‘Strip out export costs’: Gas buyers escalate pricing debate

East coast manufacturers are mounting a campaign to change the gas pricing benchmark quoted by the competition watchdog to exclude export costs as they battle for a price marker that could help them secure lower tariffs.
  1. East coast manufacturers are mounting a campaign to change the gas pricing benchmark quoted by the competition watchdog to exclude export costs as they battle for a price marker that could help them secure lower tariffs.

    Industrial gas buyers want the Australian Competition and Consumer Commission’s fortnightly LNG “netback” price series to deduct the large capital costs for the three Gladstone export plants that they say are built into the numbers.

    Such a move could reduce that price by as much as $2.60 a gigajoule, according to one manufacturing industry source, representing a potentially large reduction in periods when LNG prices are lower.

    The issue of a price reference for east coast gas contract has become heated as gas producers and industrial buyers prepare for the last few weeks of negotiations on a voluntary code of conduct that the federal government intends would give buyers more power when negotiating on deals.

    The move comes as other manufacturers such as Incitec Pivot are also pushing for a reference to be made in the code of conduct to the US benchmark gas price, Henry Hub, which is much lower than Asian benchmark prices.

    The ACCC’s LNG “netback” price is referred to in the federal government’s Heads of Agreement with the Queensland LNG exporters on domestic gas supply. Under the revised Heads of Agreement announced in January, the three LNG exporters are obliged to “have regard” to those prices when offering gas under contract to the domestic market.

    That doesn’t help manufacturers at the moment, after an extreme spike in spot LNG prices in Asia which has driven “netback” prices at Queensland’s Wallumbilla gas hub to a record.

    The ACCC’s latest netback figures, released on Monday, show a surge in the average netback price for February to $19.62 a gigajoule, about three-four times the level of spot prices on the east coast and more than double many contract prices. The forward curve points to netback prices falling back to $9.26/GJ in March, but that is still several dollars higher than at any time in 2020.

    The regulator says the netback price “is a measure of an export parity price that a gas supplier can expect to receive for exporting its gas”. It is calculated by taking the price that could be received for LNG and subtracting or ‘netting back’ the costs incurred by the supplier to convert the gas to LNG and ship it to the destination port.

    But manufacturers argue that price still includes LNG-related costs that should be excluded.

    “The issue is one of fairness: the local buyers shouldn’t have to pay for the services they don’t use, and that means all the LNG-related costs,” one said.

    A second “non-negotiable” for manufacturers in the code of conduct is a linkage to a transparent international index, preferably Henry Hub, the source said. That has been roundly rejected by gas producers including Santos, whose chief executive Kevin Gallagher says the Henry Hub price has “no relevance” to the cost of producing gas in Australia.

    Manufacturers emphasise they aren’t looking for subsidies and take issue with comments from producers such as Santos and ExxonMobil that they just want discounted gas, describing that as a deliberate tactic by producers to paint them as “rentseekers”.

    They have also been irked by Santos’ advice that it will benefit from the higher spot LNG price through 10 LNG spot cargoes this quarter. None of the cargoes is however from the GLNG plant in Gladstone, which currently only sells cargoes under long-term contracts.

    The industrial gas buyers also want the code of conduct to somehow be enforceable, despite its “voluntary” nature.

    The debate points to major divisions between the two sides just weeks before the industry-led code of conduct is intended to be tied up, by the end of February. Federal Energy Minister Angus Taylor wants “substantial progress” on the code by then, a spokesman said on Friday.

    It comes as the Australian Energy Regulator gained tougher powers to haul energy executives to investigatory hearings to be grilled about potential breaches of national energy laws. The maximum penalty that the AER can seek for a breach has also been significantly increased, to $10 million, from $100,000.

    AER chairman Clare Savage said the new powers, which also allow the regulator to seek court orders to force companies to hand over documents or information, “will better equip us to do our job to protect consumers, while incentivising compliance”.

    Source: Financial Review