Gas Market Update

Domestic gas prices on the east coast of Australia have been through a huge transitional period as a result of the introduction of the LNG export market from Curtis Island. Whilst there have been a broad range of changes, one of the key factors increasingly influencing price that domestic consumers pay is the price of oil. Domestic contracts are now being offered at oil linked pricing which effectively means that if the price of oil increases so will the price of your gas (and vice versa). For large gas producers this is nothing new as hedging commodity prices is part of their core business. For consumers however this may be more challenging depending on the products they produce.

Other factors that are now impacting Australian gas prices are:

• Climate change policies in Asia as gas is a widely used fuel for clean electricity generation. This is particularly important when considering China due the huge demand and current reliance on coal generation.
• Manufacturing levels in Japan
• US production levels and construction of pipelines
• Renewable energy technology developments

 

Turning our attention to domestic gas influences the Northern Territory Chief Minister Michael Gunner has recently announced that the 135 recommendations made in the recent inquiry into fracking in the NT would be implemented, allowing on-shore fracking to take place in the territory. The 135 recommendations made in the inquiry mitigate the risks associated with onshore gas development to acceptable levels, and in some cases claim to eliminate the risks completely. New gas developments will require environmental management plans which will be assessed by the NT Environment Protection Authority and signed off by the environment minister. There will also be area’s where fracking will not be allowed. These include indigenous protected areas, special environmental areas, cultural and agricultural areas of significance to the Northern Territory. There is a number of studies to be completed before fracking production can begin including strategic environmental and baseline assessments. At this stage it is estimated that exploration will begin in 2019 and production in 2021.

On 21 May Santos Rejected Harbour Energy’s (Harbour) offer to purchase 100% of shares at US$5.21 per share. In an effort to get the deal over the line Harbour offered $5.25 per share if Santos was willing to extend certain oil price hedging arrangements. The final offer from Harbour had a number of conditions which included Santos assisting with debt raising and hedging a significant portion of Santos oil-linked products as well as FIRB approval. Once the offer was rejected Santos shared its view on how superior shareholder value could be realised through executing the current strategy.

Australian Industrial Energy will see Port Kembla in NSW developed into an LNG import terminal.  The Andrew Forest venture recently reached significant milestones. These include receiving backing from Japanese energy giant JERA and signing a memorandum of understanding with 12 potential customers (according the AFR). Project development is still subject to approvals.

AEMO recently released its Victoria Gas planning report update that painted a concerning outlook in respect of depletion of offshore gas fields reserves. The data provided to AEMO from producers in the Gippsland basin forecast production to reduce to 38% below the 2018 production forecast and 68% for Port Campbell. In response to this outlook gas producers and other market participants are investigating additional supply and capacity.

Regional analysis

 

Narrowing our focus, Edge take a closer look at gas generation in each region and the local gas trading hub. As we know the Federal Government threatened LNG producers with the Australian Domestic Gas Mechanism late last year if they didn’t allocate more gas to domestic consumers. The threat appeared to have worked with each of the LNG producers advocating that they had made gas available.

When we take a closer look at whether a relationship exists between gas generation and gas hub prices we realise that it is difficult to discern. Limitations in access to pipeline capacity, contractual arrangements and sophistication of users are potentially key drivers behind this.

The following graphs display average gas generation from 1 January 2017 to the end of May 2018 on a regional basis as well as the average gas price for the same period.

Queensland

 

From the graph we can observe that gas generation in 2018 (to date) is largely in-line with 2017. The consistent level of generation is interesting given the significant decline in spot electricity prices in Q118 relative to that of Q117. On face value the lower spot prices in 2018 would result in less generation from gas power stations. What changed however between Q117 and Q118 was SwanBank E power station returned. The gas combined cycle power station ran consistently throughout Q118 averaging 237 MW of generation. Lower spot prices in the Brisbane STTM are a driven by lower demand and potentially increased supply as a result of the LNG producing increasing availability of gas to domestic consumers.

 

New South Wales

NSW gas generation was significantly down for the first 5 months of 2018 relative to the same period in 2017. Lower gas generation in NSW was largely the result of less volatility in the electricity spot market. If we look at the bid stacks of the large gas power stations in NSW, Tallawarra was the most motivated to produce energy offering up to 210 MW at below zero dollars. This strategy could not be observed at Uranquinty or Colongra.

 

Victoria

 

Unlike NSW and QLD generation from gas powered power stations increased in January and February 2018 relative to the same months in 2017. The closure of Hazelwood power station in late March 2017 meant that the 1,225 MW (average generation of Hazelwood in Q117) was no longer available. Less baseload generation in the region resulted in higher electricity prices which meant that gas power stations were dispatched more regularly. Despite the increases in generation there was a decline in VIC gas market prices.

 

South Australia

Gas generation in SA has been heavily impacted by the increased level of intervention in the SA market by the market operator. The market operator has been constraining off wind generation and calling on gas generation which has increased overall generation from gas plant. This increased generation however has not translated into higher gas prices as we can see from the graph these 2018 prices are trending below 2017 prices.

