IEEFA update: What does the oil price crash mean for the Australian gas industry?

10 March 2020 (IEEFA Australia): With the global benchmark for oil, the Brent crude oil price, tumbling 25% on 9 March 2020 to close at USD33.75/barrel, the effect on Australian oil and gas stocks has been immediate and profound with stocks crashing between 18% and 35%.

Bruce Robertson, gas/LNG analyst with the Institute for Energy Economic and Financial Analysis (IEEFA) says the reaction of the markets would tend to suggest the impacts of the oil price weakness will not be short lived.

“Global oil prices have a profound effect on gas prices,” says Robertson. “Australia’s export gas prices have effectively collapsed.

“AUSTRALIAN GAS CONSUMERS WILL SOON BE PAYING 47% MORE THAN THEIR ASIAN COMPETITORS for Australian gas on long term contracts.”

Gas sets the price for electricity in Australia’s national electricity market, as gas is the highest cost producer of power and therefore is the last player into the market. Essentially lower gas prices have an immediate effect on the electricity price.

“The solutions to the gas price problem that Australian gas consumers face is for governments to call for more gas to be produced,” says Robertson. “The current project being considered for approval is the locally unpopular Narrabri gas project. This ill-fated venture is a high cost gas field where, if developed, it would struggle to supply Sydney with gas at much less than $9-10/GJ. This is clearly a globally uncompetitive price for gas. ‘

“THE NARRABRI GAS PROJECT IS NOT ECONOMIC IN A WORLD WHERE GAS PRICES ARE LOW and will remain so for the foreseeable future.

“The big question to arise out of the oil price crash is will the NSW and Federal governments continue to look inwards and take advice from their donors in the gas industry, or will they make approval decisions for new projects in a global context of low gas prices?  Approving Narrabri will entrench high gas prices for the Australian consumer in a world where low gas prices are the new normal. It is simply not in the national interest.”

Australia is the world’s second largest exporter of LNG and being close to Asia is a major supplier to the region. Australia exports around three quarters of the gas that it produces. Long term export prices for gas are set as a percentage of the oil price. The oil price effectively sets the gas price for export contracts.

Robertson says customers in Asia will be looking at getting their gas at $7.12/GJ under long term contracts if oil prices stay at current levels.

“IN AUSTRALIA, THE GAS INDUSTRY IS ABLE TO CHARGE DOMESTIC CUSTOMERS A PREMIUM TO OFFSHORE MARKETS as compliant politicians allow gas companies to run roughshod over the Australian consumer of gas,” says Robertson. “The Australian Competition and Consumer Commission (ACCC) has repeatedly, over many years now, pointed out how we are paying more than we should be for gas.”

“Unfortunately, they refuse to enforce the price fixing laws that exist in Australia or the laws relating to cartel conduct.  Politicians, who are handsomely rewarded in the form of political donations, turn a blind eye to the obvious price gouging of the Australian consumer of gas and electricity.”

The ACCC has estimated that for every $1/GJ reduction in the price of gas the wholesale price of electricity falls by $11/MWh. Currently in Australia customers seeking long term contracts are paying between $9-12/GJ to secure gas.

Robertson says oil is down 49% this year as weak demand out of China has combined with a more recent effort by Saudi Arabia to start a price war. “The Saudis have opened the oil taps and intentionally crashed the price of oil in an effort to gain market share and restore their authority over the oil pricing cartel.  Discipline in the oil price cartel has been lacking and the Saudi’s are stamping their authority on global markets. It normally takes some time before pricing discipline in the oil market is restored.”

It is not just the markets that have spoken out on the longer term effects of the oil price crash.  The world’s most feted investor, Warren Buffett, has pulled out of his US$3 billion investment in a Quebec LNG plant.

Media Contact: Kate Finlayson ([email protected]) +61 418 254 237

About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.