Domestic buyers punt on cheap gas and lose by: Matt Chambers and...

Domestic buyers punt on cheap gas and lose

by: Matt Chambers and Sid Maher
From: The Australian
January 22, 2013 12:00AM

COAL seam gas producers say growing calls for gas-reservation policies are the result of punts gone wrong by domestic users who failed to lock in long-term contracts because they thought prices would fall.

Former Arrow Energy chief Shaun Scott told The Australian the company could not get the support of domestic gas users in the early years of Queensland CSG production, so LNG was pursued instead.

Santos' head of eastern Australia operations, James Baulderstone, said that in the past five years domestic gas users had been unwilling to lock in long-term contracts because they bet there would be excess CSG in the early years of the Gladstone LNG projects.

Calls for east coast reservation policies - to set aside an amount of gas production for domestic users - come amid a looming shortage of gas caused by the start-up of CSG export plants at Gladstone over the next three years. This will triple east coast gas demand and send prices beyond 2015 as high as $9 a gigajoule - three times current prices.

Mr Scott said early CSG players tried to get long-term sales contracts at $3 a gigajoule to create a viable domestic gas market. "Nearly all of them turned us down, in many cases arguing that there was so much gas they would just wait and get it cheaper," he said.

"Ultimately we saw that the only way to create a viable industry was to link into the big markets of Asia via LNG, which is what we did."

Expectations of cheaper gas were at the time driven by a now-abandoned plan to pipe gas from Papua New Guinea.

Mr Baulderstone said domestic buyers had been holding off in expectation of surplus gas as the LNG projects ramped up. "The majority of domestic customers in the past five years have not wanted to contract long term because they either believed the PNG pipeline would come in or the ramp gas from the LNG projects would mean there was a flood of cheap gas in the market," he said.

"Neither of those have proven correct and that means some parties have been caught short."

Both the gas industry and Resources Minister Martin Ferguson have rejected reserving gas for domestic users.

Australian Petroleum Production and Exploration Association chief executive David Byers said that while domestic gas reservation may sound a plausible argument it was "a highly dangerous, short-sighted and self-interested one".

Mr Ferguson said the best way of getting gas resources out of the ground was through market-based pricing that drove new production. But it was incumbent on the gas industry to maintain a balanced supply for the domestic and export markets.

http://www.theaustralian.com.au/national-affairs/domestic-buyers-punt-on-cheap-gas-and-lose/story-fnaxx2sv-1226558546448