International gas and LNG prices have collapsed. For most of 2019, the global market has seen improving gas supply and intense supplier competition result in lower prices.
In August 2019, Asian spot LNG prices went below US$4 per mmbtu (A$5.70 per gigajoule (GJ)), two and a half times less than what they were the same time last year. Meanwhile, European spot gas prices at one stage traded below the Henry Hub and have generally hovered at around US$3.50/mmbtu (A$5/GJ) this year. An LNG supply wave is the single biggest factor that is causing the current oversupply. Between 2016 and the end of 2019 some 100 million tons (mt) of new LNG production will have come on, with annual growth averaging close to 10%.
While long anticipated, oversupply didn’t materialise until this year. A big part of the reason lies in slower demand growth from what will soon be the world’s largest LNG importer: China.
With nowhere else for this LNG to go, 2019 has seen LNG sellers and European buyers parking excess gas in European storage which is now close to 100% capacity. This is an overhang that is likely to last into next year and potentially beyond.
Turning a corner for east coast gas supply and prices?
Energy headlines in Australia have been dominated by stories of impending gas shortages and rising gas prices in the east coast market. Indeed, gas prices have tripled in the last five years. This has become an increasingly political issue investigated by the Australian Competition and Consumer Commission.
One factor fairly or unfairly associated with rising prices is the ramp up of the three Queensland LNG export projects. Most gas in the east coast are tied to these projects. This provided a link between the global market and the previously isolated east coast Australian market. The Queensland LNG export projects liquefy most of their gas to meet their contractual obligations with Asian buyers. Any additional gas can then be sold as spot LNG. Consequently, domestic prices have been influenced by ‘LNG netback price’ equivalent, which means the price of LNG in Asia less the cost to get Australian gas there. For the most part, this means higher-than-legacy gas prices.
The east coast market is now seeing the other side of a global cyclical commodity market. With LNG prices at record lows, there is now little incentive for Queensland LNG producers to liquefy additional gas and sell it onto an a low but still uncertain 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. Because of these two factors, more gas is being made available by the LNG projects to the domestic market.
In October 2019, APLNG announced it will supply an additional 61 petajoules (PJ) to Origin and the domestic market beginning in January 2020 for two years. Meanwhile Santos has also highlighted in its quarterly reports that LNG production has reduced due to the diversion of 40 PJ of gas domestically. Locking in a multi-year domestic offtake contract is increasingly preferable economically and reduces exposure to the low LNG spot price. An additional benefit to the sellers is that supplying the domestic market is viewed favourably politically.
This improved gas availability is impacting prices. The Queensland LNG producers are now competing more aggressively to sell their excess gas with other producers. As such, in its latest draft gas inquiry report from July 2019, the Australian Competition and Consumer Commission noted that prices offered by Queensland producers appeared to have trended down from A$10/GJ to $9/GJ. This is a modest decrease compared to the collapse of global gas prices. But our upcoming study shows that this may just be the beginning.
How low can domestic gas prices go?
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. While Wood Mackenzie expects 2020 to be the bottom of the LNG market, it will take time to rebalance and low global gas and LNG prices look set to continue for several years. As such, LNG netback prices in Queensland will likely fall further from current levels and continue to be supressed. If these prices aren’t passed through to consumers in the form of lower gas supply contract prices across the east coast, producers may find themselves in another political headlight.
Meanwhile, lower prices should take some pressure off Australian gas-intensive industries such as petrochemicals and fertiliser production. These industries have been vocal about the risks to their businesses shutting down due to high gas costs. It remains to be seen whether supressed netback prices will be sufficiently low to mitigate these risks.
The calm before another storm?
This potentially comfortable position of enhanced domestic gas supply and downward pressure on prices off the back of an oversupplied global market will not last. The LNG market is strongly cyclical. A lack of LNG investment decisions from mid-2015 to mid-2018 means that the period 2022-2024 will face limited LNG supply growth.
Demand growth will catch up with supply. This progressive tightening will result in Asian LNG spot prices rising by 2023 and further in 2024. In turn this should incentivise LNG producers to sell excess gas onto the LNG spot market. Meanwhile, LNG buyers who have been turning down their LNG contract cargoes, may need to make up for these volumes.
At the same time, as gas availability from the LNG projects will likely have decreased by the mid-2020s, other legacy sources of east coast gas plays will also be declining.
We forecast Gippsland and Cooper Basins will decline significantly from 2018 to 2024. The east coast gas balance will again be precariously short, with renewed competition for gas.
The way out
Price volatility will impact gas demand, investment decisions to unlock new supply sources, and gas availability from the LNG export projects. It will also affect the flow of gas through existing pipelines and proposed LNG import terminals. How the east coast gas market ultimately reaches equilibrium is still uncertain. But one thing is clear, understanding the interaction between global LNG prices and east coast gas fundamentals is crucial, and will only increase over time.