South Wales. On 1 July 2014, IPART published the
latest review on regulated prices for 2014-15 and 2015-16 which determined that
average regulated retail gas prices can increase by up to 17.7 per cent across
NSW over the next 2 years. [4.1]
As at 30 June 2013, AGL Energy, Origin Energy and EnergyAustralia jointly
supplied over 85 per cent of small gas customers in eastern Australia and
account for around 95 per cent of such customers in New South Wales.
[4.2]
IPART (2014) concluded that the competiveness of the retail gas market in
NSW has continued to increase and suggested that the gas market is already
transitioning towards a largely deregulated market, where few customers remain
on regulated prices. [4.2.1]
Gas demand
New South Wales was the fourth highest consumer of natural gas in Australia
in 2012-13 at 162 petajoules (PJ). Growth in natural gas consumption has
remained relatively subdued in New South Wales, increasing by 13 per cent
between 2002-03 and 2012-13.
On a per capita basis, New South Wales is the
lowest consumer of natural gas (at 21.8 GJ/annum in 2012-13) when compared with
the other States and the Northern Territory. Western Australia had the highest
per capita consumption in 2012-13 at 289 GJ/annum. [5.1]
The manufacturing (50 per cent in 2012-13), electricity generation (25 per
cent) and residential (16 per cent) sectors account for the majority of gas
consumption in New South Wales; although consumption in the manufacturing
sector, in absolute terms and as a proportion of State consumption, has been
declining over the last decade. [5.2]
The influence of Queensland LNG developments on demand and supply conditions
in the eastern market is expected to be significant because of the scale of the
projects being developed which will demand around 1500 PJ annually; exceeding
the combined capacity of existing LNG projects in other Australian markets.
[5.4]
Eastern market annual gas demand is expected to increase from 745 PJ in 2014
to 2,182 PJ in 2033; at which point LNG exports are projected to account for 66
per cent of total annual gas demand.
Domestic demand (excluding LNG) is projected to grow slowly at approximately
0.9 per cent annually to approximately 750 PJ by 2033. On a State by State
basis, average annual demand growth between 2014 and 2033 is projected by the
AEMO to be highest in Tasmania (1.9 per cent), followed by Queensland (1.1 per
cent) and Victoria (1.0 per cent). Annual demand in NSW is projected to grow by
0.8 per cent over this period. [5.5]
Gas production
Natural gas production in Australia has grown at a relatively high annual
rate of 5.2 per cent over the last decade, increasing from 1,464 PJ in 2002-03
to 2,439 PJ in 2012-13. In absolute terms, production in New South Wales was
estimated at 6.2 PJ in 2012-13 (or 0.25 per cent of Australian production), a
decline of around 25 per cent since 2002-03.
Coal seam gas (CSG) developments in New South Wales have the potential to
supply more than half of current New South Wales domestic demand within the
next five years. The CSG industry is regulated by the Office of Coal Seam Gas
and the Environment Protection Authority; recent regulatory reforms, including
the Strategic Regional Land Use Policy, have slowed the expansion of the
industry in New South Wales. [6.1]
Australia’s gas has historically been sourced largely from the
Carnarvon, Cooper-Eromanga and Gippsland Basins. In recent years, production
from unconventional resources (i.e. coal seam gas or shale gas) in the
Surat-Bowen Basins and conventional (i.e. large underground chambers of trapped
gas) offshore resources in the Bonaparte Basin and the Otway Basin has grown
strongly.
In August 2013 Australia’s 2P gas reserves stood at around 141,000 PJ,
comprising 97,000 PJ of conventional natural gas and 44,000 PJ of CSG.
Eastern Australia contains 36 per cent of Australia’s gas reserves,
of which the majority are CSG reserves in the Surat−Bowen Basin. [6.2]
The eastern gas market is highly concentrated and characterised by a
relatively small number of players at each level of the supply chain. However,
the growth of the CSG and LNG industries has led to considerable new entry in
Queensland’s Surat−Bowen Basin over the past decade. The three
largest gas retailers, AGL, Origin and EnergyAustralia, all have commercial
interests in upstream reserves. [6.3]
The cost of new gas developments has increased in recent years, both
domestically and worldwide. A number of market analysts have developed
gas supply curves for the eastern market and a common characteristic is an
increase in production costs as the quantity of gas supplied increases. This
tends to occur because cheaper more accessible resources are the first to be
extracted, leaving behind progressively more expensive sources of supply.
[6.4]
Based on the analysis completed by the AEMO (2013), potential gas supply
shortfalls may occur in Queensland in 2019 if facilities currently dedicated to
domestic demand are prioritised to supply rising LNG export demand.
If production in Queensland and South Australia is prioritised for export,
there will be flow-on effects to New South Wales with potential daily
shortfalls of 50 to 100 TJ over winter peak demand days from 2018. BREE and the
Department of Industry (2014) recommended that unnecessary impediments to
supply be removed to overcome any potential shortfalls in the coming years.
[6.5]
Analysis by the AEMO (2013) indicates that sufficient reserves are likely to
be commercially viable to satisfy projected gas demand for at least the next 20
years. However, production and distribution capacity is the key source of
uncertainty going forward for the eastern gas market. [6.6]
Gas transmission and distribution
Gas pipelines provide a transportation link between upstream gas producers
and downstream energy customers.
Transmission pipelines enable gas to be transported under high pressure from
production facilities to either the entry point of the distribution system or
directly to users that are connected to the transmission pipeline. The
ownership of gas transmission pipelines is highly concentrated. APA Group, a
publicly listed company, has the most extensive portfolio of gas transmission
assets in Australia. [7.1]
The distribution pipeline network delivers gas from demand hubs to
industrial and residential customers and typically consists of high, medium and
low pressure pipelines. The major gas distribution networks in southern
and eastern Australia are privately owned by Envestra (which owns
networks in Victoria, South Australia, Queensland and the Northern Territory)
and Jemena (New South Wales). [7.2]
Investment in distribution networks in eastern Australia (including
investment to augment capacity) is forecast at around $2.7 billion in the
current access arrangement period (typically five years). [7.3]