BHP push for gas price transparency
BHP wants independent domestic gas index and use of the spot market, amid standoff between producers and users over prices.
BHP has called for the energy industry to back an independent domestic gas index and boost use of the spot market to help lift transparency, amid a stand-off between producers and users over gas prices.
BHP — which led a push switching iron ore to spot pricing from annual benchmark negotiations a decade ago — said Australia’s domestic gas market needs a circuit breaker to resolve ongoing tensions over term contract transparency in the market.
“BHP is committed to supporting the evolution of markets and has a distinguished track record, most notably the global iron ore and coal markets where BHP was a key participant in generating market liquidity and transparency,” BHP’s Australian head of energy Sam Bartholomaeus told the Australian Domestic Gas Outlook conference this week.
“Australian domestic gas markets have traditionally been characterised as opaque and illiquid – this structure has often encouraged regulatory intervention to solve market conflict. We believe the true dynamics of the East Coast market are best reflected by an independent domestic gas index.”
Several of Australia’s biggest gas users have called for a pricing mechanism to be introduced as part of a code of conduct being hammered out within the industry, as it fights for affordable domestic prices.
Incitec Pivot wants a fairer pricing methodology that ensures the profit per gigajoule of gas sold domestically does not exceed that achieved by selling to overseas customers.
The resources giant has been working with market provider Argus to stimulate industry interest in the resurrection of the Victoria and Wallumbilla index or even creating a new benchmark to boost transparency.
“BHP is open to price report and transact term volumes off a credible domestic gas index – we welcome other industry participants to join us in this pursuit,” Mr Bartholomaeus said.
Energy giant Shell said it was cautious in relying on one solution to improve price transparency.
“Transparency can come in many forms: hubs, codes of conduct and we support putting those in place,” Shell Australia chairman Tony Nunan said during a media call on Thursday.
“I’m hesitant to say there’s one single solution. We need to work a lot more on increasing supply and investment and making sure producers see line of sight to reasonable returns. Likewise, we have got to have more competition and ensure there is more transparency.”
BHP is Australia’s largest producer of natural gas from its assets spanning Western Australia through Victoria and currently accounts for about a third of demand on the east coast alone.
It has been running an Australian trading unit for several years overseeing its gas, electricity and carbon emissions management as it pushes to assert greater control over its role as both a major energy consumer and producer following several years of market volatility.
Frustration over the lack of visibility on term contract prices has also been a bugbear among users, although work by the competition regulator has provided some added detail in recent times.
“Term contract price transparency is low in our domestic markets, this has led to tension between market participants and invited regulators to step in to extract information which impacts market productivity,” Mr Bartholomaeus said.
“With no domestic gas index, the market has traditionally relied on fixed price and oil indexed formulas. With increasing connection to global gas markets various forms of LNG indexation are also emerging.
“However, there are shortfalls with these approaches with unique global events or contrasting seasonal dynamics that may distort the actual supply and demand fundamentals of that day for Eastern Australia gas market participants.”