When observing each of the regions and the time periods selected it is fair to say that generation from gas fired power stations and spot prices in the gas hubs do not drive average price outcomes.

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.

ACCC GAS INQUIRY – INTERIM REPORT

The ACCC released the second interim report into gas supply arrangements in December 2017. In the initial report (released September 2017) it was reported that there would be shortages in gas supply available to east coast consumers in 2018. The report found that buyers of gas were receiving offers from a reduced number of suppliers and that prices offered were above the ACCC’s benchmark prices. It was also noted in the report the lack of participation from the QLD LNG producers in the domestic market. This reported lack of participation from the LNG producers prompted the Federal Government to act. The result was the creation of a Heads of Agreement with the LNG producers which would see additional gas allocated to the domestic market.  According to the second Interim Report (released in December 2017), since September 2017 the QLD LNG producers contracted 42 PJ’s of gas under long-term supply agreements to domestic buyers for supply in 2018. The majority of this gas was sold to aggregators and retailers. The ACCC’s forecast for the balance of gas was also updated in the second interim Report and resulted in an improved balance of 75 PJ’s. The change in balance has been driven by a 12 PJ increase in supply and the lower demand from the LNG producers (63 PJ). Whilst on face value the market has gone from deficit to surplus, the balance remains tight and subject to gas producers meeting forecasts.

Table 1. Gas Balance

	September Expected Domestic Demand Scenario (PJ)	December Expected Domestic Demand Scenario (PJ)
Supply	1,901	1,913
Domestic demand	642	642
LNG demand	1,314	1,251
Projected Balance	-55	20

Source: ACC Gas Inquiry Report – Second Interim

According to the report, there continues to be a shortage of production in the southern states to meet demand (SA, NSW, ACT, VIC and TAS).  As a result, these states will continue to rely on gas transported from QLD.  Additional costs to transport gas from QLD to VIC and SA are currently between $2/GJ and $4/GJ. Transporting gas south from QLD is not only expensive but due to limited firm capacity in key pipelines is not always feasible. Firm capacity in these key pipelines is predominately booked by the major retailers. It was examined by the ACCC if the major retailers were making spare capacity available to other users on major pipelines through secondary trading. It was found that on the major pipelines this was not the case however, there was some evidence to suggest this may have been occurring on the less critical pipelines. Since the ACCC investigation it has been observed that the retailers have increased the availability of spare capacity to other pipelines participants improving competition.

FIRM CAPACITY – The amount of transmission guaranteed to be available to the shipper – up to MDQ & MHQ every day AS AVAILABLE CAPACITY – This capacity is typically spare contracted capacity that is offered on the secondary market. As can be disrupted or delayed, it is not necessarily guaranteed.

The ACCC expects that transportation costs will start to come down as regulatory reforms begin to take effect.

Domestic prices to large C&I customers were around $16/GJ in early 2017 and even higher for smaller business customers. Since July 2017, it was reported that prices between $8/GJ and $12/GJ were achieved by large C&I customers.

---

GAS PRICES

Across each of the east coast trading hubs January average prices were higher than the Q417 average.

Table 2. Hub Prices

	Adelaide price ($/GJ)	Brisbane price ($/GJ)	Sydney price ($/GJ)	Melbourne price ($/GJ)
Q417	$7.14	$7.68	$7.12	$6.20
JAN18	$ 8.10	$8.16	$9.71	$8.64
FEB18	$9.29	$7.33	$9.71	$8.67

Source: AEMO

Recent news

Four projects have received funding from the South Australian Plan for Accelerating Exploration (PACE) gas program’s second round. The program was designed as part of a suite of measures to increase investment in local gas production and to ease price pressure in South Australia. The four projects to receive funding were:

• $6.89 million for the Santos-Beach Cooper Basin project to deploy a heat-energy recovery system to offset natural gas used to run the Moomba petroleum processing plant
• $5.26 million for the Senex Cooper Basin Gemba exploration/appraisal project
• $6.89 million for Beach /Cooper Energy’s Dombey project in the Otway Basin
• $4.95 million to the Rawson/Vintage Nangwarry project in the Otway Basin

Under the program, gas extracted through the PACE program must first be offered to local electricity generators, enhancing the affordability of supply. Whether the cheaper gas is passed onto end customers by the gas generators is more difficult to say.

Moving north to QLD, Senex’s 100% owned Western Surat Gas Project recently recorded a significant milestone, which was an all-in well cost of $1.2 million. The strong results have promoted Senex’s reputation in the market and has encouraged Project Atlas, which is another Surat Basin project expected to bring first gas in 2019, to be sold to the domestic market.

On 12 December Independent Scientific Inquiry into Hydraulic of Onshore Unconventional Reservoirs in the Northern Territory releases its draft final report. The overall conclusion of the report was:

“The overall conclusion of the Report is that risk is inherent in all development and that an onshore shale gas industry is no exception. However, if the recommendations made in this draft Report are adopted and implemented in full, those risks may be mitigated or reduced – and in many cases eliminated altogether – to acceptable levels having regard to the totality of the evidence.”

