ACCC releases Gas Market Inquiry 2017 – 2025 Interim Report

Below is a summary of the key findings and recommendations drawn from the Gas Market Inquiry 2017 – 2025 Interim Report released on 17 August 2020 (Report). The Report focused on the effects on the east coast gas market that have arisen as a result of both the COVID-19 pandemic and the significant falls in oil and LNG prices. According to the Australian Competition and Consumer Commission (ACCC), these have been felt at all levels of the supply chain and highlighted the pressure points and areas of dysfunction present in the market.

Supply and demand outlook

• The east coast gas market experienced two major shocks in early 2020:
  • the COVID-19 pandemic, which is expected to affect both supply and demand for gas in 2020 and beyond; and
  • the collapse of oil and LNG prices, which has increased the supply risks for the gas market over the medium to longer term.

Despite uncertainties supply outlook in 2021 remains promising

• Supply is expected to meet forecast domestic and export demand in 2021, and is expected to be less tight. Compared to the forecast for 2020, east coast supply for 2021 is expected to be 16 PJ lower and demand 70 PJ lower.
• Queensland is expected to have sufficient gas to meet its needs in 2021, with LNG producers expecting to have 84 PJ of gas available in excess of their domestic and export commitments. Note that over 2017–2019 Queensland production grew by 11% from 1274 PJ to 1406 PJ.
• Significant uncertainty remains due to increased expected reliance on currently undeveloped 2P reserves in 2021. Development of these reserves will require significant investments which producers may be less able or willing to undertake in a low oil price environment.
• The capacity of LNG producers to seemingly increase domestic supplies to keep the east coast gas market supplied with sufficient gas may lead to broader competition and market power concerns.
• While gas production in the southern states is expected to meet domestic and export demand in 2021, this is subject to a significant proportion of undeveloped 2P reserves being developed and demand for LPG remaining at record low levels. Note that over 2017–2019 production in southern Australia fell 21% from 442 PJ to 349 PJ.

Positive developments in the east coast market

• Despite these increased risks, there have been some positive developments in the east coast market, which should increase supply over the longer term. These include:
  • the NSW and Commonwealth Governments’ Energy Package memorandum of understanding, which provides for the two Governments to develop options to increase NSW’s gas supply, and make improvements to infrastructure and energy efficiency projects;
  • the Victorian Government’s decision to lift its moratoria on onshore conventional natural gas exploration and development effective from 1 July 2021; and
  • the Queensland Government’s release of more acreage to promote domestic gas supply.

Domestic price outlook for 2020-2021

• LNG and oil prices fell by over 40% each between January and May 2020, in part due to COVID-19.
• From late 2019 to February 2020, there was a slight price decrease, with prices offered to domestic gas users ranging from $8–11GJ. The ACCC has seen evidence of prices offered in Queensland for 2020 falling below $7/GJ, and prices being offered in southern states between $7-8/GJ.
• While this was down slightly from the $9 to $12/GJ range observed earlier in 2019, the ACCC noted that this price decline did not correlate with the drop in LNG netback prices, which were for 2021 delivery within the range of $5.50-$6.50/GJ. In late 2019 and early 2020, Queensland LNG producers entered into arrangements to sell 18 spot cargoes into international markets at prices well below those observed in the domestic market, increasing the ACCC’s concerns about the level of competition in the domestic market.
• What’s more, average prices offered in Queensland for supply in both 2020 and 2021 remain above expected LNG netback prices with prices offered for 2021 supply in early 2020 more than $2/GJ higher than expected.

Prices agreed to under Gas Supply Agreements (GSAs) have also softened

• Prices agreed to under GSAs moderated slightly in late 2019 and early 2020:
  • In January 2020, average prices under GSAs had risen above $10/GJ for the first time. These average prices have since fallen below $10/GJ.
  • Average prices expected to be paid under producer GSAs in the southern states for supply in 2020 and 2021 have fallen below $8/GJ.
  • Average prices in recently executed retailer GSAs were lower than those entered into up to August 2019, with average GSA prices for 2020 supply below $10/GJ, and average prices in 2021 expected to be less than $10.50/GJ.

Prices in facilitated gas markets

• Prices in facilitated markets have also fallen significantly over late 2019 and early 2020:
  • Average prices in Queensland fell from $9.28/GJ in early 2019 to $5.17/GJ in early 2020, a decrease of 44%.
  • Average prices in the southern states fell from $10.07/GJ in early 2019 to $5.89/GJ in early 2020, a decrease of about 40%.

