What’s Oil got to do with it?

The Queensland State Government increased the petroleum royalty rate by 2.5% to 12.5% in the 2019/2020 budget, claiming that it will increase revenue by $467 million over the four years ending 2022/2023. The increase received condemnation from LNG producers and their investors. In the announcement, Queensland Treasury drew comparison to royalties in the USA and Canada. The resources sector at large has claimed that the higher tariffs put future investment and jobs at risk.

AGL announced during the week that it anticipates first gas to be delivered from its proposed LNG import terminal in the second half of FY22. Originally, AGL indicated that gas would be delivered during FY21, however it is understood that environmental requirements as set by the Victorian Government have caused delays. AGL announced that the floating storage vessel, Hoegh Esperanza would be utilised for the job. It is estimated that the LNG import terminal will be able to send between 80-100TJ/gas per day.

Hydrogen

The COAG Energy Council Hydrogen Working Group has released 9 issues papers which are to help develop the National Hydrogen Strategy. The nine papers released are:

1. Hydrogen at scale
2. Attracting hydrogen investment
3. Developing a hydrogen export industry
4. Guarantees of origin
5. Understanding community concerns for safety and the environment
6. Hydrogen in the gas network
7. Hydrogen to support the electricity systems
8. Hydrogen for transport
9. Hydrogen for industrial users

The hydrogen strategy revolves around producing hydrogen from renewable energy sources to create “clean” hydrogen. Australia has recognised its competitive advantage in producing clean hydrogen due to the solar and wind (renewable electricity required in production of clean hydrogen) resources. The market for hydrogen is currently small relative to other energy sources such as gas and coal however with increasing appetite for low emissions fuel it is anticipated that this will grow. The potential size of the market is unknown. Unsurprisingly parties that stand to benefit from hydrogen becoming a more widely used fuel source anticipate huge growth whereas the more moderate are generally in a wait and see phase.

Currently cost of producing hydrogen remains high and makes the fuel uncompetitive as well as having no commercial scale shipping capacity. Hydrogen production costs for different technology options according to the International Energy Agency are summarised below:

Source: International Energy Agency. “The Future of Hydrogen, seizing today’s opportunities” June 2019 p.g. 52

It cannot be understated how substantial the task is to deliver on the COAG Energy Councils vision of Australia becoming a major clean hydrogen player. The table below provides a high-level timetable for actions to 2030 as prescribed by the COAG Energy Council.

Gas Powered Generation

Gas powered electricity generation has been, is, and will continue to be critical to ensuring reliable electricity supply in the NEM. Recently, gas has started to become displaced by new renewable generation in the NEM. Gas however remains critical at times of tight supply and demand balance. The graph below summarises the daily gas used for gas powered generation (Source Australian Energy Regulator) dating back to Q308.

Source: AER

On aggregate we can see that gas generation reached its minimum level since Q308 in Q418. This is primarily driven by new renewable generation in the form of wind and solar. Queensland gas demand has declined after Q414 on the back of Swanbank E mothballing. We also note the rise in SA which corresponds with the closure of Northern coal power station in SA. As the energy market continues to transition to intermittent renewable fuel sources and a 5-minute market, there is interest in adapting existing gas power stations to be able to respond more quickly.

Regional analysis

Brisbane

Gas prices in the Brisbane STTM were marginally higher in Q219 relative to Q218, averaging $8.72/GJ. There was no material change in volumes traded through the STTM.

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(Source: AEMO)

Sydney

Sydney Q219 average STTM price was $9.79/GJ, which was $1.26/GJ higher than the Q218 average price. Prices during Q219 were highest at the beginning of the month.

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(Source: AEMO)

Adelaide

Adelaide Q219 average STTM price was $10.45/GJ which was $2.29/GJ higher than the Q218 average price. Sustained higher prices as well as a spike during June contributed to the higher average price.

(Source: AEMO)

Victoria

Victoria Q219 average gas price was $9.54/GJ which was $1.36/GJ higher than the Q218 average price. Prices were higher earlier in the quarter then converged in May. In late June gas prices softened, potentially on the back of less demand from electricity generators due to high wind.

(Source: AEMO)

If you would like to know more about what is happening in the gas market and how your business may be affected, please call Edge on 07 3905 9220.

For a growing number of large energy consumers, consideration is turning to whether entering standard vanilla retail gas agreements deliver the most effective outcome. For consumers who are located within the bounds of the Sydney, Brisbane or Adelaide Short Term Trading Market (STTM) markets, many may not be aware that there is an alternative way to purchase gas. Below, we consider how the STTM works and what the benefits are of exploring this option.

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What is the STTM

The STTM is essentially a market for the trading of natural gas at a wholesale level at defined hubs between pipelines and distribution systems. The STTM is a day-ahead gas market operated by the Australian Energy Market Operator (AEMO) with hubs located in Sydney, Adelaide and Brisbane. This means that gas is traded a day ahead of the actual gas day. The market settles daily with “shippers” delivering gas and “users” consuming gas. An organisation may sell gas as a shipper and purchase gas as a user through the same STTM, however, it would do so at the daily market price.

