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

2. 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

3. Potentially lots of gas…

4. 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

5. 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

6. Supply is changing…
Cooper conventional
Bowen-Surat CSG

7. and so is domestic demand…
Electricity generation
Manufacturing
Mining

8. 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 (3.7 Mtpa)
NWS train 4
(4.4 Mtpa)
This didn’t ‘just happen’
NWS trains 1, 2 & (7.5 Mtpa)

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

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

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

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

13. 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.

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

15. 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

16. 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.

17. 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

18. 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

19. 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

20. Thank you