Trends in Australian Gas Prices
Jim Snow
Executive Director
31 August 2015
INTRODUCTION
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Domestic Gas Market
• Annual in 2013-2014 was 1,402 PJ
• Mining here includes LNG self use
• Actual gas demand is higher as the
domestic market figures do not
include LNG exports (another 1,285
PJ in 2014-15)
• LNG exports the growth area of the
gas market – domestic market in
serious decline
• The majority of gas in Australia has been
used in the generation of electricity and
manufacturing (approx. 71%) – electricity
usage though is reducing rapidly – almost
wiped out
• Residential direct usage of gas accounts
for 11% of gas usage in Australia
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INDUSTRIAL GAS PRICE
REVIEW
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Industrial customer segments
• Large Industrial Customers - >1 PJ/a
– Can get GSA offers from Producers and Retailers
– Mainly supplied off high pressure gas systems – transmission & sub-transmission
– Tend to be sophisticated buyers – energy a high % of their costs – energy intense
industries – metals, fertilisers, wall board, food prpaper, bricks, etc.
– Their prices are the wholesale gas prices – no Retail margins as such – more about
portfolio head room, negotiations and vertical integration – also some strategic issues
related to price reviews
– Error band for the large Industrial gas customer pricing presented has been
estimated at +/- 10%
• Small Industrial Customers – 0.1 to 1.0 PJ/a
– Retailer offers predominate and gas from lower pressures systems
– Small manufacturing and food production, etc.
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Key factors influencing Industrial gas prices
• Load Factor - ratio of MDQ to ACQ (set at 1.1) - been a “free” ride for the review
period but this is changing - drives storage investment as well – underground, LNG
• Contract Terms - long term is typically longer than 3 years – used to be longer major risks with longer term agreements when prices are volatile – buyers and
sellers then prefer short terms to manage market price risks, and
– The term of the agreement also specifies the total 2P reserves that must be allocated to
the contract - 2P reserves are finite until new gas can be “booked” by a Producer –
important concept – especially when large volumes are contracted
• GSA Price Reviews - longer term GSA’s will generally have a market price review
after 3 years - just another way of managing this market price risk – can also tend
to dampen price increases in existing contracts
• Contract timing 2011-2015 - when market prices escalating the timing of individual
customer renegotiations can have major impacts on their prices over 3 year period
• Transmission Prices - these vary a little across jurisdictions for Industrial
customers and are normally charged on the basis of their booked MDQ which
reflects the capital costs of the asset, with a smaller charge for operating costs
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Key factors influencing Industrial gas prices
• LNG Netback - LNG demand for gas feedstock and then linking the sale of this
gas to oil prices has been the major factor that has driven up wholesale gas
prices in Australia (east and west coast) – seeing a tripling of demand for gas
– Also reflects the need to develop large scale new gas supplies – conventional and
unconventional to meet this demand – and these also come at relatively higher prices
than past conventional gas supplies - even as LNG prices have been hit by oil price
reductions negotiations have focused onto this cost of new gas supply issue - has
had a major impact on large industrial prices for the southern gas markets (NSW, Vic,
SA and Tasmania) – the linking of Moomba gas prices to LNG was the key
• Carbon Tax - this was applied 1 July 2012 to 1 July 2014 - for large Industrial
customers only Scope 3 emission costs were applied to gas prices – carbon
liberated from the production and transportation of the gas – typically low cost
– For small Industrial customers Scope 3 and Scope 1 emissions were applied – the
difference was who paid for the emissions generated from the use of the gas
(combustion or other forms of liberating the carbon as carbon dioxide) which is a
much higher costs (circa $1.18/GJ)
– It should be noted though that different basins had different imposts – Moomba for
example was 5 times higher than Longford
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INDUSTRIAL JURISDICTIONAL
RESULTS
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East coast weighted average large Industrial gas price
• The average large Industrial gas price for the east coast of Australia has
been developed by volume weighting the prices for the averages of the
state jurisdictions (Qld, NSW, Vic, SA and Tasmania). In 2015 the
weightings were 20% NSW, 34% Vic, 29% Qld, 15% SA and 2% Tasmania.
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East coast weighted average large Industrial gas price components
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Queensland large Industrial customers
• The large geographic extent of gas
demand in Queensland has created
three unique demand nodes and
different gas pricing for each node.
• SEQ/Brisbane, Gladstone and North
West Queensland
• Although there are consistent market
fundamentals across Queensland,
varying transportation and market
structure issues have created different
price outcomes across these nodes.
