Australians’ Gas Bills Soar Amid Export Boom – WSJ

SYDNEY—Australia’s natural-gas bills are rising as the country prepares to ramp up exports of the fuel, in a cautionary example for the U.S., which is also planning to sell some of its gas overseas.

Australian wholesale domestic-gas prices have almost tripled over the past couple of years, inflating household energy bills and hitting bottom lines at some businesses.

The culprit is gas exports, which are set to more than triple by 2018, while the country’s production levels have stayed relatively flat until recently—though they are to rise dramatically as early as next year.

Seven export facilities are to come on line within the next three years to feed rising Asian demand. The first of those plants, which will ship gas in liquid form to countries like China and Japan, is backed by Britain’s BG Group BG.LN -1.04% PLC and due to start producing this year. But since gas contracts are typically negotiated years in advance, domestic prices have risen in anticipation of tighter supplies amid competition with Asian buyers.

In Australia’s most populous state, New South Wales, a cross-industry pricing regulator recently warned that shrinking domestic supplies of natural gas could push the typical household gas bill up by as much as 18% in the current fiscal year through June—equal to an annual increase of roughly 225 Australian dollars, or US$200.

Last year, the Grattan Institute, a public-policy think tank, said the average household gas bill in Australia could keep rising by as much as A$170 annually for several years.

Some experts say that the same sort of thing, albeit to a lesser extent, could happen in the U.S., where technology to tap natural gas trapped in rock formations underground has led to a shale-gas boom.

The U.S. Department of Energy has approved several large liquefied natural gas, or LNG, facilities on its coastlines in preparation for shipping more gas overseas, especially to Asia. Dozens more companies have applied for export permits.

Australia has been exporting LNG for more than 20 years, but only in limited amounts. Customers have mostly been in Japan, a country which doesn’t have much fossil fuel of its own. The rest of Australia’s gas has typically been produced for the domestic market.

In the past five years, however, Asian demand has risen rapidly—tempting producers to look to offshore to boost profits. Fast-developing nations like China are jostling to secure affordable long-term energy supplies, while also striving to cut pollution by burning less coal. Japan has also been importing more LNG than usual since a 2011 disaster at a nuclear plant forced the bulk of such plants offline.

Companies like Chevron Corp. CVX -1.41% have been increasing production in Australia and investing heavily in more facilities. The country is now on track to overtake Qatar as the world’s biggest LNG exporter within three years; global and local firms have committed some US$170 billion to build new export facilities.

But the wooing of overseas gas buyers means Australian manufacturers accustomed to paying A$3-A$4 per gigajoule for long-term supply contracts will be competing with customers in Asia willing to pay up to A$18 a gigajoule, including LNG processing and shipping costs.

Australia is on track to export three times what it consumes domestically by 2020, up from a roughly even split now.

“I wouldn’t want to lecture the U.S. on energy policy, but if you want an example of getting it wrong, it’s Australia,” said James Fazzino, chief executive of Australia’s biggest fertilizer maker, Incitec Pivot. IPL.AU -3.51% “It’s a train wreck.”

High domestic gas prices among other things prompted Incitec Pivot last year to build a US$850 million ammonia plant in the U.S. rather than in Australia. Other manufacturers, including international chemical firms BASF BAS.XE -3.66% SE and Dow Chemical Co. DOW -0.73% , have also said they are rethinking their Australian investments in the wake of rising energy bills.

A recent report by Deloitte and Access Economics said makers of everything from plastics to bread may lose up to A$118 billion in income in the seven years through 2021 as Australia’s gas market focuses more on exports.

To be sure, the situation in North America isn’t directly comparable. Unlike Australia, the U.S. will likely be exporting much less than it uses at home. LNG projects approved in the U.S. would account for just over 10% of the country’s current annual consumption.

The U.S. produced 30.2 trillion cubic feet of natural gas in 2013, according to the International Energy Agency. Australia, in comparison, produced about 2.2 trillion cubic feet in the year to June.

Still, rapid increases in exports could prompt U.S. domestic gas prices to rise by as much as 36% in 2018, according to a 2012 IEA report.

In Australia, higher domestic prices should encourage the development of more gas fields, say industry players like Santos Ltd. STO.AU -1.78% , one of the country’s biggest domestic gas suppliers, which expects gas prices to come down as a result. The company places some of the blame for rising gas prices on strict environmental regulations, such as those restricting drilling for coal-seam gas close to residential areas.

“Australia is an extreme case relative to the U.S., but it’s certainly a cautionary tale on what could happen if companies get too carried away,” said Neil Beveridge, an energy analyst at broker Sanford C. Bernstein.

via Australians’ Gas Bills Soar Amid Export Boom – WSJ.