Source: “Overview of the STTM for Natural Gas”, AEMO, page 1

Market participants are incentivised to ship and consume volumes of gas nominated through a pricing mechanism, which aims to keep the gas supply system balanced. Organisations are able to sell excess gas to its requirements on the open market the next day, as well as bid to purchase extra gas as and when required. This system allows participants more flexibility and choice in purchasing gas supplies. Furthermore, the STTM’s price transparency ensures that the price set by the market daily truly reflects the current supply and demand situation.

Each of the STTM hub settles independently of the other, however each hub operates under the same rules outlined by AEMO.

For further operational details of the STTM, AEMO has provided an “Overview of the STTM for Natural Gas” (Link: https://www.aemo.com.au/media/Files/Other/STTM/1130-0679%20pdf.pdf).

Benefits of participating in the STTM

There are a range of drivers for some large gas consumers transitioning to purchasing and selling gas in the STTM. The main reasons are:

• The STTM is an historically lower commodity cost;
• Consumers can manage or avoid penalties under daily, monthly, and / or annual take or pay positions;
• There is increased flexibility for both sellers and consumers; and
• There are no long-term commitments.

These benefits can materially lower the cost of consuming gas. Depending on the nature of the organisation, there are a range of structures to access an STTM. Each structure requires varying levels of engagement from the consumer.

Engagement with Edge

To assist in transitioning your organisation to accessing the STTM, Edge are able to offer the following services:

• Daily nominations and trading;
• Monthly reconciliation;
• Facilitation of short and long-term Gas Supply Agreements; and
• Managing the STTM application.

Entering the STTM market is strategic decision for most organisations and can take anywhere between 3-12 months to transition. If you would like to know more, please contact us to understand if accessing the STTM market is the right decision for your organisation.

We note that there are also alternatives for consumers who are not within the STTM limits, however these options are not discussed for the purposes of this article. If you would like further information on your options, please contact your Manager Wholesale Clients or Edge on (07) 3905 9220.

Capacity Trading

As of 1 March, the new Capacity Trading Platform (CTP) and Day Ahead Auction (DAA) came online. This market arose after the Council of Australian Governments (COAG) Energy Council agreed to implement the legal and regulatory framework required to give effect to the capacity trading reform package, as recommended by the Australian Energy Market Commission (AEMC) as part of its Easter Australian Wholesale Gas Market and Pipelines Framework Review.

The reforms apply to the operators of transmission pipelines and compression facilities operating under the contract carriage model (collectively referred to as “transportation services”). The objective of the reforms is to encourage and facilitate trading of unutilised capacity on non-exempt transportation facilities. This is achieved by providing shippers with an incentive to trade spare capacity on a secondary capacity market (the CTP). If a shipper fails to sell any spare capacity prior to the nomination cut-off time, then its contracted but unnominated (CBU) capacity is then offered to other participants in an auction conducted a day ahead of the gas day (the DAA). In contrast to trades conducted by shippers prior to nomination cut-off time, the proceeds from the auction are retained by the service provider, which incentivises shippers to sell their spare capacity ahead of nomination cut-off time. (AEMO, Pipeline Capacity Trading: Overview, 2018).

According to the Australian Energy Regulator (AER) in the first two weeks of the DAA, 1.87 PJ of capacity was bought across multiple pipelines and compressors (Australian Energy Regulator, Gas Market Report, March 2019).

C&I Gas pricing

C&I gas contracts continues to be an opaque market. Contract prices have softened since the peak in 2016, however remain high and continue to put businesses under strain who are challenged with either absorbing higher costs or passing these onto customers.

AEMO recently released their Gas Statement Of Opportunity which reinforced the situation that domestic gas supply and demand balance is tight. AEMO highlighted that:

“Supply from existing and committed gas developments is forecast to provide adequate supply to meet gas demands until 2023. However, risks remain that any weather-driven variances in consumption or electricity market activity could increase gas demand, creating potential peak-day shortages as outlined in AEMO’s 2019 Victorian Gas Planning Report”.

Weather driven variances in consumption were observed in late January this year when the Cumulative Price Threshold was met and the Administered Price was activated VIC and SA. This highlight from AEMO is generally concerning as it suggests that there is unlikely to be any reprieve in gas prices in the near to medium term.

Recently, pricing for C&I customers has been observed between $11.00/GJ and $14.00/GJ subject to terms and conditions. Customers are increasingly looking at taking on more responsibility for their consumption in an effort to bring down the commodity price.

Gas Powered Generation

Gas powered generation in Q119 was 4% higher than Q118 with less generation from hydro, black coal and brown coal. There was a material increase in generation from solar and wind resources which was to be expected.

Average prices in the STTM hubs and the VIC gas market all increased in Q119 relative to Q118. Volumes were lower in the STTM markets, whereas the volumes increased through the VIC market. Gas fired generation in VIC averaged 75TJ/day in Q119, which was 23TJ/day higher than Q118. Less generation from brown coal and hydro generators was the primary driver behind this.

Regional analysis

Brisbane

Brisbane STTM gas prices were higher in Q119 relative to Q118. Prices were consistently higher and generally followed a similar pricing trend. Volumes exchanged through the STTM were marginally higher in Q118 relative to Q119.