• The gas price paid by large Industrial
customers has been shown for each of
the nodes, and
• A high proportion of large Industrial
customers have long term (10 to 15
year) GSA’s directly with gas Producers
and arrange their own gas
transportation
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Queensland weighted average Industrial gas prices
• This is the volume weighted price
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Queensland weighted average Industrial gas price - components
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NSW & ACT large Industrial gas prices - components
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SA large Industrial gas prices – components
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Victorian large Industrial customers - price components
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Tasmanian large Industrial prices - components
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Victorian small Industrial gas prices - metro
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Victorian small Industrial gas prices - country
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Victorian small Industrial gas prices - comparisons
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NSW small Industrial gas price - comparison
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Some key points
• The NSW price rises were faster and higher than for Victoria due to the
Moomba connection, and
• This is what has kicked off the Victorian price rises (and indicates what may
happen to prices in Victoria)
• Sydney also has to pay additional haulage as there is no gas supply close by
and this does add more to the costs
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WA large Industrial gas prices (Perth) – real and nominal
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WA large Industrial gas prices (Perth) - components
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INDUSTRIAL FUTURE GAS
PRICE DRIVERS
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Key drivers of future Industrial gas prices?
• The key issue in nearly all the jurisdictional markets that will impact future wholesale gas
prices is the supply and demand balance, including the ability to haul gas without undue
transmission constraints.
• The simple economic models of supply and demand balances and clearing prices is
always at play in this market.
• High prices develop, signalling scarcity, and this has seen the playing out of demand
reductions and new supply entering the various jurisdictional markets to mitigate these
prices or satisfy demand at the relevant clearing prices.
• For those with market power at the time price increases may seem to be a windfall but it
can be seen from this report that this is also an essential component in the development
of new supply (and in rationing demand)
• Once supply in those markets exceeds the demand the prices start to almost
immediately retreat to cost of supply pricing, as long as there is reasonable competition.
• This produces WA type “pricing bubbles” where prices rise to signal the need for change
in the market clearing volumes as supply becomes scarce, and then retreats once this
occurs and supply can meet demand or is in excess of market need. In Australia’s case
wholesale gas prices have escalated first to LNG netback and then retreated more to
cost of supply.
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Key drivers of future Industrial gas prices?
• The east coast gas market prices are in the rising, and maybe even topping
out, stage of this cycle/bubble.
• This is clearly dependent on the market satisfying the current demand for LNG
plant feedstock and there being no new LNG plant development in this region.
This cycle has yet to be played out but for the east coast gas markets it is
critical in terms of pricing over the next 5 years, and there are a arrange of new
explorers and developers that have entered the supply market.
• The impact of significant oil price reductions has been a distinct factor in
wholesale gas price mitigation as it has negated LNG netback pricing cases.
But this has simply exposed the true underlying problem of the need for new
gas supply volumes to be developed, and that these look to be more expensive
than the traditional gas supply.
• The interesting aspect of this cycle is how much it has affected the traditional
market prices of Victoria, NSW and South Australia (and Tasmania). The
transmission interconnectivity of the basins and markets has been enough to
see the flow back of high Queensland prices that were more directly driven by
LNG feedstock demand increases.
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Key drivers of future Industrial gas prices?
• The prices seen in the south eastern Australian gas markets have lagged those
in Queensland and prices have been mitigated by distances and underlying
contractual positions of Retailers and large Industrial customers (and greater
competition for customers).
• The prices into the Sydney hub seem to be the clearing prices for this current
market dynamic in the southern markets (largely because NSW does not have
any major supplies of indigenous gas). Victoria is best served in this market as
the available supply is so close to the market demand but it is also starting to
suffer from price escalations as Sydney sets the clearing prices for Bass Strait
gas sales.
• The issue over the next 5 years is the cost of new gas supplies to service the
market demand as this will be the new wholesale gas market clearing price.
The pricing bubble effect will continue until the demand is satisfied (be that in
total or through reduced demand) and new supply starts to seek out market
demand. The outlier is if demand again escalates should there be a believable
increase in oil prices that sparks new LNG capacity in Australia.
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RESIDENTIAL GAS PRICES
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National Residential Gas Market Overview
3 PJ
10 PJ
26 PJ
12 PJ
107
PJ
0.1 PJ
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Residential Gas Consumption by State
Residential Gas Consumption by State
180
160
140
120
PJs
100
80
60
40
20
0
2005-06
2006-07
2007-08
2008-09
VIC
TAS
2009-10
NSW
ACT
2010-11
SA
2011-12
QLD
2012-13
2013-14
2014-15
WA
• Percentage portion of gas consumption by each state is relatively constant.
