Oz East Coast Gas Prices to Bottom Out in Two Years: WoodMac
The LNG netback price for Australia's east coast could bottom out to A$6.50 (US$4.3) – A$9/gigajoule (GJ) over the next two years, Wood Mackenzie said in a research report published November 20.
"The price of gas in Queensland as a netback from the Asian LNG price fell from an average of A$11/GJ in 2018 to an average of some A$7/GJ in the first three quarters of 2019. Expect lower-for-longer spot LNG prices into the 2020s, putting additional downward pressure on LNG netback prices and potentially contract price levels," Wood Mackenzie research director Nicholas Browne said.
The research report said that the oversupply in the global LNG market is leading to lower LNG netback prices domestically. Additionally, there has been a greater availability of gas from east coast LNG projects to the domestic market. Wood Mackenzie said that with LNG prices at record lows, there is now less incentive for Queensland LNG producers to liquefy additional gas and sell it to a low but still uncertain LNG spot market.
In addition, some Asian buyers are deciding to reduce their contracted offtake from Queensland LNG as they are more expensive than other alternatives. Furthermore, in the face of measures such as the Australian Domestic Gas Security Mechanism (ADGSM), additional gas is being developed. Because of these three factors, more gas is being made available by the LNG projects to the domestic market, the report stated. Collectively, APLNG, QCLNG and GLNG are delivering at least 100 petajoule/year of additional gas supply to the domestic market, Wood Mackenzie said.
Meanwhile, the estimate of long-term gas demand has also been revised higher by the Australian Energy Market Operator (AEMO) mainly due to the forecast of higher by the gas-powered generation (GPG) sector. The higher GPG demand forecast in Victoria in particular, will amplify the risk of gas shortages longer-term, Wood Mackenzie said. There is also a potential downside risk to industrial demand in the long run as prices rise.
"The east coast will need the development of contingent reserves. The AEMO does not see supply shortage before 2030 and is reliant on contingent resources from as soon as 2021. In contrast, we think the shortfall could come as early as 2023 and forecasts that much of this contingent gas is unlikely to be developed and hence third party and equity LNG gas will be at risk,” Browne commented.
"2023 is also around the same time as when the global LNG market starts to tighten, and international prices are likely to rise. As such, with the east coast market still contractually short of gas, there will be a call on gas contracted to or owned by the LNG projects. In turn, this could impact domestic prices."
The report argued that Additional sources of gas supply urgently needed, and the Narrabri project in New South Wales could help. Santos-operated Narrabri project has remained undeveloped since its discovery in 1993 due to strong opposition from various groups. However, with the state government voicing support for its development, albeit with a reduced scope, New South Wales gas production could be set for an uplift.
"Looking at first gas from 2023, we are forecasting about 36 PJ per annum of gas production with the potential of up to 73 PJ per annum when it becomes fully operational," said Browne. "This is timely as we expect a lower Gippsland Basin supply through the 2020s. Narrabri would have a significant impact on the balance of the southern gas markets and particularly New South Wales, which would become increasingly self-reliant. Given how short the market will become, any additional sources of gas will have a significant impact."
Browne added: "There is little doubt that LNG imports will be needed by Australia's east coast by at least 2025. But given the tight supply-demand balance, a regasification terminal needs to be in place, in the event seasonal shortfalls materialise even earlier.
"We believe that a terminal in Victoria is more urgently required and would see higher utilisation than a terminal in New South Wales. But ultimately, if a terminal in New South Wales moves ahead first, this could also supply Victoria, so there is a clear first-mover advantage."