AUSTRALIA'S east coast gas market -- which has delivered comparatively cheap gas to industry and domestic consumers in isolation from the rest of the world -- is heading for a huge shake-up that could see prices triple.
By one estimate from think tank the Grattan Institute, industrial consumers could end up paying an extra $1.4 billion annually while domestic gas bills in eastern states would also shoot higher, with Victoria worst affected with an annual increase of $160.
Add in the prospect of a short-term squeeze on NSW supplies in 2016 -- as the manoeuvring by those who produce gas and those who contract to buy it unfolds due to the move to a higher gas price -- and the price picture worsens.
There are two driving forces behind the move from comparatively cheap gas to what could become among the most expensive in the developed world among countries with the own abundant indigenous gas reserves.
The first force takes shape next year, when the first of Queensland's $70bn in LNG export projects -- BG's $20bn QCLNG project at Gladstone's Curtis island -- begins sucking up gas at a rate that will dwarf all other consumers in the east coast market. It will be followed by two equally big projects in following years.
In all, the three projects will consume three times as much gas as the domestic market alone.
The LNG projects are all about capturing prices that are up to three times as much as gas in the domestic market (about $12 a gigajoule before processing and shipping costs, versus $4).
As the projects are largely based on converting immense but previously unused coal-seam gas reserves in Queensland into export dollars, the resultant investment boom should be cause for national celebration.
But the start to the Queensland projects comes with some serious fallout because after decades of isolation the east coast gas market will now be tied to the global gas market. And in this part of the world, that means higher prices.
There is broad agreement that the relatively low east coast (average wholesale) price of $4 will rise. How much higher is uncertain, but the trend is not.
Energy fellow at the Grattan Institute, Lucy Carter, told The Weekend Australian: "The real challenge with gas prices is that you can have a scenario where there can be a $12 price.
"But there could also be a scenario where there is a $6 or $7 gas price. And both of those would be reasonable. So there is huge uncertainty about where the gas price is going."
The linking of the east coast market to the higher-priced Asian market through the Queensland projects had made sure of that, she said. The future gas price was "now dependent on everything from what the Japanese government decides to do about recommissioning nuclear power stations, through to the extent to which the US government moves forward on allowing gas exports to Asia".
'If there is a massive drop-off in Japanese demand because their nuclear power gets going again, or if the US massively ramps up exports, you will get a drop in the world price," Ms Carter said.
However, higher prices would prevail if the reverse were to come to pass.
Unlike ever before, domestic gas prices will be at the whim of international circumstances, to a degree anyway.
The other force behind the coming gas price crunch is purely a local issue: the cost of getting gas out of the ground.
"The wellhead price is going up because a lot of the cheap stuff has been produced and because unconventional gas (coal-seam gas and shale) costs more to get out of the ground," Ms Carter said.
"Because of those two underlying price drivers (Queensland LNG and costs) gas is unlikely to get back to $3 or $4 as a long-term measure."
Cost pressures on the wellhead price of gas also underpin a prediction by energy consultancy and analysis firm Energy Quest that the current average price of $4 ($5-$6 in short-term contracts) will at least be replaced by a floor price of about $5-$7.
That is the price the industry will need to invest in new production.
EnergyQuest chief executive Graeme Bethune said that meeting the massive demand from the Queensland LNG projects was one thing, "but on costs alone, the increase to $5-$7 is needed".
And he warned that gas price spikes could be a feature of the east coast markets as the three Queensland LNG projects began their ramp-up to full production.
"Once the LNG projects get switched on next year, prices in Queensland could spike to $12 on the assumption that they need to buy additional domestic gas as they are getting their plants up to full speed," Dr Bethune said.
"The dynamic there is what it would cost them to buy (higher priced) spot cargoes versus domestic gas."
In the same scenario, prices in Victoria could quickly reach $8. The Sydney market would have to accept $9 prices, and Adelaide prices could touch $10, according to EnergyQuest analysis.
"In the longer term, when the LNG projects are able to operate at full capacity, we expect domestic gas prices to settle into an $8-$10 range, depending on location, but with a floor set by production costs," EnergyQuest said in its August energy market report.
Industrial gas users, who account for about 40 per cent of the nation's usage and will face the full brunt of the increases, are worried.