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Average Household Gas Consumption
Jurisdiction
Victoria
Tasmania
NSW (Sydney)
NSW (Rural)
ACT
South Australia
Queensland
Western Australia
Declining household consumption across
all jurisdictions:
• Improved building standards
• Fuel substitution and switching
• Govt energy policies
• Number of household members
reducing
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Average Household
Consumption (GJ)
51
30
20
37-45
45
18
11
15
• Appliance efficiency
• Long weather changes – Effective
degree day declining trend.
• Jurisdictions that do not use gas
primarily for heating have a much
lower average consumption
RESIDENTIAL
JURISDICTIONAL RESULTS
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Australian weighted average residential gas price
• Weightings determined from
each residential jurisdiction
consumption. Vic dominates
national average (64.9%)
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National Review – key points
• Households have declining average consumption (even while new connections
have grown). There are a number of causes:
– Switching fuel type
– Improved building construction
– Energy efficiency
– Long term trend in weather changes and decreasing EDD
• Retail costs fall into a number of components:
– Retailer component (costs within retailer control) which are wholesale cost, retail cost
and margin ~47-53%
– Distribution and transmission component (costs outside retailer control) which covers
mostly regulated costs such as pipeline distribution and transmission. ~46-52%
– Environmental Policy component (Carbon Tax) ~5%
• Tariffs and costs increasing with large distribution network cost increases in
some jurisdictions and retail in others over the last 5 or so years.
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Some key points – distribution cost analysis
• As distribution density
increases (e.g. Victoria) the
overall distribution charge
on an energy per unit
charge decreases.
• Distribution business seem
to be restructuring tariffs –
fixed and declining block –
defensive – and some
Ramsey pricing to reduce
switching
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Distribution Network Benchmark 2013/2014
45.00
40.00
AGN - Qld
35.00
$/GJ Network Charges
• Graph highlights the
economies of scale issues
that face a number of the
jurisdictions with regard to
gas networks.
AGN - SA
30.00
25.00
Allgas
JGN
20.00
15.00
ActewAGL
10.00
AusNet
Multinet
Tas Gas
5.00
AGN - Vic
0.00
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Gas Distribution Energy Density (GJ/m network)
3.5
4.0
4.5
Queensland Pricing Analysis
• The price per GJ is quite high in
Queensland in comparison to other
jurisdictions
Averaged Qld Gas Retail Pricing ($2015)
70
60
$/GJ
50
• The high price is largely driven by the
distribution costs which make up
between 53-61% of the overall price
throughout the period
40
30
20
10
0
2006
2007
2008
Wholesale Market Price
Retailer Component
Qld. Avg. Standing Offer
2009
2010
2011
Retail Transmission
Environmental Policy
2012
2013
2014
Distribution
Qld. Avg. Offer
2015
Averaged Qld Gas Retail Pricing - Bill Component
Percentages
100%
90%
80%
• This high proportion of distribution
costs is driven by the low penetration of
gas and the low average household
consumption – thereby resulting in a
smaller economies of scale than other
jurisdictions
70%
• It can be seen also that the retailer
component has gradually decreased as
a portion of the average price over the
period (from 35% in 2009 down to 20%
by 2015)
60%
50%
40%
30%
20%
10%
0%
2006
2007
2008
Wholesale Market Price
Retailer Component
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2009
2010
2011
2012
Retail Transmission
Environmental Policy
2013
2014
Distribution
2015
NSW/ACT Pricing Analysis
• Significant difference in the average
price per GJ between Sydney and
rural NSW.
NSW Metro Gas Retail Pricing ($2015)
45
40
35
• There is not as such though a big
differential in the average annual bill
due to different average
consumption between Sydney (20.4
GJ) and rural NSW (37-45 GJ)
$/GJ
30
25
20
15
10
5
0
2006
2007
2008
2009
Wholesale Market Price
Retailer Component
2010
2011
2012
Retail Transport
Environmental Policy
2013
2014
Distribution
Standing Offer
2015
• Until 2011 the wholesale market and
network costs where relatively
similar and the average price
differential was driven by the retailer
component
NSW Rural Gas Retail Pricing ($2015)
30
25
$/GJ
20
• Following 2011 there has been a
much greater increase in distribution
costs in Sydney compared to rural –
it is quite a marked trend
15
10
5
0
2006
37
2007
2008
2009
Wholesale Market Price
Retailer Component
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2010
2011
2012
Retail Transport
Environmental Policy
2013
2014
Distribution
Standing Offer
2015
ACT Pricing Analysis
• Penetration of gas is higher in ACT at
68% compared to NSW (43%)
ACT Gas Retail Pricing ($2015)
• Gas heating is almost double NSW
installations.