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Sydney

Sydney STTM gas prices were higher in Q119 relative to Q118 with a divergence in prices in the final week of the month. Volumes exchanged through the STTM were very marginally higher in Q118 relative to Q119.

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Adelaide

Adelaide STTM gas prices were higher in Q119 relative to Q118. Q119 prices were consistently above that of Q118, with the exception of a few days at the beginning of February. Volumes exchanged through the STTM were very marginally higher in Q118 relative to Q119.

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Victoria

VIC gas prices were higher in Q119 relative to Q118 with prices diverging in the final weeks of the quarter. Unlike the STTM markets, there was more volume traded through the VIC market in Q119 relative to that of Q118. On the 24^th and 25^th of January, there was a spike in gas volumes which was driven by higher demand from the Gas Powered Generators as a result of very high electricity prices.

If you would like to know more about what is happening in the gas market and how your business may be affected, please call Edge on 07 3905 9220.

Domestic gas prices have increased again as Queensland continues to export most domestic gas overseas in the form of Liquefied Natural Gas (LNG). Outages in early 2018 had limited output from the LNG facilities, however all trains are now available.

The increase in total gas extracted on the East Coast of Australia is the largest contributor to the increase in gas prices. Before LNG demand, domestic gas could be extracted from cheap resources. However, as more gas is extracted from Roma, Queensland, the price of extraction has increased, which is then passed onto consumers. With the ability to sell gas overseas, producers are also looking to obtain a similar price domestically when the cost of transport has been taken into account (so called netback prices).

The Australian Energy Regulator (AER) has published the average daily production of gas by production point. This shows the large increase, particularly for Roma. The volume is necessary to justify the very high fixed costs of liquefying and exporting gas.

Source: AER

Overall, prices were lower at the start of 2018 and the Federal Government has been quick to point to its domestic gas policy, whereby producers could be forced to sell gas to domestic consumers ahead of exporting it in the event of a shortage. The inference is that without the domestic gas policy, prices would have been higher. A more obvious driver would be lower export of LNG as one of the export facilities was undergoing planned maintenance. With all facilities now back online, the prices have crept back up and are now higher than the same period in 2017 for all regions.

The Australian Labor Party (ALP) announced that it would look to further strengthen the domestic gas policy by forcing producers to sell locally before exporting if prices were too high. This goes beyond the current policy which requires a shortage for the gas policy to apply. The ALP has not indicated what they consider to be “high prices” for the policy to apply. Additionally, producers are concerned about uncertainty at a time when the gas market needs further investment. The current state of the electricity market should serve as a warning of what happens when there is little investment certainty.

Regional analysis

There are regional differences in the gas prices, which  are mainly based on the different usage of gas. In Queensland, gas is mainly used for LNG export while in Victoria it is predominantly used by residential and commercial customers, particularly for heating. In South Australia and Tasmania, gas is still mainly used for gas powered generation (GPG).

Gas usage in 2017 by sector and region

	Residential / commercial	Industrial	GPG	LNG	Regional gas consumption (PJ)
Queensland	<1%	8%	3%	89%	1,377
New South Wales	37%	42%	21%	0%	130
South Australia	11%	23%	66%	0%	101
Tasmania	5%	33%	62%	0%	15
Victoria	55%	30%	15%	0%	228
Total	10%	14%	10%	66%	1,851

Source: AEMO

Queensland

With lower exports in early 2018, gas prices at the Brisbane hub have been lower than the previous year. Once the outage at an LNG facility was completed in June, prices went back to their elevated levels and have subsequently been sitting above the 2017 prices. In the short term, there is limited opportunity for production of gas to stop, which means that shut downs of facilities will tend to lower prices.

Since the increased LNG production, prices in Queensland have remained steady, consistent with prices in 2017 before the shutdown. There is little gas used outside of LNG in Queensland, therefore making it the main driver.

New South Wales

Gas is primarily used in industrial process in New South Wales, providing a flat demand across the year.

From the above graph, it is apparent that prices have been stable across most months. There were slightly lower prices until approximately June 2018 as cheaper gas flowed from Queensland. Prices have started trending up since then.

South Australia

Gas in South Australia is predominately used by gas powered generators. These tend to operate more in both summer and winter when demand for electricity is generally higher.

South Australian gas prices have been modest throughout the year. Higher demand for gas generation in February increased prices overall, however the largest change was again in June when the Queensland LNG facility started exporting again after its outage.

There is still a large swing component of gas demand in South Australia due to residential/commercial demand. Even though this only represents 11% of overall consumption it tends to be very concentrated for a few days per year.

Tasmania / Victoria

There is no separate Tasmanian gas market with most contracts based on the Victorian prices.

Victoria also has the largest proportion of gas being used by residential/commercial consumers. This creates a large swing in gas demand throughout the day and throughout seasons. Unlike South Australia which uses a lot of gas for power generation, Victoria mainly relies on coal. This means that prices are typically lower in summer and higher in winter.

If you would like to know more about what is happening in the gas market and how your business may be affected, please call Edge on 07 3905 9220 or contact your Edge Portfolio Manager.