The launch of the Australian Workers Union’s “Reserve Our Gas” campaign on Monday is timed, deliberately or not, just as the export LNG program that underlies the campaign is about to enter a new and transformative phase.
When BG Group’s $20 billion-plus QLNG project at Gladstone in Queensland begins exporting sometime in the final quarter of this year it will mark a decisive punctuation mark for the nature of the gas market in the eastern states.
In reality that point was reached some years ago when the three big coal seam gas-fed LNG plants at Gladstone received positive final investment decisions and the impact of the start-up of those plants has already been seen in soaring east coast gas prices.
Where once domestic gas was sold for less than $4 per gigajoule, today the domestic price is climbing towards double-digits and there is a scarcity issue which hadn’t previously existed. The three Curtis Island export LNG plants are the reason for the changed circumstances in the east coast gas market.
Where previously there was no export market for east coast gas there very shortly will be a major one — all three plants will be operating sometime next year — and that will effectively mean domestic gas will be priced (and is already being priced) in reference to the price available in export markets, where gas tends to be sold today on oil-linked prices.
While US dollar-stated spot prices have fallen recently into the low teens, the Gladstone plants have contract prices that should deliver outcomes in the mid-teens. After taking into account the capital and operating costs of liquefaction and transport, the “netback” price — the Australian domestic price — is likely to be in the high single digits.
For manufacturers that have historically been used to low gas prices because there was an abundance of east coast gas but only a domestic market to sell it into, the emergence of an export LNG sector in eastern Australia has come as a shock. Not only do they face much higher costs but the massive supply requirements for the Queensland plans has tied up much of the available new supply in Queensland and South Australia.
Faced with the prospect of having to compete with foreign buyers for the gas at prices far higher than they have been accustomed to, local manufacturers have been advocating the reservation of some domestic gas production for domestic use. The AWU campaign is for a proportion of the gas to be reserved at a “fair” price.
Given that the Queensland plants have locked up much of the available incremental production and acreage to support their export contracts, have invested more than $60 billion in building their plants and will invest considerably more if they decide to build additional LNG trains to improve the plants’ economics, the AWU campaign may have come too late.
It may also be misconceived. Across the entire LNG sector, including Western Australia, closer to $200 billion has been invested or committed to build LNG projects that will, according to the recent federal government energy white paper, generate export income of more than $60 billion in 2017-18.
That’s export income from selling gas and between three and four times (if not more) the price at which gas was previously sold in the domestic market.
Apart from the massive investment and the employment and prospective national income gains that flow from the LNG projects, a lot of the gas off WA and onshore in Queensland and elsewhere on the east coast would never have been developed on the basis of a gas price of $4 per unit or less. It costs significantly more than that to develop and produce unconventional gas from coal and shale deposits.