The ACCC will publish additional and more relevant data about pricing in the east coast gas market to help improve the negotiating power of commercial and industrial (C&I) gas users seeking longer-term supply contracts.
Last year, the Australian Government asked the ACCC to review its Liquefied Natural Gas (LNG) netback price series, which it publishes to improve transparency in Australia’s east coast gas market. The ACCC has decided to continue publishing export parity prices for two years based on Asian LNG spot market prices, and will extend the forward LNG netback price series to five years based on international oil-linked prices.
ACCC Commissioner Anna Brakey said the data helps to reduce bargaining power imbalances in the gas market by giving commercial and industrial (C&I) users the same data that gas producers use when deciding what prices to offer to the domestic gas market.
“The current LNG netback price series is a useful benchmark for gas producers and C&I users negotiating domestic contracts for two years or more. However, C&I users told us that they routinely seek contracts that run longer than two years. Extending the price series will help them negotiate longer-term contracts with gas producers.”
The development of three Queensland LNG export plants significantly changed the east coast gas market by connecting it to international markets. Asian LNG prices influence Australian gas prices as east coast gas that supplies domestic customers now also supplies international LNG users, predominantly in Asia.
The ACCC’s LNG netback price series represents the prices east coast LNG producers could expect to receive for exporting their uncontracted gas to Asia under current market circumstances. For domestic gas buyers, these are the prices they can expect to pay when LNG producers have spare capacity and are in a position to sell their uncontracted gas either to the Australian market or overseas.
Ms Brakey said during the review, many C&I users recommended the use of Henry Hub prices to calculate LNG netback prices, as the Henry Hub is a deep trading market within the US and is an increasingly important global gas marker. Users also suggested that the capital costs required to build the Queensland LNG plants are to be deducted.
“We carefully considered these arguments, and while we recognise the potential benefits of using a gas price marker, Henry Hub prices are not yet influencing Asian prices to a degree that enables it to be a proxy for forward Asian LNG prices, which we use to calculate LNG netback prices.”
Instead, the Japan Korea Marker (JKM) was found to be a suitable measure of Asian LNG spot prices, with the majority of contracts for supply into Asia for terms of three to five years linked to oil prices.
“In calculating LNG netback prices, we deduct only the costs that LNG producers avoid by supplying uncontracted gas to the domestic market. As the Queensland LNG plants continue to have unutilised liquefaction capacity, we don’t believe it’s appropriate to deduct fixed export costs such as LNG plant capital costs,” Ms Brakey said.
“Deducting fixed costs would mean our LNG netback prices no longer represent the current commercial reality facing LNG producers when deciding whether to supply gas domestically or overseas.”
“We recognise that if the LNG plants do reach capacity, we would need to review our approach to estimating export costs,” Ms Brakey said.
The ACCC will monitor the spare liquefaction capacity of the Queensland LNG plants and developments in the international LNG markets through its east coast gas market inquiry, to ensure the LNG netback price series methodology remains appropriate.
“The decisions we made in this review reflect the realities of the east coast gas market and global LNG markets now. However, market dynamics continually change and we will undertake another review of the LNG netback price series before 2024 if we need to,” Ms Brakey said.