Elephant in the room: the veiled role of gas markets/supply?

Historically, prior to the commencement of Queensland Liquified Natural Gas (LNG) exports in early 2015, gas markets in eastern Australia have been relatively stable. Conventional gas fields supplied large industrial users (LI), business/residential – mass market (MM) – load as well as gas-powered generators (GPG) at relatively low prices (~$3-4/GJ).

The development of LNG facilities in Queensland has seen contract and spot prices triple (see Figure 1) with some contract prices now well-above $11/GJ; even in southern states. As evident in Victoria, the Declared Wholesale Gas Market (DWGM) prices have been on an upward trend over the past five years with a clear shift in gradient since 2015. Given the dominance of pre-contracting in the market, these prices do not necessarily reflect those at which all traded volumes are settled. However, they are a good indication of price trends and movements with about 20% of volumes settling at the DWGM spot prices.

LNG exports (increased demand) explains only a part of this new normal for gas prices. Proved and probable reserves of conventional southern gas fields (predominantly in Victoria) have been in decline for some time. Without additional developments of southern reserves, the Gas Statement of Opportunities (GSOO) forecasts potential supply gaps in the south by 2024. This decline has also contributed to scarcity premiums being increasingly priced into contract and spot sales.

The sharp rise in gas prices is having varied impacts on different demand segments and customer groups. In Victoria, LI load in 2018 fell by 8% on 2014 (pre-LNG) levels with our analysis predicting a further drop this year (see Figure 1). This price elasticity observed in LI demand reflects the difficulty manufacturers experience in passing on their increased input costs to consumers.

However, the story is different for other segments of the Victorian gas market. In 2017, GPG demand reached its highest levels with around 34PJ consumed in the state for power generation. This is relatively unsurprising given the supply gap left in the National Electricity Market (NEM) by the rather sudden exit of Hazelwood – Victoria’s largest coal generator at the time – was partly filled by GPG in the state. Fast-forward to (post-Hazelwood) 2019 and that record is sharply in sight with 30PJ of gas already consumed by GPG in the state.

MM demand is more weather-driven (heating) – less so price-driven – with a recent cold snap resulting in Victoria breaking its 12-year daily demand record (new record: 1.3PJ).

Of all three customer types, large industrial users are most exposed to the ever-tightening balance of demand and supply. Unlike GPG who can price their increased costs through bids into the NEM, such pass-through of costs to customers for manufacturers may render their prices uncompetitive against other alternatives. However, given the price-setting role GPG plays in the NEM, cost pass-throughs are likely to result in higher electricity prices for consumers; will gas still play a key role in future coal closures as it did post-Hazelwood in 2017? This highlights the rather veiled part gas supply plays across the energy landscape in Australia.

Gas reserves in Victoria also contribute significantly to the security of energy supply in connecting states. On average, in the last six years, Victoria exported over 145PJ of gas to South Australia, NSW, and Tasmania; suggesting the tightening supply and demand balance in the state impacts all southern states.