Australia / Analyst Insights
The domestic price of gas set to fall, benefiting wider community

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by Jason Aravanis
Jul 24 2018

Increasing regulatory pressure and new market opportunities are expected to decrease domestic gas prices. Industries with high energy costs are set to benefit significantly.

 Domestic natural gas prices are expected to have peaked in 2017-18, as increasing availability reduces price tension in 2018-19. This   trend will be welcome news for industries across the eastern seaboard, particularly manufacturers with high energy costs. The   unsustainable rise in gas prices in recent years has threatened the entire Australian economy, with utility costs significantly rising for   manufacturing industries, and discretionary income for households declining due to rising household bills. Domestic natural gas prices are   expected to fall by 3.3% in 2018-19, as oil and gas extractors respond to increasing regulatory pressure and new market opportunities.

 Oil and gas extractors have experienced immense growth over the past five years, as the development of multiple LNG production and   export facilities has increased annual production volumes. However, domestic supply has been threatened over the five-year period by the   increasing allocation of natural gas to export markets, leaving insufficient supply available for the eastern seaboard. This situation is   expected to improve in 2018-19 as LNG exporters respond to the imposition of new Federal Government regulations. The implementation   of the Australian Domestic Gas Security Mechanism in July 2017 has provided an incentive for LNG producers to prioritise domestic supply. This mechanism gives the Federal Government the capacity to impose export control restrictions when domestic supply is threatened. As a result, an additional 8 petajoules of gas will likely made available in Queensland by LNG producers in 2018-19. This additional supply is expected to reduce supply tension. Despite this regulation, the Oil and Gas Extraction industry is still expected to grow by 23% in 2018-19 as new LNG projects are activated in Western Australia and the Northern Territory. The additional supply to the domestic market is anticipated to account for less than 1% of the total production of LNG in 2018-19.

Rising LNG exports only partially explain the rise in domestic gas prices over the past five years. Restrictions on domestic gas resources, particularly on the Coal Seam Gas Extraction industry, have further reduced domestic supply capacity. The Federal Government has argued that state governments should increase gas supply by removing the moratoriums on unconventional gas extraction. A shortage of gas transport capacity has also played a significant role, as access to pipeline capacity appears to be a barrier to entry for gas producers in Queensland seeking to supply the southern states. Although Australia has abundant natural gas resources, these deposits are predominantly concentrated in Queensland and Western Australia. In contrast, the largest consumers of natural gas are industrial firms that are based in New South Wales and Victoria. Pipeline operators have sought to address this problem through increasing capacity, such as through the development of the Northern Gas Pipeline.

Growth in gas prices and the pressing need for new transport capacity has made importing LNG a cheaper option than high-pressure pipelines. Over the past two years, four private consortiums have announced plans to develop LNG import facilities in eastern Australia. This would enable LNG to be transported from Queensland via ship, to ease supply constraints in New South Wales and Victoria. This is likely to present a significant source of competition to pipeline transport operators, which operate as regulated monopolies.

Despite the shift towards green energy, domestic gas use is still a vital part of the Australian economy, at least in the visible short term. The domestic price of natural gas is projected to fall at an annualised 3.0% over the five years through 2023-24, as supply tensions ease. This is forecast to bring welcome relief to Australian businesses and consumers.

Related industries:

Oil and Gas Extraction
Coal Seam Gas Extraction