1. Mr Ross Lambie Gas Manager, Energy & Quantitative Analysis Bureau of Resources and Energy Economics (BREE)

2. bree.gov.au When two markets collide Linking Australia’s eastern gas market to the world Ross Lambie Gas Manager Bureau of Resources and Energy Economics (BREE) ANCRE Workshop, October 2013

3. bree.gov.au Introduction  What will be the likely impact on domestic gas prices in the Eastern market when LNG production begins at Gladstone?  Outline: A snapshot of the Eastern gas market A snapshot of the LNG market Why the linking of the domestic with the LNG market is an issue Some simple economics BREE’s gas market models Conclusion

4. bree.gov.au Australia’s gas markets Western gas market Eastern gas market Northern gas market Source: Adapted from AER, State of the Energy Market 2012

5. bree.gov.au Gas consumption by state Source: BREE

6. bree.gov.au A snapshot of the Eastern gas market  2011-12 – 59% Australia’s gas consumption (839 PJ)  Queensland and Victoria largest consuming states (509 PJ)  Historical long-term contracts ~ $3-$4 per GJ  New long-term contracts – media reports, $6-$9 per GJ; AIG Gas Market Survey 2013, $8.72 GJ  Gas-fired electricity generation – 2005-06 to 2011-12, 9.8% to 19.3% of total generation  ~ 36% of gas production sourced from coal seam gas (EnergyQuest 2013); abundant reserves  New demand – LNG projects (6 trains committed ~ 250PJ/train/year)  260 PJ of gas contracts expiring within next five years

7. bree.gov.au The Eastern gas market – consumption by sector Source: BREE

8. bree.gov.au A snapshot of the Asian LNG market  Total LNG imports in the Asian market in 2012 was 166.56 MT (70% of global imports)  Japan and Korea - world’s dominant LNG importers (52% of the market in 2012)  Spot/short-term LNG market is continuing to grow Globally, 73.5 MT in 2012 (31% total LNG volume) Asian buyers purchased 72% in 2012 (Japan, Korea and India ~ 61%)  Potential for significant LNG supply 30 trains under construction globally (110.1 MTPA) New supply regions: US Gulf Coast, Western Canada, East Africa, Floating LNG, Asia Pacific

9. bree.gov.au Asia’s LNG Imports, 2012 – Volume Source: IGU, 2013

10. bree.gov.au Australia’s LNG Exports to Asia, 2012 – Volume share Source: IGU, 2013

11. bree.gov.au Australia’s historical and projected LNG production – volume and value QCLNG GLNG Gorgon

12. bree.gov.au Eastern market LNG production  6 trains coming online between now and 2018  Queensland Curtis LNG (QCLNG) – 2014-15, 2 trains, 8.5 MTPA  Gladstone LNG (GLNG) – 2014-15, 2 trains, 7.8 MTPA  Australian Pacific LNG (APLNG) – 2015-16, 2 trains, 9 MTPA  Arrow LNG (ALNG) – going to FID in 2014, 2 trains, 8 MTPA

13. bree.gov.au Eastern market domestic gas contracts by basin Source: EnergyQuest, 2013 Currently committed LNG trains come online

14. bree.gov.au The economics of linking to an export market  Kenneth Medlock, 2012, U.S. LNG Exports: Truth and Consequence

15. bree.gov.au The economics of linking to an export market  Kenneth Medlock, 2012, U.S. LNG Exports: Truth and Consequence

16. bree.gov.au The economics of linking to an export market  Demand and supply in the domestic gas market

17. bree.gov.au The economics of linking to an export market  Demand and supply in the domestic gas market

18. bree.gov.au The economics of linking to an export market  Insights from the simple framework:  Domestic gas prices will be determined by the opportunity cost of gas supplied  In the transition to linking, uncertainty and/or market power may drive the price of domestic long term contracts to the netback price based on current long term LNG contracts  After linking, the opportunity cost of gas supplied will either depend on the demand from LNG producers for additional gas and, therefore, the relevant LNG market price, or domestic market prices  Only if the LNG market is the basis for the equilibrium price in the domestic market will developments in the LNG market affect domestic prices

19. bree.gov.au Nexant world gas model  Large scale LP model  Simulates interactions between supply availability and costs, transportation, LNG capacity and long term gas contracts  Produces global, regional and national supply-demand balances, and gas prices based on linkages to oil and oil product prices  Comprehensive database on gas production, LNG and pipeline infrastructure and long term gas contracts

20. bree.gov.au Domestic gas model – Ateshgah  Under development at the University of Queensland – nearing completion  Mixed complementarity model of the Eastern gas market  Multi-agent behaviour at each demand node  Spatial equilibrium problem – Nash-Cournot solution  Capable of representing both perfectly and imperfectly competitive markets for gas supply

21. bree.gov.au Conclusion  The Eastern gas market is undergoing major changes with the development of coal seam gas and associated LNG production  The Asian Pacific LNG market is also undergoing significant change  Linking the domestic gas market to the LNG export market will see adjustments in both markets  Understanding the implications of linking requires understanding these adjustments  Basing expectations on present conditions without taking into account the relevant market adjustments is likely to be misleading  Comprehensive modelling of the export market and the domestic gas market that captures the underlying economic behaviour of interest is necessary to gain useful insights on the implications of linking