BlueScope chief Paul O'Malley said a lack of gas policy combined with the LNG industry overestimating the amount of gas that was available was bad news for gas users.
"Australia is the only country in the world that exports gas without having a national gas policy, and understanding how gas is positive for value-added industries as well as for export," Mr O'Malley told The Australian last month.
"I think there is a problem, and quite frankly I think there's a train wreck coming."
Mr O'Malley has stopped short of calling for a gas reservation policy, which Incitec Pivot boss James Fazzino and Dow Chemical head Andrew Liveris have urged.
But he said it should at least be investigated.
The producers and many others argue that reserving gas for domestic use will discourage development and that higher prices are needed to justify the cost of unlocking the gas resources needed for either export or domestic use.
There is also a view that the buyers are in this situation because they refused to lock in contracts earlier, when producers wanted support for the development of higher-cost gasfields.
Instead, buyers banked on a gas glut -- first, from a Papua New Guinea to Australia pipeline (which became the aborted PNG LNG project), and then from an expected abundance of gas during the ramp up phase of the Queensland projects.
The perceived abundance turned into a shortage because drilling was slower than expected because of weather, community and regulatory factors, and because producers learned how to trap the gas for later use once wells had been drilled. Beach Energy managing director Reg Nelson said the supply and price crunch had been visible for a while, and had buyers read the market better, they may have been prepared to invest earlier in more gas supply.
"It seems to have happened all of a sudden, but it has been a long time in the making," Mr Nelson said.
Coal-seam gas moratoriums in NSW and Victoria have made supply from the nation's untapped shale gas more important.
"Timing is critical, you are looking at 2017 when NSW runs out of gas," Mr Nelson said.
When Santos and Origin first started talking about what east coast prices would rise to when the export plants started, they suggested $6-$9.
Prices are already approaching that level.
"Gas prices are already above $7 for any medium-term volumes," JCP Investment Partners head of resources research Peter Harris said.
"A recent transaction with a Victorian retailer was at $7, and the further north you go, the higher the gas price.
"Given the prices that Santos expected to occur in 2016 are already the new norm, we believe spot prices could briefly spike over $10 in 2016-17."
JCP has been buying more Santos shares because of the company's exposure to higher gas prices and because of its ownership of the Moomba gas plant in the northwest of South Australia.
"To get your gas to Queensland, you have to go through Moomba, and therefore pay Santos," Mr Harris said.
In the Cooper, which has been producing gas through the Moomba plant since the 1960s, Santos, Beach and other players are developing new conventional gas sources and trying to prove unconventional gas sources such as shale and tight sands can be commercially viable.
This does not appear to have dampened the pressure that he only major east coast supplier with any spare capacity -- the Gippsland Basin joint venture in Bass Strait owned by Exxon Mobil and BHP Billiton -- is putting on buyers.
"BHP and Exxon are open for business but the starting price is $10 a gigajoule," Mr Harris said.
BHP and Exxon, which say gas buyers and sellers have been asking the highest prices for long-term supplies, this month signed a $3bn gas contract with Origin for the equivalent of a third of NSW demand over the next decade.
The deal was a timely message -- given NSW during the week had an energy summit organised to discuss its gas shortage and moratorium on CSG in sensitive areas -- that additional supplies for NSW could come from Bass Strait. That has become an issue in itself for Victoria, with former Howard government federal defence minister Peter Reith in charge of a study into whether the fully supplied state should nevertheless increase its options to keep prices in check by chasing its unconventional gas potential, among other things.
The Bass Strait partners have been coy on exactly how much spare gas they will have when their $4.4bn Kipper-Tuna-Turrum development starts producing gas in coming years, but are saying they can supply more if the price is right.
Analysts believe the Origin deal was done at about $5.50-$7 for current gas and will rise as it becomes linked to the oil price, at an undisclosed point in the future. The fact that it will eventually be linked to the oil price is a clear indication that after decades of isolation, the eastern gas market is now inextricably tied to the global market for oil and gas.
- See more at: http://www.theaustralian.com.au/business/mining-energy/east-coast-gas-prices-set-to-triple/story-e6frg9df-1226728846266#sthash.ojnX81Mg.dpuf
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