The gas industry’s profitability is determined by export sales, not domestic prices, as over 70% of gas produced on the east coast of Australia is exported.
A price cap of $7/GJ for domestic gas allows for all gas fields in eastern Australia to make profits over and above a return on equity, with some gas fields highly profitable at this level.
A proposed $12/GJ for gas would gift the east coast gas cartel super profits to the detriment of Australian energy consumers, and risks continuing deindustrialisation in Australia with the unintended consequence of higher global greenhouse gas emissions.
There has been much discussion about the need for a domestic gas reservation for Australia’s east coast market, or a price cap, and prices have been widely bandied about by government, industry and commentators.
There has been little analysis done on what constitutes a fair domestic gas price for both producers and consumers. Western Australia’s domestic gas reservation policy, in operation since 2006, has delivered gas at prices in the $5-7/Gigajoule (GJ) range.
A price cap of $7/GJ allows for substantial profits over and above a return on investment for the majority of gas produced on the east coast of Australia.
This briefing paper seeks to dimension what a fair price is and comes to the conclusion that a price cap of $7/GJ allows for substantial profits over and above a return on investment for the majority of gas produced on the east coast of Australia. A price cap of $7/GJ would see all producing fields make a return on equity and a profit on top.
This paper also makes the case for a domestic gas reservation on the east coast of Australia for the following reasons: