Australia’s Gas markets BREE Workshop, November 2014 Ross Lambie Gas Market Manager Bureau of Resources and Energy Economics (BREE)

2014 Gas Market Report Development of Australia’s natural gas industry Overview of Australia’s natural gas resources and markets Development of Australia’s natural gas industry Cost competitiveness: a key challenge to Australia’s LNG sector Global LNG outlook Review of the economic impact of the CSG industry in Queensland Note on the economics of domestic gas reservation policy

Potentially lots of gas…

Three distinct and separate gas markets… Western – largest market, incl. LNG exports, 1,551 PJ Northern – smallest market, 26 PJ Eastern – largest domestic market, 854 PJ Development strongly influenced by: Remoteness of gas supply basins Concentrated energy demand around population centres Relatively low domestic demand Northern Gas Market Western Gas Market Eastern Gas Market

Strong growth in production and use over the last 45 years Little value, no clear commercialisation pathway - focus on oil Few industrial users, replacement for manufactured town gas Growth in large industrial users, demand from residential and commercial customers Value-adding LNG export opportunities – linking domestic markets to international markets

Supply is changing… Cooper conventional Bowen-Surat CSG

and so is domestic demand… Electricity generation Manufacturing Mining

Darwin LNG train 1 (3.7 Mtpa) …and LNG exports Pluto train 1 (4.3 Mtpa) NWS train 5 (4.4 Mtpa) Darwin LNG train 1 (3.7 Mtpa) NWS train 4 (4.4 Mtpa) This didn’t ‘just happen’ NWS trains 1, 2 & 3 (7.5 Mtpa)

Australia must remain cost competitive Ichthys QLD CSG LNG Darwin LNG NWS 1-3

LNG delivered cost to Japan Australian projects APLNG Ichthys Gorgon Sabine Pass

Asian demand has dominated LNG growth Australia’s supply response has been relatively modest

Things are about to change… Major sources of growth in LNG export capacity ‘The coming of the second wave’

With significant potential for more supply… LNG supply capacity Australia becoming number one this decade. The location of new supply will then depend on where it is least costly.

But, new supply will depend on LNG demand… Growth in Asian demand looks promising over the medium term… particularly for China and India

And forecasting LNG demand is fraught with uncertainty… Depends on many factors: Natural gas share of energy demand Relative costs of alternative energy LNG share of natural gas (indigenous gas and pipeline imports) Geopolitical factors The role of unconventional gas China’s natural gas supply and demand balance

Unconventional gas is also an issue for Australian LNG supply… social licence In this figure, there is an increase in the demand for gas to supply the LNG spot market. This is shown as an outward shift in the elastic section of the demand curve and a corresponding upward movement in the kink point (red dashed line). The price in the spot LNG market remains the basis for the opportunity cost of supply for a gas producer, but is slightly higher after the shift in demand. Over time we would expect the market to adjust the relative levels of long term contract prices and spot/short term market prices according to which segment of the market (LNG contract, domestic contract, LNG spot) is the basis for determining the opportunity cost of gas supplied. http://www.lngworldnews.com

Need to understand the coal seam gas industry’s impacts This simple framework sheds several insights on the impact on domestic gas prices when the domestic gas market is linked to the LNG market: The key determinant of domestic gas prices is the opportunity cost of gas supplied. In a given period, the opportunity cost of gas supply will depend on the underlying costs of supply (wellhead price and transport costs), uncertainty, the degree of market imperfection (ability of suppliers to exert market power) and the type of demand (contract or spot) for which there is excess demand. In the transition to linking, and until there is stable LNG production, if there is uncertainty about the demand for gas from LNG producers, and hence the supply of gas needed from the existing domestic market, and the gas market is perceived to be tight, then the current LNG contract price may become the basis for the opportunity cost of domestic long term contracts. Investment in LNG trains is large, lumpy and involves significant sunk costs. If the supply capacity of LNG trains is almost fully contracted, then until there is the need to secure gas for additional LNG trains, the opportunity cost of additional gas supplied in the domestic market will be based on either the LNG spot price if it is an option (marginal cost of LNG from existing trains), or if not, then prices as determined in the domestic market. When the domestic gas market is linked to the LNG market, developments in the latter will affect prices in the former if the LNG market is the basis for the equilibrium price of gas in the domestic market. Source: Rolfe et al. 2011

We are beginning to… First part of BREE’s CSG study reviews the projected and actual economic impacts of CSG on Queensland Key findings: A clear positive net benefit to Queensland through increased economic output, employment, household income, royalties and regional population ̶ broadly consistent with forecasts Detailed analysis of cumulative impacts would have been useful in the early stages of development Distribution of net benefits and costs important - considered in the second part of the study Ateshgah is the name of the fire temple at Baku in Azerbaijan

With opportunity comes challenges… The eastern market’s transition to LNG exporting ̶ the domestic market is changing higher wholesale gas prices supply concerns Implications of potential policy responses need to be understood Domestic gas reservation policy Ateshgah is the name of the fire temple at Baku in Azerbaijan

Thank you Ross.Lambie@industry.gov.au