Commercial and industrial (C&I) user experience

• The COVID-19 pandemic has increased opportunities for some C&I users and decreased demand for other C&I users’ products, and heightened the risks they face generally, as well as the risks posed by take or pay obligations.
• Numerous C&I users have reported an easing of conditions in the gas market, as suppliers appear to be more receptive to requests for offer and price reductions over the last six months.
• C&I users raise concerns about the high gas prices, in particular, the impact this could have on their business, investment and the continual viability of their operations.
• The ACCC repeats earlier concerns about the lack of competition amongst producers and retailers, the imbalances in bargaining power and information asymmetries that C&I users face in negotiations and the impact of high take or pay obligations.

Transportation and storage

Transportation facility increases

• The prices paid by shippers for firm forward haul transportation services increased in line with inflation between July 2019 and January 2020.
• The key exceptions were the Tasmanian Gas Pipeline (TGP), the Moomba to Adelaide Pipeline System (MAPS) and the Port Campbell to Adelaide Pipeline (PCA). The minimum price paid by shippers on the TGP fell by 13%, the maximum prices paid by shippers on MAPS increased from $0.78/GJ to $0.89/GJ, and the PCA tariff increased from $0.86/GJ to $0.99/GJ. According to the ACCC, the elevated prices paid by shippers on both the MAPS and PCA is a cause for concern, as it indicates that competition between these pipelines is having minimal influence on the tariffs being charged.

Storage price increases

Between July 2019 and January 2020, the prices paid on the Dandenong storage facility increased in line with inflation, while the maximum price paid by users of the Iona storage facility increased by more than inflation.

Contract terms appear to be increasing

• There are indications that transportation contracts in the east coast gas market may be transitioning to longer contract terms.
• Between 15 March 2019 and 24 February 2020 a total of 41 new GTAs and price variations that included a firm forward haul service were entered into, with 13 for terms of three years or more, and 19 for terms of more than one year.
• While this is longer than the contract terms observed in the ACCC’s July 2019 interim report, it is much shorter than the 10 to 15 year terms that are usually required to underwrite a major expansion or development of a new pipeline.

Fully contracted facilities limiting access to capacity

• The northern and eastern haul pipelines have a reasonable amount of uncontracted capacity available between 1 May 2020 and 31 December 2021.
• A number of southern haul pipelines, however, have been fully contracted or are close to being fully contracted throughout this period. This includes the Wallumbilla compression facilities, which are fully contracted, limiting access to capacity on the South West Queensland Pipeline (SWQP) between Wallumbilla and Moomba. The southern haul capacity of the MAPS is also fully contracted. It is anticipated that this lack of uncontracted capacity could create issues in 2021 if producers in the southern states experience any delays or difficulties producing gas from undeveloped 2P reserves and more gas has to flow south.

Policy challenges

• Shortfall, particularly in the south, is a likely consequence of the significant decline in oil prices and the increased reliance that producers are placing on supplying gas from undeveloped reserves.
• The risk of a shortfall in the east coast gas market overall emphasises the relevance of the Heads of Agreement (HoA) the Commonwealth Government has entered into with LNG producers, which is due to expire at the end of 2020. However, the HoA is unlikely to adequately address the supply risks the east coast gas market faces, with further measures required.
• While a range of governments have announced measures to increase the domestic supply of gas, including the Victorian Government’s lifting of the moratorium on the exploration of onshore conventional gas reserves noted above, and the Victorian, Queensland and Commonwealth Governments’ decisions to release more acreage, such measures are likely to only lead to supply improvements in the long term. The variability surrounding oil and gas prices and their impacts on investment also contributes to the uncertainty that new supply will eventuate in time to avert the potential future gas shortfalls. Furthermore, due to the long lead times between identifying potential gas resources and such resources being developed, the variety of solutions to address future shortfalls will significantly narrow as we draw nearer to 2024.

Recommendations

Addressing price concerns and potential supply shortfalls

• The ACCC put forward the following recommendations:
  • Extension of the existig Commonwealth Government HoA with LNG exporters as well as strengthening the commitments in the HoA around the pricing of offers to domestic gas users in the HoA.
  • Governments to consider what further measures should be taken to support investment in the north-south transportation infrastructure and import terminals on the east coast.
• The ACCC continues to recommend the following:
  • Governments to pursue greater diversity of suppliers when releasing new acreage, as greater competition between suppliers is likely to decrease domestic gas prices.
  • Governments to use measures such as active tenement management to ensure producers bring gas to market in a timely manner and to prevent larger producers from ‘warehousing’ gas.
  • Where feasible, governments to coordinate the development of pipeline and storage infrastructure to avoid duplication and other inefficiencies, and to ensure infrastructure is operated on a third party access basis.

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