Years of high gas prices ahead
AGL Energy says big gas users on the east coast face years of elevated prices.
AGL Energy says big gas users on the east coast face years of elevated prices, with the high cost of moving Queensland gas to southern states, expensive LNG imports and developing new domestic supplies locking in high tariffs for industrial buyers.
Australia’s biggest electricity generator — working to develop its own LNG import plant in Victoria’s Mornington Peninsula — says there are no quick fixes to reset the nation’s gas market despite Australia holding some of the world’s largest reserves of the fossil fuel. Instead, industrial and commercial users need to adapt to gas prices starting from $10 a gigajoule, which is roughly three times historic levels, AGL says.
“There just isn’t the availability of gas for the market and that’s having a consequential impact on price, both near and longer term,” AGL’s head of wholesale markets Richard Wrightson told The Australian ahead of Credit Suisse’s inaugural energy conference in Sydney today.
“There are no silver bullets to bring prices down. When you talk to a lot of the large industrials, they’re looking for the heady days of four or five years ago when they could buy gas for $4 a gigajoule or even less. But those days are truly gone. Prices are not coming down.”
Domestic gas prices have surged due to a wide range of factors, including Queensland’s LNG export plants, the growing cost of developing new gas fields, and onshore production restrictions in NSW, Victoria, South Australia and the Northern Territory.
Market forecasts show NSW, Victoria and South Australia will experience gas shortages on peak demand days from 2023, which big users fear may force heavy industry and local manufacturers to close their operations.
AGL — waiting on environmental approvals for its Crib Point LNG import plant in Victoria — said costs for developing new domestic energy supplies including unconventional coal-seam gas reserves remained high compared with international peers like the US.
While Australia’s east coast market is now tied to international LNG markets because of the Queensland export plants, Mr Wrightson pointed out that local users are yet to see a corresponding fall in Asian pricing translate to domestic prices.
He says that is partly due to the high costs of indigenous production.
“There is actually in the international markets right now a regional glut of gas but that’s not bringing lower prices to Australia because a lot of the upstream producers have costs actually higher than that. So it’s actually not flowing through to the Australian price,” Mr Wrightson said.
“The problem with the east coast is it’s always expensive to do things in Australia, particularly with coal-seam gas. It is the most expensive form of gas to get out of the ground. Despite us having a fairly large set of reserves up in Queensland, the actual raw cost compared to international gas is quite high.”
Lower-cost supplies of gas on Australia’s eastern seaboard have all but disappeared, Credit Suisse says.
“All the cheap gas is gone and we are left to choose between varying expensive options,” Credit Suisse analyst Saul Kavonic said ahead of the conference. “Lower LNG prices will bring down domestic gas prices, but we are still talking about pricing levels at which some manufacturing cannot sustain operations.”
Mr Kavonic said onshore drilling restrictions by state governments have set back new low-cost gas for years although Santos’ Narrabri project in NSW could provide moderately priced supplies if it proceeds in the next few years. AGL may have to pay elevated short-term prices to top up its gas portfolio if Crib Point faces delays receiving approvals, UBS argues. However, Mr Wrightson said the project still stacks up.
“We want to answer community concerns and hopefully we come out of it with a project that can bring gas to Victoria and help address some of the price and security concerns.”