Australia's LNG exporters have a no-win domestic dilemma

11/22/2022

(Reuters) - Australia's LNG exporters have a problem at home, where industrial and domestic consumers are making strident demands for them to accept a price cap, higher taxes, guaranteed volumes or some combination of all of these.

The LNG industry argues that all of those of measures would result in lower investment and lower natural gas production over time, which would ultimately lead to higher prices.

There is merit on both sides of the argument.

But the problem for Australia's natural gas producers and LNG exporters is that politically their case is a hard sell, and they could risk getting a reputation for profiteering unless some way is found to take the burden off consumers.

Australia vies with Qatar and the United States as the world's biggest LNG exporter, having boosted its export capacity over the past decade mainly by building three export terminals on the east coast, which use coal-seam gas as a feedstock.

The Russian invasion of Ukraine and the subsequent surge in energy prices amid fears over the loss of Russian exports of natural gas, LNG, crude oil and coal has provided Australia's LNG exporters with windfall revenues.

But it has also led to higher prices in the domestic market, and calls from businesses and households for action to make LNG more affordable.

The argument seems reasonable enough, namely why should consumers in a major exporting country pay high prices domestically as natural gas should be made available to the local market at a price well below the current high international LNG spot price.

The LNG industry is happy to meet one of those demands, namely ensure sufficient supply is offered to domestic consumers before being made available to the LNG exporters.

The industry lobby group, then Australian Petroleum Production and Exploration Association (APPEA) argues that the vast majority of natural gas supplied to the domestic market is done so on a contract basis at prices below the spot LNG price in Asia.

"While a range of prices can be offered to customers in direct negotiations, the average realised domestic prices reported by APPEA members to the Australian Securities Exchange recently for the third quarter sit between A$8.50 ($5.61) a gigajoule (GJ) and A$13.10/GJ, well below the international market," group said in a Nov. 3 statement.

That seems reasonable given that even the upper end of that range equates to about $8.19 per million British thermal units (mmBtu), which is about one-third of the $25.50 per mmBtu the Asian spot price <LNG-AS> was assessed at in the week to Nov. 18.

However, the devil is in the detail, and in this case it's the word "average."

PRICE IS KEY

The issue for natural gas consumers is that when they have to buy on the spot market in periods of high demand, such as when gas-fired peaking power plants swing into action, the price is significantly higher.

There are also reports that new natural gas contracts are costing well above what APPEA says, with the Energy Users Association of Australia, which represents manufacturers, saying that some members have recently had to pay between A$30 and A$35/GJ for new deals.

The spot price of natural gas at the Queensland state hub of Wallumbilla, as assessed by commodity price reporting agency Argus, was A$21.44/GJ on Nov. 18, almost double the A$11.44/GJ that prevailed in the same week last year.

This price doesn't include the cost of transporting the gas from the hub via pipelines to consumers in the most populous southeastern states of New South Wales and Victoria.

What gas consumers want is capped prices and guaranteed volumes. The gas-consuming manufacturers lobby group reportedly wants a price around A$10/GJ.

The centre-left federal government of Prime Minister Anthony Albanese is looking at the ways of easing price pressures, but the ruling Labor Party seems somewhat split on the best course of action.

It ideally wants to ensure domestic supplies at a reasonable cost, while ensuring the industry is happy enough to continue investing in new gas fields.

That's a magic pudding that's unlikely to work in reality, meaning the government will be forced to make difficult choices.

But given the LNG industry has managed to get itself painted as the villain in this story in large sections of the media, both traditional and social, the easier and popular path will be to impose higher taxes and hand out subsidies, or regulate prices.

The industry is likely to lobby against any such moves, but even winning means losing as they would then be blamed for rising energy and electricity prices, and will take the heat from any job losses among gas-dependent manufacturers.

The lowest cost option for the LNG sector would be to impose a voluntary price cap for the domestic market, and work out a way of spreading the pain of this equally among the gas-producing companies.

But it's likely that they will try to fight first, and make themselves more unpopular in a situation they can't win.

(Editing by Simon Cameron-Moore)