20 January, 2017
Australian wholesale and domestic energy consumers face a 50% rise in gas prices due to the country's focus on liquid natural gas (LNG), a National Australia Bank report has said.
Australia has been increasing LNG production capacity and is expected to have the world’s largest LNG production capacity, at around 85 million tonnes per annum or over 20% of global capacity once development is completed, the report said.
Growth has, however, been slower than planned, and global LNG prices have fallen since 2014. The volume of exports is also expected to rise, overtaking coal as Australia's largest export after iron ore in 2018. This exposure to LNG export markets is likely to increase wholesale prices significantly, with "far reaching implications for domestic gas use", NAB said.
"Higher wholesale gas prices are likely to spill over into electricity markets by increasing fuel costs for peak load open cycle gas turbines. Higher gas prices are already flowing through to domestic customers, with reports that contracts are being offered well in excess of current netback export parity prices. While wholesale gas prices generally constitute a smaller portion of residential customers’ bills, higher prices are likely to see some fuel substitution to electricity, especially for space heating," the report said.
Although residential gas prices have increased across Australia over the past 15 years following a period of relative stability in the 1990s, they "remained underpinned by low wholesale prices struck through stable long term contracts", NAB said.
However, gas suppliers are now believed to be offering long term wholesale contracts at AU$10 per gigajoule (GJ) in expectation of a recovery in LNG export prices in the coming years, the report said.
If spot and domestic contract prices move consistently into that price range, alongside increases in other costs, the price of gas for residential customers in Australia’s five largest cities could increase by more than 50% by 2020, it said.
"The impact of higher prices will differ across different parts of the country … Melbourne tends to use around twice as much gas as Sydney, reflecting historic factors and climate. Industrial demand continues to face challenges from a wind-down in manufacturing, but the more than doubling of wholesale gas prices will increase input costs for gas intensive producers," the NAB report said.
The International Energy Agency (IEA) said in November 2016 that major transformations in the global energy system will mean that renewables and natural gas are the "big winners" in meeting energy demand by 2040.
Investment in oil and gas will remain essential to meet demand and replace declining production, but growth in renewables and energy efficiency will reduce demand for oil and gas imports in many countries. Increased LNG shipments will also change how gas security is perceived, the IEA said.
For further information, please contact:
David Rennick, Partner, Pinsent Masons
david.rennick@pinsentmasons.com
