East coast gas headaches to worsen: WoodMac by Angela...

East coast gas headaches to worsen: WoodMac
by Angela Macdonald-Smith 17th July
East coast gas buyers looking forward to easing pricing pressures should think again.
Rapidly growing Asian demand for LNG will subject domestic gas customers to rising prices that will squeeze profits and harm competitiveness, raising the risk of industrial plant closures that will once again lead government to intervene, according to Wood Mackenzie.
Rapid LNG demand growth in Asia means domestic gas customers are facing a future of further price escalation, squeezing profits and harming competitiveness, raising risks of plant closures that will once again lead government to intervene, according to Wood Mackenzie.
The energy consultancy is forecasting a gradual tightening of the links between the east coast gas market and the LNG market in Asia, subjecting the domestic market to the vagaries of international factors such as Chinese air quality measures and summer weather in Japan.

It is anticipating a further intensification of public pressure on the gas industry as prices rise, causing headaches for major gas buyers and producers.

"What has happened in the past may just look like a storm in a teacup compared to what is coming," said Nicholas Browne, Wood Mackenzie's director for Asia-Pacific gas and LNG.
"A new and uncertain market reality awaits gas consumers and producers in east Australia."
The past several years has placed the east Australian gas industry in an unwelcome spotlight, subjected to official inquiries by the national competition regulator and direct government intervention to restrict LNG exports through the Australian Domestic Gas Security Mechanism.
Prices for new domestic gas supplies are in the $8-$10 a gigajoule range, down from extreme levels above $20 early last year, but WoodMac says Asian LNG prices are higher and could further increase due to strong demand, with the effect to flow through to east coast tariffs.

"In effect a gas-short domestic market will need to compete with Asian buyers," Mr Browne said.
"From now on factors such as Chinese attempts to clean up its air and Japanese summer heatwaves will directly impact east Australian gas prices and consumers."
The pressures in the local market have spurred proposals for four separate LNG import terminals in the southern and eastern states as companies such as AGL Energy seek to lock in firm supplies of gas.
Wood Mackenzie regards the AGL terminal in Victoria's Western Port as the frontrunner of the four proposals, but said that ExxonMobil, which is studying a potential LNG import terminal in Victoria, may ultimately have the strongest case for bringing gas in from overseas.

The firm said it saw that only one LNG import terminal is needed until the 2030s, but didn't rule out more going ahead as players battle for market strength. That could lead to a repeat of the excessive building of LNG export capacity in Queensland, but for imports this time, Wood Mac warned.
"The project to get the green light first will hinder economic viability of subsequent projects," Mr Browne said.
"But after overbuilding east coast LNG export capacity, we cannot rule out overbuilding of LNG import capacity as well, despite the overall inefficiency of the outcome as players prize control and flexibility over collaboration."
Australian Industrial Energy, a venture half-owned by iron ore billionaire Andrew Forrest, is looking to build and LNG import terminal in Port Kembla in NSW, while Mitsubishi is mulling a gas import project in South Australia.

The comments follow an earlier gloomy warning by Macquarie Equities, which suggested that the LNG import terminals would do nothing to lower prices on the east coast and could in fact lock in permanently higher costs for manufacturers.
Wood Mac said the expected higher gas prices in the domestic market would squeeze disposable incomes as utility bills rise and cause gas-intensive industries such as petrochemicals and fertilisers to start to struggle to compete with rivals overseas.
"A risk of closures will likely lead to more public pressure on the gas industry and government, leading to politicians stepping in [again] to berate the industry and propose solutions," it said.