35
30
$/GJ
25
• Since 2004 ACT government has offered
rebate scheme for upgrade from wood to
gas heating with only minor impact (1000
rebates)
20
15
10
5
0
2006
2007
2008
Wholesale Market Price
Retailer Component
Standing Offer
2009
2010
2011
Retail Transmission
Environmental Policy
2012
2013
2014
Distribution
Average Offer
• For the ActewAGL distribution network
(~134k connections) which straddles two
jurisdictions, it was assumed that the
residential connections (~25k) in NSW
were part of the ACT analysis.
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2015
• Significant difference in the average price
per GJ between Sydney and the ACT,
however the average price is relatively
consistent with rural NSW
• The retailer component has increased
from 25% in 2006 to 34% in 2015 (with a
reduction in the retailer component during
the carbon price years of 2013 and 2014)
• It appears as though the impact of the
carbon price was effectively absorbed by
the uplift in the retailer component in
2013 and 2014.
South Australia Pricing Analysis
• Distribution charges almost doubled in the
last 5 years. Year on year increases of 15%
from 2010 to 2014
• Distribution makes up over 70% of the
overall bill
• Retail margins on standing offers steady
and trimmed after full contestability as
would be expected
• Typical residential gas bill based on 18GJ/a
is circa $800 per year. Third lowest behind
QLD and WA.
• Average charges $44/GJ second highest
behind QLD.
• Carbon contributed an increase of
approximately 3.3% in 2013 (or $29 out of
$880)
• Transmission and wholesale gas prices
currently trending steady - slight increase in
wholesale gas price over time
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Victoria Pricing Analysis
• Distribution and Retailer components
accounted for between 60-70%
throughout the period
• The distribution component is the
lowest of the jurisdictions and declines
over the period
– This most likely reflects the economies
of scale that can be generated through
higher network usage within a smaller
geographic area
• The carbon price and VEET initiatives
contribute a maximum of 7% in 2013
• The analysis shows that the retailer
component has been increasing as a
proportion of the retail price, this is
consistent with the ESC’s findings for
electricity retailers in 2012.
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Tasmania Pricing Analysis
• Doubling of network fixed price
charges from 2014 20c/day to 2015
42c/day translates to a 10% increase
in $/MJ for distribution charges
• Distribution makes up 50% of the
overall bill
• Retail margins steady increase over
time to about 20% in 2015
• Typical residential gas bill based on
30GJ/a is circa $1,000 to $1,200 per
year. Second highest behind ACT.
• Average charges $33/GJ third lowest
behind Vic and ACT.
• Carbon contributed an increase of
approximately 4.7% in 2013 (or $42
out of $883)
• Transmission and wholesale gas
prices currently trending steady
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Western Australia data and analysis summary
• Alinta was exposed in the 2007-2008 period
by renewing gas contract arrangements
with NWSJV where wholesale gas price
doubled and the tariff was capped. Pincer
movement.
• ERAWA increased the tariff cap year on
year for the next three years to allow
headroom for Alinta and also to encourage
new entrants without a competitive gas
supply. Retail margins escalate.
• ATCO bought WAGN in 2011. Distribution
component goes up.
• Typical residential gas bill based on 15GJ/a
is circa $640 per year. The lowest in
Australia.
• Average charges $38/GJ in the middle.
• Carbon contributed an increase of
approximately 3.3% in 2013 (or $21 out of
$637)
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National Review – Comparative Household Bills
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RESIDENTIAL FUTURE GAS
PRICE DRIVERS
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Key drivers of future Residential gas prices?
• It is a confusing jurisdictional story in all likelihood – at a turning point probably
• Caused by fuel switching issues in response to escalating prices – reductions in
volumes will be critical to network charges and retail income, and
• This will largely in the major markets be driven by switching for heating – to
reverse cycle air conditioning mainly – complex story here with PV, batteries,
peaked pricing, etc. – and retailers may well be indifferent – unlike networks, so
• The responses by networks to this decline will also be critical – far more so in
regions with very high prices – and lower WACC’s will assist here as will
aggressive treatment of capital and operating cost budgets by the AER
• Victoria seems to have seen a price peak – might see this elsewhere
• Retail margins maintenance can be expected with targets likely of $10 - $15/GJ
• Underlying gas price increase – marginal though given final prices
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