Mr Ross Lambie
Gas Manager, Energy & Quantitative Analysis
Bureau of Resources and Energy Economics (BREE)
When two markets collide
Linking Australia’s eastern gas market to the world
ANCRE Workshop, October 2013
Ross Lambie
Gas Manager
Bureau of Resources and Energy Economics (BREE)
bree.gov.au
Introduction
 What will be the likely impact on domestic gas prices in the
Eastern market when LNG production begins at Gladstone?
 Outline:
• A snapshot of the Eastern gas market
• A snapshot of the LNG market
• Why the linking of the domestic with the LNG market is an issue
• Some simple economics
• BREE’s gas market models
• Conclusion
bree.gov.au
Australia’s gas markets
Northern gas
market
Western
gas
market
Source: Adapted from AER, State of the Energy Market 2012
Eastern
gas
market
bree.gov.au
Gas consumption by state
Source: BREE
bree.gov.au
A snapshot of the Eastern gas market
 2011-12 – 59% Australia’s gas consumption (839 PJ)
 Queensland and Victoria largest consuming states (509 PJ)
 Historical long-term contracts ~ $3-$4 per GJ
 New long-term contracts – media reports, $6-$9 per GJ; AIG Gas
Market Survey 2013, $8.72 GJ
 Gas-fired electricity generation – 2005-06 to 2011-12, 9.8% to 19.3%
of total generation
 ~ 36% of gas production sourced from coal seam gas (EnergyQuest
2013); abundant reserves
 New demand – LNG projects (6 trains committed ~ 250PJ/train/year)
 260 PJ of gas contracts expiring within next five years
bree.gov.au
The Eastern gas market – consumption by
sector
Source: BREE
bree.gov.au
A snapshot of the Asian LNG market
 Total LNG imports in the Asian market in 2012 was 166.56 MT
(70% of global imports)
 Japan and Korea - world’s dominant LNG importers (52% of the
market in 2012)
 Spot/short-term LNG market is continuing to grow
• Globally, 73.5 MT in 2012 (31% total LNG volume)
• Asian buyers purchased 72% in 2012 (Japan, Korea and
India ~ 61%)
 Potential for significant LNG supply
• 30 trains under construction globally (110.1 MTPA)
• New supply regions: US Gulf Coast, Western Canada, East
Africa, Floating LNG, Asia Pacific
bree.gov.au
Asia’s LNG Imports, 2012 – Volume
100
87.26
90
80
MTPA
70
60
50
36.78
40
30
20
10
14.77
3.69
0
China
15.92
13.99
0
India
0.79
0 0
Indonesia
LNG net imports
12.78
Japan
Sth Korea
0.31
Taiwan
0.98 0
Thailand
LNG imports from Australia
Source: IGU, 2013
bree.gov.au
Australia’s LNG Exports to Asia, 2012 –
Volume share
90%
77%
80%
70%
60%
50%
40%
30%
20%
25%
18%
18%
10%
0%
China
0% 0%
0% 0%
India
Indonesia
Australia's share of total LNG imports
Source: IGU, 2013
Japan
2% 4%
2% 1%
0% 0%
Sth Korea
Taiwan
Thailand
Share of Australia's total Asian LNG exports
bree.gov.au
Australia’s historical and projected LNG
production – volume and value
100
60
Prelude
Wheat- FLNG
stone
46
Ichthys
80
APLNG
60
Mt
32 real
2013-14
A$b
18
QCLNG
GLNG
Gorgon
40
20
4
0
-10
2002-03
2005-06
2008-09
exports (LHS)
2011-12
2014-15
2017-18
value (RHS)
bree.gov.au
Eastern market LNG production
 6 trains coming online between now and 2018
 Queensland Curtis LNG (QCLNG) – 2014-15, 2 trains, 8.5 MTPA
 Gladstone LNG (GLNG) – 2014-15, 2 trains, 7.8 MTPA
 Australian Pacific LNG (APLNG) – 2015-16, 2 trains, 9 MTPA
 Arrow LNG (ALNG) – going to FID in 2014, 2 trains, 8 MTPA
bree.gov.au
Eastern market domestic gas contracts by
basin
Currently committed LNG
trains come online
Source: EnergyQuest, 2013
bree.gov.au
The economics of linking to an export
market
 Kenneth Medlock, 2012, U.S. LNG Exports: Truth and Consequence
$
Domestic market
$
Export market
S0
S0
P0
P0
D0
D0
Q0
Q
Q0
Q
bree.gov.au
The economics of linking to an export
market
 Kenneth Medlock, 2012, U.S. LNG Exports: Truth and Consequence
$
Domestic market
$
Export market
S0
S1
S0
P0
LNG production / P1
shipping costs etc.
P1
P0
D0
Q0
Q1
D0
D1
Q
Q0 Q1
Q
bree.gov.au
The economics of linking to an export
market
 Demand and supply in the domestic gas market
$
S
P LNG-Con
P Dom-Con
P Spot
LNG
Quantity
contracted
Dom
Quantity
Spot
D0
Q
bree.gov.au
The economics of linking to an export
market
 Demand and supply in the domestic gas market
$
S
P LNG-Con
P Dom-Con
P Spot
LNG
Quantity
contracted
Dom
Quantity
Spot
D0
D1
Q
bree.gov.au
The economics of linking to an export
market
 Insights from the simple framework:

Domestic gas prices will be determined by the opportunity cost of gas
supplied

In the transition to linking, uncertainty and/or market power may drive the
price of domestic long term contracts to the netback price based on
current long term LNG contracts

After linking, the opportunity cost of gas supplied will either depend on the
demand from LNG producers for additional gas and, therefore, the
relevant LNG market price, or domestic market prices

Only if the LNG market is the basis for the equilibrium price in the
domestic market will developments in the LNG market affect domestic
prices
bree.gov.au
Nexant world gas model
 Large scale LP model
 Simulates interactions between supply availability and costs,
transportation, LNG capacity and long term gas contracts
 Produces global, regional and national supply-demand balances, and
gas prices based on linkages to oil and oil product prices
 Comprehensive database on gas production, LNG and pipeline
infrastructure and long term gas contracts
bree.gov.au
Domestic gas model – Ateshgah
 Under development at the University of Queensland – nearing
completion
 Mixed complementarity model of the Eastern gas market
 Multi-agent behaviour at each demand node
 Spatial equilibrium problem – Nash-Cournot solution
 Capable of representing both perfectly and imperfectly competitive
markets for gas supply
bree.gov.au
Conclusion
 The Eastern gas market is undergoing major changes with the
development of coal seam gas and associated LNG production
 The Asian Pacific LNG market is also undergoing significant change
 Linking the domestic gas market to the LNG export market will see
adjustments in both markets
 Understanding the implications of linking requires understanding
these adjustments
 Basing expectations on present conditions without taking into account
the relevant market adjustments is likely to be misleading
 Comprehensive modelling of the export market and the domestic gas
market that captures the underlying economic behaviour of interest is
necessary to gain useful insights on the implications of linking
bree.gov.au