nsw, don't say you weren't warned, page-17

porker et al,

You guys are missing a major point that Gittens also completely missed. Actually there are two big points he missed.

First, Gittens is assuming an ideal distribution network like the one in the US - you just hook into the pipeline and you can buy or sell gas. The price is similar everywhere and the distribution is wide.

If that were the case here he would be right. But it's not.

All mainland states (and NT) except NSW are self-sufficient in gas. There is no pipeline from Qld to NSW, only from SA to NSW and Vic to NSW. The one from SA is from Moomba which is controlled by Santos.

On top of this you have the fact that gas in eastern Australia is subject to contracts which are at fixed (or roughly fixed) prices. This is another barrier to Gittens' ideal gas market assumption. These contracts have to be booked for several years.

Second, Gittens is assuming that the cost of gas will rise to the LNG netback price. This is only true if the three (or possibly four) plants are fully supplied with gas. At this stage that is far from guaranteed and Santos's GLNG in particular is looking increasingly desperate. The others may be short too, which means THEY may be looking to take gas from the Cooper (the only pipeline into Qld). And here's a key point - they won't only pay the Netback price, because they are subject to penalty rates if they fail to deliver contracted LNG cargoes that will likely be well in excess of the Netback price.

So they will pay any amount per GJ up to their penalty rate!

This means the only source of 'cheap' gas for NSW (using the term loosely) is going to be Victoria. But Victoria has to supply itself too, meaning that NSW gas buyers will be fighting to secure what they have leftover and uncontracted. This is likely IMO to lead to sharp gas price shock in NSW for a few years until Victorian gas producers ramp up production to meet the demand.

Gittens is right in the longer term, supply will eventually catch up to demand because we have plenty of gas. But NSW is vulnerable to sharp supply shock which could see prices rise well above the LNG Netback price. The problem is Gittens is looking at an idealised scenario and not looking at the intricacies of the real situation.

Qld could of course be vulnerable to this too if the state gov refuses to implement a reservation policy - but CSG already supplies almost all Qld's gas from dedicated, contracted domestic fields. So the gas for Qld is there and if price pressures threaten the gov can solve them instantly by instituting a small gas reservation policy.

NSW won't have that option because they will have no domestic gas production capability.