Gas buyers fear fresh price surge amid Europe crunch

Prices for natural gas on the east coast have almost doubled over the past month, causing fresh worries for manufacturers all too aware of the crisis that surging prices has caused in Britain and Europe, where businesses have gone broke and plants closed down.
  1. Prices for natural gas on the east coast have almost doubled over the past month, causing fresh worries for manufacturers all too aware of the crisis that surging prices has caused in Britain and Europe, where businesses have gone broke and plants closed down.

    The price spike has come as maintenance work at the main Longford plant that processes gas from the Bass Strait fields squeezed supply and led to a concerning run-down in storage levels at Victoria’s major storage plant.

    On Friday, prices in Sydney for gas for immediate delivery were $13.50 a gigajoule, and up at $14/GJ or higher in Brisbane and Adelaide, with Victoria slightly softer. That’s up from last month’s average of about $8.15 a gigajoule in some states.

    The tariffs are also being pulled higher by international prices for gas that have stayed super strong over the past several weeks and last week pushed higher again in Europe after a setback for the critical Nord Stream 2 pipeline from Russia.

    Asian LNG spot prices were above $US37.50 per million British thermal units on Thursday, up from under $US2 in the June quarter last year, reportedly causing rationing of gas use at some Japanese utilities ahead of the northern hemisphere winter.

    Prices at those levels translate to a “netback” export-equivalent price in Queensland – one of the benchmarks for assessing whether domestic prices are reasonable – of more than $30/GJ.

    “Every customer goes out of business at that price,” said Andrew Richards, head of the Energy Users Association of Australia, whose members include industrials such as BlueScope Steel and Boral.

    “We’re certainly very concerned about prices edging up. It’s making people very, very nervous.”

    Sky-high prices for gas in Britain and Europe in recent months triggered closures of factories and sent several energy retailers out of business. While Australia, as one of the world’s biggest gas exporters, is in a different position, industrial gas users on the east coast say they are at the mercy of the huge export business of Queensland’s LNG producers, whose primary focus is the valuable Asian market.

    James Simonian, chief executive at NSW gas wholesaler Weston Energy, said variations in export volumes by the Queensland LNG ventures dictated by the Asian LNG market tended to deter investments in new fields that could supply domestic customers. He said when demand and prices were weak in Asia, the ventures could “dump” gas onto the domestic market, which had the effect of deterring buyers from negotiating with domestic gas developers for long-term supplies.

    “That has a real chilling effect on any dedicated domestic field development,” Mr Simonian said.

    “I think we’re still on track for $8 gas for the middle of next year but … the short-term prices of the daily market are much more vulnerable to international prices than they were.”

    Gas buyers complain that moves by the federal government to try to ensure adequate supply for domestic buyers have failed to address the issue of competitive and affordable prices. Earlier this month, Incitec Pivot blamed high gas prices for its decision to close an ageing fertiliser plant near Brisbane.

    “At the end of the day, governments have done a lot of work on electricity prices, but they seem reticent or reluctant to do something on gas prices,” Mr Richards said, adding that most government initiatives could have an impact only longer term.

    “We’re just wondering how bad it needs to get before they’re prepared to do something more on gas prices.”

    Gas buyers say the government’s agreement with the three Queensland LNG projects to avoid shortages in the domestic market lacks teeth.

    “It’s well known that those measures are more designed to ensure sufficient supply, but it’s pretty clear that it has minimal effect on prices,” Mr Richards said. That leaves buyers reliant on market monitoring by the competition watchdog and an overdue code of conduct for gas producers that does not include the commitments on pricing that manufacturers wanted.

    Competitive prices

    Federal Resources Minister Keith Pitt pointed out there was no imminent risk of a gas shortage in Australia.

    “We will continue to monitor the market, but prices should be stabilising as the weather warms and the Longford facility returns to normal processing,” Mr Pitt said.

    “Fifteen commercial gas arrangements have already been struck this year, showing there is supply and competitive terms available.”

    Federal Energy Minister Angus Taylor noted Australia’s gas prices remain internationally competitive, with the average east coast spot price about 60-70 per cent below prices in Asia and Europe.

    “The energy crisis overseas shows the continued importance of our gas-fired recovery by getting more local gas out of the ground and delivered to our domestic markets,” Mr Taylor said.

    “A secure and affordable supply of gas will support our economy and the 1-million-strong manufacturing workforce, levels not seen since 2009.”

    Mr Richards noted that most of the long-term gas sales contracts struck this year involve gas quarantined for the domestic market by the Queensland government, voicing strong support for that policy.

    The Australian Energy Market Operator said the higher domestic gas prices experienced last weekend were driven by unusually cold weather in Victoria, coinciding with planned maintenance at Longford and high LNG export prices.

    “As a result, gas storage levels at the Iona gas plant fell from 12.6 petajoules to 10.1 petajoules over the last two weeks,” an AEMO spokesman said, noting that was getting close to the minium of 9.6PJ seen in late July.

    The spokesman said Iona storage levels are expected to improve with warmer weather and increased output at Longford from November 25. He said AEMO would “continue to monitor” the refilling of storage at Iona, where inventories had been drawn down heavily during the winter because of reduced coal power production and an unplanned outage at Longford.

    AEMO is expecting a decline of production in any case at Longford next winter and again in 2023, and the spokesman said an expected improved outlook for gas supply through to 2026 depended on field developments and expansions taking place as planned and the proposed Port Kembla LNG import terminal starting up before the 2023 winter.

    Global energy scarcity

    However, again, the LNG import hopes give little comfort to buyers, given high international prices. JPMorgan estimates that importing LNG into Australia in October – assuming terminals existed then – would have cost $15.69/GJ for gas from the US, and $43.49/GJ for gas from Asia, far above domestic prices.

    Josh Stabler, at advisor EnergyEdge, said the decline in storage levels at Iona had paused, meaning “it is unlikely that there will be any threat to energy security during the short term”. He said that supply in the medium term was more of an issue, given a four-month delay in rebuilding gas storage levels for winter 2022.

    “While the high price events in the European gas market conditions seem far away, the issue is that energy scarcity is becoming a common theme across the planet right now, and it will create a magnet for gas supplies out of Curtis Island beyond the normal December-February peak period,” he said.

    Esso Australia, which operates the Longford facility, confirmed it is carrying out planned maintenance there and at the Tuna and Snapper platforms to help prevent unplanned disruptions.

    “This activity has been scheduled in accordance with AEMO in a traditionally low-demand period, and we have worked closely with AEMO and our customers to minimise any potential impacts,” a spokesman said.

    “Almost all of our domestic customers are on long-term contracts and therefore, not impacted by spot prices,” he said.

    “As we have noted previously, having multiple supply sources across the domestic energy market is critical to ensure system reliability and avoid customer disruptions.”

    Source: Daily Advent