Since the release of the draft final report the panel has engaged with the Northern Territory community, Government, Industry, environmental groups, and other relevant stakeholders about the content of the report. This is the last opportunity for the Territorians to express their views on the inquiry.

The final round of regional consultations concluded mid-February and the final day for submissions due to the panel is 25 February 2018. At this stage the panel has committed to providing the Final Report to the government in March 2018.

---

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.

Market News

The Australian Energy Market Operator (AEMO) released its updated Gas Statement of Opportunities during September. The report indicates that in eastern and south-eastern Australia, there is potential for an annual energy shortfall in the domestic gas market of 54 petajoules (PJ) in 2018 and 48 PJ in 2018. AEMO warned that the shortfall could be higher in a variety of plausible circumstances that could increase demand for gas by household and business consumers, and for gas-powered generation of electricity (GPG) in the National Electricity Market (NEM). AEMO’s estimates that the shortfall could be as high as 107 PJ in 2018 and 102 PJ in 2019. This forecast was quickly followed by the Federal Government requesting major LNG producers to bridge the supply gap or face the implementation of the Australian Domestic Gas Security Mechanism (ADGSM). The LNG producers agreed to the Prime Minister’s request to make gas available. Had they not, the Federal Government has the power to implement the ADGSM which is a mechanism designed to restrict gas exports to increase domestic supply.

The Sole Gas Project is a new source of gas for the south east. The project is estimated to bring an additional 25 PJs of supply to the market each year, of which some is already contracted. This is the first offshore project in VIC to be sanctioned in almost a decade.

Still on the topic of increasing supply of gas to the east coast, the Northern Gas Pipeline is being promoted by owners Jemena, as being operational from the end of 2018. This is despite delays caused by negotiations with traditional owners of land and issues with the construction partner. Once the pipeline is complete it will have capacity to transport 90 TJs per day from Tennant Creek to Mt Isa. The challenge will be delivering gas to the east coast at a competitive price and achieving a level of increased supply that is sufficient to impact prices.

Following the NT Governments announcement of a moratorium on hydraulic fracturing of onshore unconventional reservoirs and the initiation of an Independent Scientific inquiry into Hydraulic Fracturing of onshore unconventional reservoirs, an interim report was released during July.  The report provided some high-level conclusions regarding the environmental, social, cultural and economic risks associated with hydraulic fracturing for shale gas in the NT.  The final report is due March 2018 and will be critical in guiding the NT government on whether to lift the moratorium. During September the Federal Government pressured the NT government into lifting the moratorium in the interest of making more gas available for domestic consumption.

---

Difference between Conventional and Unconventional gas…

---

Unconventional gas rests in relatively impermeable rock. The low porosity of the rocks is why, as opposed to conventional gas, ‘artificial stimulation’ is required. Artificial stimulation is where fracturing or “fracking” is required to disrupt the rock and release the gas. Unconventional gas includes Coal Seam Gas (CSG), shale gas and tight gas.

Conventional gas has moved from its original source rocks and is now resting in more permeable rocks and has then been trapped under a seal of impermeable rocks. Collection of conventional gas is easier as the gas accumulates in confined spaces and therefore allows for strategically placed wells to take advantage of areas of accumulated gas.

---

Gas Prices

Wholesale gas prices were lower for Adelaide and Brisbane and higher for Sydney and Melbourne relative to the same period last year. Unlike last year there were no significant price spikes in Adelaide or Melbourne.

	Adelaide price ($/GJ)	Brisbane price ($/GJ)	Sydney price ($/GJ)	Melbourne price ($/GJ)
Q316	$9.27	$7.13	$7.53	$8.48
Q317	$ 8.11	$6.71	$8.94	$8.72

---

During September there was an increase in average temperatures which lowered demand for domestic heating gas and consequently there was some softening of wholesale prices late in the month.

C&I customers are generally facing increased prices as they come off old contracts. Prices quoted by gas suppliers have a relatively wide range and are subject to swings in consumption and tenure of agreement. The higher contract prices have prompted consumers to ask questions about alternative supply options and there has been an increase in interest into participation in capital city trading hubs.

Gas supply is a key feature of the recently announced National Energy Guarantee (NEG). Gas plays a key role in any emissions reduction policy due to its relatively low emissions and responsive nature of gas fired power stations. Within the NEG there is $90 million allocated to securing medium term supply. The funds will go towards the following initiatives:

• Geological and Bioregional Assessments program to examine new gas reserves and support increased domestic supply by assessing the environmental safety of unconventional gas;
• Development of new onshore gas in the NT and east coast;
• Accelerate the work of the Gas Market Reform group to improve access and transparency;
• Assessment of benefits in construction of new gas pipelines in the north and west of Australia to the south east via Moomba in SA; and
• Examination of constraints on increasing gas supply on the east coast such as regulatory barriers and inconsistent policy.

---

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 3232 1115 or contact your Edge Portfolio Manager.