Presentation on theme: "Australia’s Gas markets"— Presentation transcript:
1 Australia’s Gas markets BREE Workshop, November 2014Ross LambieGas Market ManagerBureau 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 marketsDevelopment of Australia’s natural gas industryCost competitiveness: a key challenge to Australia’s LNG sectorGlobal LNG outlookReview of the economic impact of the CSG industry in QueenslandNote on the economics of domestic gas reservation policy
4 Three distinct and separate gas markets… Western – largest market, incl. LNG exports, 1,551 PJNorthern – smallest market, 26 PJEastern – largest domestic market, 854 PJDevelopment strongly influenced by:Remoteness of gas supply basinsConcentrated energy demand around population centresRelatively low domestic demandNorthern Gas MarketWestern Gas MarketEastern Gas Market
5 Strong growth in production and use over the last 45 years Little value, no clear commercialisation pathway - focus on oilFew industrial users, replacement for manufactured town gasGrowth in large industrial users, demand from residential and commercial customersValue-adding LNG export opportunities – linking domestic markets to international markets
6 Supply is changing…Cooper conventionalBowen-Surat CSG
7 and so is domestic demand… Electricity generationManufacturingMining
9 Australia must remain cost competitive IchthysQLD CSG LNGDarwin LNGNWS 1-3
10 LNG delivered cost to Japan Australian projectsAPLNGIchthysGorgonSabine 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 capacityAustralia 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 demandRelative costs of alternative energyLNG share of natural gas (indigenous gas and pipeline imports)Geopolitical factorsThe role of unconventional gasChina’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 QueenslandKey findings:A clear positive net benefit to Queensland through increased economic output, employment, household income, royalties and regional population ̶ broadly consistent with forecastsDetailed analysis of cumulative impacts would have been useful in the early stages of developmentDistribution of net benefits and costs important - considered in the second part of the studyAteshgah 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 changinghigher wholesale gas pricessupply concernsImplications of potential policy responses need to be understoodDomestic gas reservation policyAteshgah is the name of the fire temple at Baku in Azerbaijan
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