ACCC delivers setback for gas users in fight for price change
Big gas buyers have been dealt a blow after the competition regulator rejected their pleas for changes to east coast pricing.
Big gas buyers have been dealt a blow after the competition regulator rejected their pleas for changes to east coast pricing, the latest setback for local users who want changes to a benchmark linked between domestic and international markets.
The Australian Competition & Consumer Commission is reviewing its LNG netback formula — effectively the price of LNG shipped overseas less processing and shipping costs — which acts as a guide for prices Australian gas suppliers will snag for exporting gas and the level a domestic user will pay for supplies.
Australia’s east coast domestic gas price is now linked to international LNG prices and markets after Queensland’s three export projects started shipping local gas to customers in Asia in 2015 which effectively tied the two markets together.
Big users including Incitec Pivot boss Jeanne Johns want to establish prices with America’s Henry Hub model which traditionally tracks at low levels given the much bigger scale and abundance of gas in the US market.
However, the ACCC rebuffed the idea in a draft decision released on Thursday.
“Our review found that for LNG producers on the east coast, exporting to Asia remains the main alternative to supplying the domestic Australian market,” ACCC Commissioner Anna Brakey said.
“Therefore Asian LNG prices, linked to the Japan Korea marker or an oil index, are the most relevant benchmark for calculating LNG netback prices for the east coast gas market.”
“Some stakeholders recommend the ACCC use Henry Hub prices as a starting point for calculating LNG netback prices. We do not consider this to be appropriate. Henry Hub prices reflect the supply-demand fundamentals of the US domestic gas market and these prices currently have limited influence on Asian LNG pricing.”
Users had also called for the removal of an implicit cost premium built in to pay back the cost of the giant LNG export plants used to ship gas to Asian buyers which they say adds $2 to $3 a gigajoule to the price they pay for gas.
But the ACCC rejected the idea.
“Deducting the historical costs of building LNG plants is not appropriate as this is not something LNG producers would have regard to in the choice between selling uncontracted excess gas domestically and internationally,” Ms Brakey said.
The Energy Users’ Association of Australia, which represents big manufacturers, said it was disappointed by the ACCC’s decision on LNG costs arguing “domestic gas users will continue to foot the bill for LNG projects they have never been involved in, never benefited from and that are thousands of kilometres away from their operations.”
The ACCC will continue to publish historical and short-term forward LNG netback prices for up to two years and for up to five years based on an oil index.
“Domestic gas users are feeling let down by this decision as we feel the existing methodology continues to favour the seller in a market dominated by sellers,” said EUAA chief executive Andrew Richards.
Oil and gas industry body APPEA said the current mechanism accurately reflects the sizeable investment and commercial risk taken by producers to develop more gas resources on the east coast.
