Outlook for the East Australian Gas Market David Whitelaw Resources and Energy Economics Branch Office of the Chief Economist November 2015 Office of the Chief Economist 1 The East Australian gas market Market in transition East Australian gas demand forecast Impact of LNG exports • 2500 • Higher wholesale prices • Falling domestic demand • Fears of gas shortages • • 2000 • PJ 1500 1000 500 0 2010 2012 NSW 2014 Qld 2016 Tas 2018 2020 2022 SA Vic LNG Source: AEMO National Gas Demand Forecast Project 2014 2 2024 State of the market Inter-connection 1998–2003 Hub Processing plant Multiple sources of supply Gas-on-gas competition • • Cooper Basin South Bowen Basin BRISBANE NSW Basins SYDNEY ADELAIDE CANBERRA MELBOURNE Bass Otway Basin Basin Gippsland Basin HOBART Source: Industry, Innovation and Science (2015) 3 State of the market Not yet fully inter-connected Hub Processing plant North • Queensland (Brisbane, Gladstone and Mt. Isa) • Cooper basin • Surat / Bowen basins • • Cooper Basin South Bowen Basin BRISBANE • NSW Basins SYDNEY ADELAIDE CANBERRA MELBOURNE Bass Otway Basin Basin Gippsland Basin HOBART Source: Industry, Innovation and Science (2015) 4 South • Victoria, NSW, South Australia and Tasmania • Gippsland, Bass and Otway basins • NSW CSG basins • • State of the market Not yet fully inter-connected Hub Processing plant North • Queensland (Brisbane, Gladstone and Mt. Isa) • Cooper basin • Surat / Bowen basins • • Cooper Basin South Bowen Basin BRISBANE • NSW Basins • • SYDNEY ADELAIDE CANBERRA MELBOURNE Bass Otway Basin Basin Gippsland Basin HOBART Source: Industry, Innovation and Science (2015) 5 South • Victoria, NSW, South Australia and Tasmania • Gippsland, Bass and Otway basins • NSW CSG basins State of the market Adequacy of gas reserves Hub Gas Reserves (proved and probable) • Processing plant 1. 2. 3. 4. Cooper Basin South Bowen Basin BRISBANE SYDNEY ADELAIDE CANBERRA MELBOURNE Bass Otway Basin Basin Gippsland Basin HOBART Source: Industry, Innovation and Science (2015) 6 Queensland Surat / Bowen CSG Victorian offshore Cooper basin NSW CSG State of the market — in the South Adequacy of gas production capacity Maximum production capacity and forecast demand 600 Production capacity in the South is adequate Reserve depletion soon becomes a problem 500 400 The South needs new gas reserves to maintain production: Pj 300 200 • NSW CSG • More exploration • NT supply 100 0 2014 2016 Otways 2018 2020 Longford 2022 Other Vict Source: Industry, Innovation and Science (2015) 7 2024 2026 NSW CSG 2028 2030 Demand State of the market — in the North Adequacy of gas production capacity Maximum production capacity and forecast demand Production capacity (after LNG demand is served) is very tight • 500 450 LNG production can vary between nameplate and Take-or-Pay 400 • 350 300 The market needs more production capacity PJ 250 • 200 150 100 50 0 2014 2016 2018 2020 Min Domestic production Source: Industry, Innovation and Science (2015) 8 2022 2024 2026 Max Domestic production 2028 2030 Qld Demand Modelling results Impact of market power How market power determines domestic prices in the South 10 Perfect competition Prices set by marginal cost • 9 • 8 7 Oligopoly Mark-up depends on strength of market power • $/GJ 6 • 5 4 Conclusion Increasing market concentration as Otways decline • 3 • 2 1 0 2014 2016 2018 Market Power 1 2020 2022 Market Power 0.5 Source: Industry, Innovation and Science (2015) 9 2024 2026 2028 Perfect Competition Modelling results Impact of market power Domestic demand in the South 500 Higher prices depress demand • 450 400 Mainly in gas-fired power generation • 350 PJ 300 Demand is supported by large residential loads 250 • 200 150 100 50 0 2014 2016 2018 Market Power 1 2020 Market Power 0.5 Source: Industry, Innovation and Science (2015) 10 2022 2024 2026 2028 Perfect Competition Conclusions Key factors influencing the future development of the gas market Queensland • 1. LNG demand volatility 2. Incentives to add production capacity • • The South • 1. New gas reserves or sources of supply 2. Market power in a tight market • • But gas pipeline capacity mostly OK • 11 Further information Contact details • David Whitelaw Economist Resources and Energy Economics Branch Economic and Analytical Services Division Phone: Email: 02 6243 7158 david.whitelaw@industry.gov.au industry.gov.au