ACCC makes final decision in LNG netback price series review

On 30 September 2021, the Australian Competition and Consumer Commission (ACCC) announced that it had finalised its review of the liquefied natural gas (LNG) netback price series for the east coast gas market.  The ACCC is now consulting with stakeholders to implement its final decision.

The LNG netback price series

In 2018, the ACCC started publishing an “LNG network price series” on its website to improve the transparency of gas prices in the east coast gas market.[i]  The ACCC has defined the “LNG netback price” as:

“…the price, at Wallumbilla, that a gas supplier would expect to receive for gas if it was converted to LNG and exported. This is done by taking the price payable for LNG and subtracting or ‘netting back’ costs incurred between Wallumbilla and the location where the LNG would be delivered.” [ii]

In the ACCC’s view, the LNG netback price reflects the opportunity cost for LNG producers if they supply uncontracted gas into east coast markets instead of supplying that gas into international LNG markets.[iii] It is the price at which LNG producers can be expected to be indifferent about whether they supply internationally or domestically. [iv]  And it is a price below which LNG producers (including suppliers of gas to LNG producers) are unlikely to be prepared to supply gas into the domestic east coast gas market.[v]

According to the ACCC, the LNG netback price represents information that east coast gas market “…suppliers already have and which they use in their decision making around prices offered for and agreed in domestic supply contracts”. [vi]  By calculating and publishing the price, the ACCC aims to tackle the imbalance that exists in the bargaining positions of gas producers and users because users do not have that information. [vii]

The ACCC review process

In 2020, the Australian Government asked the ACCC to review the LNG netback price series as part of a range of measures that sought to increase gas supply, increase efficiencies in gas transportation, and improve the bargaining power of gas users in the east coast gas market.[viii]

Between March and August 2021, the ACCC published an issues paper, engaged in stakeholder meetings, published a draft decision, and conducted a second round of stakeholder consultation.[ix]  Key issues addressed by stakeholders included:

• “publication of forward netback prices using the Henry Hub [in the United States], in addition to [Japan Korea Marker (JKM)] and oil-linked markers;
• publication of long run netback prices (which would involve the deduction of capital costs) as well as short run prices;
• development of a non-LNG domestic gas producers netback price series; and
• reviewing the LNG netback price series prior to the expiry of the current Heads of Agreement LNG producers have with the Australian Government”.[x]

Final decision

The ACCC concluded that the publication of the “LNG netback price series will continue to help inform negotiations between commercial and industrial…gas users and gas producers in the east coast gas market.” [xi] It also decided that “publishing additional longer-term forward LNG netback prices will also help inform negotiations over longer-term domestic gas supply agreements…”.[xii]

The ACCC also pointed out that it did not seek “to set a ‘market price’ for gas or provide a ‘cost-plus’ benchmark to compare domestic prices against”.[xiii]

The ACCC’s final decision was to:

• “continue to publish historical and short-term forward LNG netback prices extending to 2 years based on JKM spot prices;
• publish longer-term forward LNG netback prices extending to 5 years based on an oil index;
• deduct only avoidable (marginal) export costs in calculating the LNG netback price series; and
• undertake another review of the LNG netback price series when market developments warrant doing so, or by no later than 2024.” [xiv]

Next steps

The ACCC is now in the process of implementing its decision, including:

• updating the cost assumptions that underpin its liquefaction and pipeline cost estimates; and
• beginning in 2022, the engagement of appropriate experts in relation to longer-term LNG freight cost estimates.[xv]

The ACCC has indicated that it will, over the remainder of 2021, commence further stakeholder consultation on the methodology for the longer-term forward LNG netback price.  That will include consultation on:

• the selection of an oil index;
• how to determine the appropriate percentage, or pricing “slope”,  that is to apply to oil prices to determine the LNG price;
• how often to update the slope; and
• transparency measures in relation to how the slope is worked out.[xvi]

The ACCC aims to start publishing the new long term LNG netback prices in 2022. [xvii]

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