Gas Prices Too Much for Manufacturers: LNG Prices Still High Despite Weakening Tarrifs

Gas Prices Too Much for Manufacturers: LNG Prices Still High Despite Weakening Tarrifs

Gas Prices Too Much for Manufacturers

LNG Prices Still High Despite Weakening Tarrifs

East coast gas producers face another round of scolding from ACCC Chairman Rod Sims as gas prices for local customers remain high despite a fall in international tariffs for liquefied natural gas (LNG).

LNG: Safe but expensive

Liquified natural gas is a gas mixture of methane and ethane, which has been cooled down to liquid state. The advantage of LNG over other forms of fuel stems from ease of transport, especially when pipeline infrastructure is not available. LNG is safe and non toxic, and achieves a greater energy density as opposed to compressed natural gases. The drawback however comes from the relatively high cost of production, and the need to store it in cryogenic barrels. Most of Australia’s LNG projects are based in Queensland and Western Australia regions, while more untapped natural gas basins can be found in the south on the east coast. LNG sees a wide usage in power generation, manufacturing, food processing and construction projects.

ACCC Investigation

The Australian Competition and Consumer Commission is currently conducting an investigation headed by Mr. Rod Sims  into the east coast gas market, and the expected findings indicate that domestic prices still remain excessively high. International spot prices have seen a drop from $4 to levels below $3/gigajoule, yet customers within the east coast are paying as much as $9/gigajoule. Mr. Sims has iterated his expectation that reductions in international prices should be reflected in the prices paid by domestic consumers. This has not occurred.

A string of recent failures and closures of manufacturing plants have been caused by a lack of competitive gas prices within the domestic market. Dow Chemical, an avid advocate on the need for affordable energy, will be shutting down its manufacturing plant in Melbourne. The company has cited increasing gas prices among other issues as factors contributing to its decision. The shutdown will lead to job loss of 26 people employed at the factory. Dow Chemical’s downfall follows the failure of polystyrene cups manufacturer RemaPak and bricks manufacturer Claypave. Their dependency on LNG has led both of them to enter into voluntary administration. The consensus is that chemical manufacturers are at most risk, and a number of firms have already voiced their concerns.

The interim report to a 2017 inquiry into east coast LNG prices was released on the 30th of May. The ACCC has done much to improve transparency, implement reforms and report on the operation of the gas market. While the report concedes that gas prices have normalised from 2017 levels at $22/gigajoule, current prices were still not sustainable in the long term. Smaller gas users who could not source LNG from producers were at greater risk, as prices offered by retailers were much higher. Long term outlook was also uncertain, with a supply gap being projected for southern states in 2024 if key infrastructure upgrades was not in place by then.

Future Outlook

There has been a debate over whether government intervention is required in regards to exports. There has been an oversupply in Asia, and some are calling for a curb to exports to make sure that supply is being redirected to the domestic market. The need for a government response comes in the face of some manufacturers even considering importing LNG rather than buying it locally. However, government intervention is also a recipe for higher prices, and may not bring about the intended effect.

The key issue is that there are not enough sources of low-cost gas. Further investment into gas exploration and development of essential infrastructure is necessary in order to guarantee a secure supply of LNG at affordable prices for consumers in the east coast. More competition will lead to more competitive prices.

ACCC Chairman Rod Sims has supported Santos’ $3 billion Narrabri coal seam gas project in a bid to open up onshore supply, especially in Victoria and New South Wales. Kevin Gallagher, chief executive of Santos, agrees that government intervention and import terminals are not the way to go.  Gallagher will provide a verbal guarantee that gases from Narrabri will be cheaper than imported gases from overseas. Manufacturers such as the Brickworks and Perdaman Group, and Weston Energy intend to sign up as customers once the project has been approved. The approval of the project still remains pending.

The findings will pressure Federal Resources Minister Mathew Caravan into a response as to why efforts to curb LNG prices have failed to have much impact. It also remains to be seen what the newly elected Morrison government plans to do. The ACCC will continue promoting transparency in the LNG market, which has historically been very opaque in Australia. There is a greater need for clarity, and more information about reserves, infrastructure development, gas prices and LNG shipment will be required if the market is to operate efficiently.

By Oliver Ju

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