Incitec Pivot urges price mechanism for gas
One of Australia’s biggest gas users has strengthened its call for a pricing mechanism to be introduced as part of a code of conduct for the industry.
One of Australia’s biggest gas users has strengthened its call 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 is among high-profile manufacturers including Orica and Qenos who say they can’t find gas on a contracted basis for less than $8 to $10 a gigajoule, more than double historic levels.
Their frustration over gas prices has 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.
It’s also upped the ante for a voluntary code of conduct being negotiated between users and producers, with the federal government to consider stepping in and enforcing a mandatory code if a pact is not agreed.
“The code needs a pricing methodology that ensures fairness to local gas consumers through the principle that the profit per gigajoule of gas sold domestically does not exceed that achieved by selling to overseas customers,” Incitec Pivot chief executive Jeanne Johns writes in today’s edition of The Australian.
“A domestic gas reference price is not about dictating a price, setting a floor, or a cap. As it implies, it would rise and fall with international gas markets.”
The federal government said there had been progress by gas users and producers in negotiating and drafting a voluntary industry-led code.
“The government will continue to assess progress over the coming weeks and expects all sides to continue to negotiate in good faith and in a timely manner,” a spokesman for Energy Minister Angus Taylor said.
The Australian Petroleum Production and Exploration Association, known as Appea, has been in talks with users on behalf of producers and recently received feedback from the competition regulator on a draft code, suggesting it would present a potential pact in the next few weeks. Still, the two sides appear some way apart on agreeing any price-setting code. Appea on Sunday said it was working with companies, the government and the Australian Competition & Consumer Commission and was committed to the process.
The ACCC also announced a separate review of the pricing benchmark in February. The ACCC’s LNG netback formula — effectively the price of LNG shipped overseas less processing and shipping costs — needs to be changed, according to Incitec.
“The key will be transitioning the ACCC gas price series from a fortnightly calculation to a 24/7 market-based outcome clearly linked to international price trends,” Ms Johns said. “This would allow market buyers, users and traders to develop short and long-dated trading and hedging products as is normal throughout much of the rest of the world.”
Utilising the US Henry Hub mechanism would be an effective marker for Australia, Incitec said.
“The Australian market needs its own domestic gas marker aligned to existing global gas reference pricing, the most effective of which is Henry Hub, in Louisiana, USA. Of course, the calculation needs to make the appropriate adjustments to translate this into the equivalent Australian price by accounting for LNG shipping costs and other local LNG capital and gas pipeline delivery costs.
“Using a Henry Hub-based pricing will ensure Australia competes based on international pricing, both in natural gas production and Australian manufacturing. Australia’s gas industry has nothing to fear from a local gas price better aligned to global price trends. The globally integrated LNG producers already use the Henry Hub to trade and balance their portfolios, much like many airlines buy, trade and hedge jet fuel against another US reference price, the West Texas Intermediate oil price.”
Gas prices on Australia’s east coast will increase beyond $10GJ by the late 2020s as LNG imports become the marginal supplier to the market, consultancy WoodMackenzie predicts.
Prices dropped from $8-$14GJ in the second half of 2019 to $6-$8GJ according to the ACCC but are set to lift further as southern market prices become increasingly linked to Asian LNG markets.
The east coast gas shortfall predicted for 2024 by the Australian Energy Market Operator has eased, but the market will still experience seasonal gas shortages.
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