Govt may underwrite Twiggy’s LNG import plant, says UBS

Canberra may look to step in and underwrite LNG imports as it weighs policy options to ease a supply crunch on the east coast, UBS says.

Andrew Forrest’s Port Kembla LNG import plant in NSW could receive support from the Albanese government, UBS said.

The federal government may underwrite Andrew ‘Twiggy’ Forrest’s proposed LNG import plant in NSW as it weighs policy options to ease a crunch in east coast gas markets, UBS said, with contract prices forecast to surge a third by 2025.

The billionaire‘s Port Kembla plant has struggled to attract customers to buy gas ahead of the facility being built and Canberra may look to step in given official forecasts of a gas shortfall in the winter of 2024.

“With global gas hub prices trading at record levels, we recognise the Commonwealth may consider underwriting the Port Kembla LNG import terminal (or others) with offtake over the next three years (or until a time when some price relief occurs in international spot LNG markets) to ensure the import terminal progresses as planned and avoids a gas supply shortage in the domestic market,” UBS analyst Tom Allen said.
“The Government could auction the LNG offtake cargoes to the industry at reduced prices, leaving the Commonwealth only funding the gap.”

Australia‘s richest man was previously handed a $30m grant from the Coalition for early works on a gas-fired power station at the same Port Kembla location.

UBS lifted its 2022 forecast for east coast contract gas prices by 14 per cent to $10.20 a gigajoule and expects a further jump by a third to $13.50 GJ by 2025 with new sources of gas supply remaining scarce or very expensive via imported LNG.

Anthony Albanese’s government may also look to fund support for new gas storage capacity such as Golden Beach in Gippsland Basin or the expansion of Lochard Energy‘s Iona facility.

Industry subsidies for large manufacturers through cash handouts could also be on the table to prevent plant shutdowns, while a super profits tax on oil and gas producers is seen as unlikely given that it would discourage bringing new supply into the market.

“There has been growing pressure, in our view, for the new Commonwealth Government to intervene in the east coast gas market to provide price relief to Australian consumers and businesses from elevated gas prices,” Mr Allen said.

Resources Minister Madeleine King has already said a scheme to reserve gas for use by east coast consumers or direct ­intervention to force more supply were options “on the table’’ as the government battles ­energy shortages that have driven a spike in electricity prices.

Making changes to the export gas trigger, known as the Australian Domestic Gas Security Mechanism (ADGSM), so that more gas can flow from the three Queensland LNG plants down to southern states may do little to boost supply given the single pipeline route – APA Group’s South West Queensland pipeline and the Moomba-Sydney pipeline – are already nearly fully contracted for the 2023 and 2024 winter periods.

“Changes to the ADGSM to bring additional gas to south-eastern demand centres during off-peak/ shoulder seasons is possible, but additional southern storage capacity is required,” Mr Allen said.
“Therefore a possible policy option might see Government providing funding support to accelerate development of new gas storage capacity.”

Ms King has previously said that the gas trigger, introduced by former Prime Minister Malcolm Turnbull’s government, could not be invoked until next year and was not a solution to the current crisis.

UBS lifted its Santos share price target to $9.90 from $9.70 and retained buy, raised Woodside to $32 from $31.80 at neutral and trimmed Viva Energy to $3 from $3.05, but retained a buy rating.

Origin‘s price target was lifted to $7.70 from $7.55 at buy, Beach Energy raised to $1.95 from $1.80 also rated buy while AGL Energy was cut to $8.35 from $8.50 with a neutral rating.