Mr Ross LambieGas Manager, Energy & Quantitative Analysis

Bureau of Resources and Energy Economics (BREE)

bree.gov.au

When two markets collideLinking Australia’s eastern gas market to the

world

Ross LambieGas Manager

Bureau of Resources and Energy Economics (BREE)

ANCRE Workshop, October 2013

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

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Australia’s gas markets

Western gas market

Eastern gas market

Northern gas market

Source: Adapted from AER, State of the Energy Market 2012

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Gas consumption by state

Source: BREE

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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

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The Eastern gas market – consumption by sector

Source: BREE

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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

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Asia’s LNG Imports, 2012 – Volume

China India Indonesia Japan Sth Korea Taiwan ThailandTotal Asia0

10

20

30

40

50

60

70

80

90

100

14.77 13.99

0

87.26

36.78

12.78

0.983.690 0

15.92

0.79 0.31 0

LNG net imports LNG imports from Australia

MT

PA

Source: IGU, 2013

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Australia’s LNG Exports to Asia, 2012 – Volume share

China India Indonesia Japan Sth Korea Taiwan Thailand0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

25%

0% 0%

18%

2% 2% 0%

18%

0% 0%

77%

4% 1% 0%

Australia's share of total LNG imports

Source: IGU, 2013

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Australia’s historical and projected LNG production – volume and value

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18

0

20

40

60

80

100

-10

4

18

32

46

60

exports (LHS) value (RHS)

Mt

real2013-14

A$b

APLNG

Wheat-stone

Ichthys

Prelude FLNG

QCLNGGLNG

Gorgon

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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

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Eastern market domestic gas contracts by basin

Source: EnergyQuest, 2013

Currently committed LNG trains come

online

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The economics of linking to an export market Kenneth Medlock, 2012, U.S. LNG Exports: Truth and

Consequence

Q0 Q0

$

P0

Q Q

P0

D0

S0 S0

D0

Domestic market Export market $

bree.gov.au

The economics of linking to an export market Kenneth Medlock, 2012, U.S. LNG Exports: Truth and

Consequence

D1

$

LNG production / shipping costs etc.

Q1 Q0

P0

P1

Q Q

P0

D0

S0 S1 S0

D0

Domestic market

P1

Export market

Q0 Q1

$

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The economics of linking to an export market

Quantity Spot

Dom

Q Quantity

contracted

S

D0

PSpot

PLNG-Con

PDom-Con

LNG

$

Demand and supply in the domestic gas market

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The economics of linking to an export market Demand and supply in the domestic gas market

Quantity Spot

Dom

Q Quantity

contracted

S

D0

PSpot

PLNG-Con

PDom-Con

LNG

$

D1

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

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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

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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

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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