Dwindling reserves, escalating extraction costs and large, long term export contracts are playing their part in the exorbitantly expensive gas market.
Industrial buyers seeking gas to power manufacturing and processing plants are calling current contract prices extortionate.
The spot price for wholesale gas hovers around $10 a gigajoule and according to the Australian Competition and Consumer Commission long term contracts have gone to $8 to $12/gigajoule and higher for small processors and manufacturing.
Before east coast exports began in December 2014, the long term average price was $3 to $4 from long standing operations in Bass Strait, Moomba in South Australia and the relatively new Queensland gas fields.
When Queensland’s Curtis Island export hub linked the east coast supply to the international market and prices more than doubled overnight.
Now we have hit peak market dysfunction with not one, but two companies planning to import gas back into Australia at time when Australia is set to become the world’s biggest exporter.
Gas companies’ predictions of their reserves has fallen short and huge long term export contracts, which the Gillard government decided not to make subject of a domestic reserve, are sucking up domestic supply.
The same scenario is starting to play out in second tier Queensland reserves. Last month Origin issued a $355 million write down of its Ironbark gasfield and slashed its reserve by two thirds.
Last year Australian Competition and Consumer Commission (ACCC) chairman Rod Sims said industrial buyers had been “gouged” by producers, pipeline owners or gas retailers.
Last week he urged NSW and Victorian governments to lift restrictions and kickstart onshore gas development, citing the potential for dwindling reserves to create a shortfall in the local market.
But prices would not fall with NSW and Victorian gas.
Santos’ Narrabri project in NSW is not subject to restrictions and is seeking development approval. But its production would be $7.25 at the wellhead, which is more expensive than Queensland current operations.
And that’s where AGL and the Andrew Forest-backed Australian Industrial Energy come in with a trading play.
They have done the numbers and figured out they can find enough cheap gas on the oversupplied international market, likely around $5 to $6/gigajoule.
Local prices provide a $2 to $6/gigajoule margin, enough to cover international shipping.
Or, because Japanese buyers overshot their long terms LNG contracts from Gladstone, the importers could snap up their surplus gas and sell it back for a tidy profit.