Gas producers Shell, Santos and Origin Energy score victory in price spat with users
Major gas producers including Shell and Santos have won a battle with large users who were calling for a mechanism to help lower east coast prices.
Big gas users have lost a long-running spat with producers over introducing a mechanism to lower domestic prices over a year after the Morrison government told the two sides to thrash out an industry-led code of conduct.
As part of its gas-fired recovery plan, the government in September 2020 told commercial and industrial customers to negotiate the code with suppliers amid ongoing complaints that gas prices were too high for manufacturers to keep their plants open. If they failed to agree a pact voluntarily, Canberra threatened to step in with a mandatory code.
Large users including Qenos and Incitec Pivot, Australia’s biggest commercial gas buyer, entered the talks agitating for a mechanism to regulate prices on the east coast. Orica complained manufacturers were paying a premium for the cost of export plants built by big Queensland LNG producers and demanded the competition regulator’s LNG netback formula — effectively the price of LNG shipped overseas less processing and shipping costs — should be amended.
But their high profile push gained little traction in the negotiations and no mechanism was included in the final code of conduct released on Wednesday, sources told The Australian.
It marks a major win for Australia’s large gas and LNG producers including Shell, Santos and Origin Energy, who dismissed calls for pricing mechanisms made by users, represented by the Australian Industry Group at the talks. Influential east coast gas producers including Beach Energy and Cooper Energy were also against the proposed mechanism.
Gas users said the code did not address their main concern over high prices.
The code “will not address the central concerns of gas users, which relate to the price driven loss of competitiveness that threatens the future of many facilities and the jobs and investment associated with them,” a joint statement from Ai Group, Chemistry Australia, the Energy Users’ Association of Australia and Manufacturing Australia said.
It “does not establish a process to help achieve an equitable gas reference price, and looks unlikely to have any impact on overall price outcomes in the market. As a voluntary code, this had the potential for inclusion, but was unable to be achieved.”
Big buyers have maintained they can’t find gas on a contracted basis for less than $8 to $10 a gigajoule, more than double historic levels, and underscored by Incitec’s recent move to close its Gibson Island manufacturing centre at the end of 2022 at a cost of 170 jobs, blaming high gas prices for the decision.
The Australian Production and Petroleum Exploration Association, which represented producers in the negotiations, said it did accommodate several requests from users but confirmed it did not budge on pricing.
“We were able to accommodate the vast majority of requests from customers while working within the Australian Government’s parameters for the Code which included that the Code should not regulate prices or contain anti-competitive provisions,“ Appea chief executive Andrew McConville said.
“We have also maintained a consistent approach with other voluntary Codes and – critically – ensuring the efficient operation of markets that will allow more gas to be developed for the very supply customers are seeking,” he said.
Federal Energy Minister Angus Taylor said the code will introduce standards governing conduct of the two sides in contract talks and also pricing principles with a reference to the ACCC’s LNG netback price series.
Good faith dealings will be promoted between suppliers and consumers while a dispute resolution process will be overseen by an independent arbiter and a regular review process of the code will be made by an independent reviewer.
“This code will help to level the playing field in the negotiation of gas supply agreements. Fortunately, Australian spot prices have remained 60 to 70 per cent below international prices, meaning Australian users have access to internationally competitive prices even in light of the energy crisis in Europe,” Mr Taylor said.
The competition regulator dealt a blow to domestic gas users in September by effectively reaffirming its “netback” pricing formula and declining to substitute it for a cheaper US benchmark.
Spot prices for gas have surged on the east coast in the last few months, mirroring tight Asian markets, although supplies on contract terms have only increased moderately.
Users’ frustration over gas prices had grown after a deal between Scott Morrison and big LNG exporters in January avoided formal price controls, which some big manufacturers had pushed for but were strenuously resisted by the LNG industry.
But producers argue those numbers reflect the hefty costs of exploration, production and delivery of supplies to users with the east coast now tied to international markets given the two effectively compete for supplies.
Andrew Liveris — architect of Scott Morrison’s energy blueprint to reboot manufacturing — was ridiculed for saying gas could be made available at $4GJ, which he later upgraded to $6GJ.
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