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East coast gas prices remain stubbornly high despite oil price collapse

East coast manufacturers are voicing frustration as domestic gas prices fail to follow international LNG prices lower, leaving them paying up to 25 per cent more for spot gas than equivalent export “netbacks” despite the dive in crude oil prices.

A combination of cool spring weather in Victoria and an apparent reduction in supplies from the Esso-BHP venture in Bass Strait has pushed gas prices in in the south-east up to about $10 a gigajoule, from $8-$9 a few weeks ago.

At the same time the rapid drop in international oil prices, the steepest since the global financial crisis in late 2008, has pushed the LNG “netback” price – the price of Australian LNG less liquefaction and shipping costs – down south of $8/GJ, according to energy market adviser Energy Edge.

EnergyEdge’s Josh Stabler said the recent unseasonally cool weather has driven up gas demand in Victoria from 450-500 terajoules a day to over 600T TJ/d, which was “the primary motivator behind the price lift”.

At the same time, he calculates that as oil prices have collapsed LNG netback prices have plunged more than $5 a gigajoule, or 39 per cent, in just 45 days.

“This means that the day-in-arrears international netback prices are now lower than the domestic prices,” Mr Stabler said.

“However, as LNG prices are delayed by their physical nature, the impact on domestic outcomes is likely to be in the coming months,” he said, signalling the lower netback prices should filter through to the domestic market in time.

Still, the discrepancy between local prices and international equivalents has left some manufacturers fuming, struggling with prices right at the top of or beyond the $8-$10/GJ range they say is bearable.

Spot gas prices in Adelaide were $10.99/GJ on Monday, and $9.82 in Victoria, with Sydney prices slightly lower, according to the Australian Energy Market Operator.

A sharp increase in east coast prices well beyond netback prices in early 2017 that caused the federal government to step in to introduce the Australian Domestic Gas Security Mechanism, which gave it powers to curb LNG exports if needed, to prevent local customers going short. The policy encouraged Queensland’s exporters to release more gas onto the domestic market, helping eliminate the premium by late 2017, but that gap looks now set to open up again unless east coast prices soften.

Still, federal Resources Minister Matthew Canavan has already decided not to impose controls on LNG exports in 2019 after the government struck an agreement with the Queensland LNG exporters at the end of September to maintain secure supplies of gas to the east coast.

The Australian Competition and Consumer Commission says netback prices are an important influencer of gas prices on the east coast now that the domestic and export markets are connected through Queensland LNG exports. But it also advises that other local factors also come into play.

But Garbis Simonian, chief executive of business gas retailer and trader Weston Energy, said the volatility of netback prices makes it hard for gas-dependent manufacturers to plan.

“We need long-term stable prices,” Mr Simonian said, calling for domestic prices to be based on a cost-plus methodology rather than being driven by LNG export markets.

Meanwhile the start-up due in mid-December of the $800 million Northern Gas Pipeline between the Northern Territory and the east coast grid is giving hope to east coast users of a softening in domestic prices around the corner.

The NGP, built by Jemena, is understood to be due to come online on December 15. It will have capacity to deliver 80TJ/day of gas to Mt Isa, reducing demand on the rest of the east coast by that amount.

Mr Stabler described the NGP as “an important new component of the gas market”, bringing a chunk of new supply suddenly into the east coast. He calculates the pipeline is the equivalent to a $1 billion gas production project, based on the assumption that a new well will eventually supply 500 gigajoules a day and cost $3 million to drill.

In the ACCC’s latest report on LNG netback prices on November 16, it put netback prices at $11.20/GJ, while forward prices were pointing to above $12/GJ in January and February, the peak of the northern hemisphere winter, when LNG demand is at its highest. The further drop in oil prices since then points to a likely softening in the numbers in the watchdog’s next price report, due on Friday.

Source: Financial Review