East coast gas exports are at record levels as Queensland’s three big liquefied natural gas plants run hard to meet growing Chinese demand that has sent spot prices soaring and pushed east coast domestic gas prices higher.
But the higher domestic prices have been contained, indicating that Malcolm Turnbull’s moves to ensure the three big gas exporters, Origin Energy, Shell and Santos, did not leave domestic markets short have worked so far in a hot summer.
Further evidence of this is the fact that the big Bass Strait gas fields owned by ExxonMobil and BHP Billiton — which have been running at record rates this year to supply extra demand driven by the LNG plants — last month started a production pullback without a big rise in spot prices.
Gladstone port statistics show LNG exports jumped 17 per cent from the previous month to 1.99 million tonnes.
The move eclipsed the previous record of 1.75 million tonnes set the previous December.
The three plants built at Gladstone for a cost of $70 billion, which have rapidly tripled east coast gas demand, are now able to run at full capacity.
The plants have opened domestic markets to international prices, meaning contract prices have risen from $3 to $4 per gigajoule to $8 to $10 or more, spurring warnings of looming job cuts and increased power prices.
Citi analysts said spot gas prices in Australia’s southeastern states averaged $7.40 per gigajoule in December, up 9 per cent from the previous month.
“Higher domestic gas prices seem to be a function of both higher LNG export prices as well as increased use in electricity generation during the summer,” Citi analyst Dale Koenders said.
“LNG producers continue prioritising exports over domestic markets ... while power demand rose in the southern states in a hotter than usual December, net contributions to the domestic markets remain low with producers leaning on exports on the strength of high spot LNG prices.”
Australian Energy Market Operator data shows that the Longford gas plant that processes gas from Bass Strait has pulled back from about 1100 terajoules of production per day from June to September, to about 900 terajoules in December.
That this has not resulted in a spot price surge indicates domestic markets remain well supplied for now.
Spot LNG has more than doubled in the past six months as China has accelerated a shift from coal-fired power and heating to gas to tackle air pollution.
Asian spot prices are now at $US10.86 per million British thermal units, or $14.60 per gigajoule.
The increased LNG demand and spot price rise, combined with a hike in international oil prices that contract LNG sales are linked to, has sent Santos shares to a two-year high of $5.60, nearly doubling from $3 at the start of June.
Origin Energy, which operates the Australia Pacific LNG plant with ConocoPhillips, is also at a two-year high, having risen 40 per cent in the past three months to $9.75.
The surging LNG prices and Chinese demand, if contained, are refuting the argument that Australian businesses are paying more for wholesale gas than their Asian counterparts.
Not that this is good news for local users.
If the increase is long-term, it could spell the end of AGL Energy’s plans for a $250 million LNG import plant in Victoria to increase competition in the southern states by making imports uneconomic.
In August, AGL said it could import gas to Victoria at a price of between $8 and $10 per gigajoule.
This was when spot LNG prices were still below $US6, indicating any LNG that was imported to Victoria at current prices would cost well over $10 per gigajoule.
Still, at an investor briefing in early December, when prices had climbed to $US9, AGL said it was “reasonably confident” of the economics of the terminal, which would be built at Crib Point.
City said it did not expect surging Chinese demand to keep LNG markets tight for long.
“Policy-accelerated gas demand growth in China has occurred faster than the infrastructure and domestic gas supply can keep up, in turn placing greater reliance on China LNG imports,” Citi analysts said. “However, we expect China’s domestic gas markets will respond with increased production and storage, prior to Russian pipeline supply late 2019, mitigating the ongoing impact.”
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