Shining a light on Australia’s controversial east coast gas pricing – a new ABS tool

The Australian east coast gas market has been at the centre of the energy pricing debate for much of the last 12 months. It has divided politicians, gas producers, consumers, regulators and the voting public. There have been two fundamental challenges to understanding this market dynamic:

  • A lack of price and volume transparency across the gas market; and
  • The use of confusing language and numbers, as recently highlighted by Shell Australia’s new chair, Zoe Yujnovich.

Both of these have created some of the current uncertainty.

So the Australian Bureau of Statistics (ABS) has stepped in with a recently launched indicator of how average wholesale gas prices, paid by large customers, are changing over time.

The new wholesale gas price index will, for the first time, provide an official measure of quarterly gas price changes nationally and disaggregated to the east coast and Western Australian markets.

The Australian east coast gas market is now a major LNG exporter

In the last five years the Australian east coast gas industry has experienced a substantial transformation driven by the establishment of a world-leading LNG export industry. To illustrate the magnitude of this structural change, total gas demand on the east coast has risen from 690 PJ in 2014 to an estimated 1,900 PJ in 2017. The LNG industry is now the largest user of gas on the east coast, making up 70 percent of that demand.

Structural change on this magnitude rarely occurs smoothly and gas industry participants are understandably facing a number of challenges. Contracting terms are shorter, prices have increased and pricing formula in some contracts now reference international commodities such as oil, due to the influence of Asian LNG pricing. In the current market dynamic buyers and sellers are having to adjust business strategies and processes to be more flexible and active in how they trade gas.

Because most natural gas has historically been traded under confidential gas supply agreements, there has been limited official data publicly available to track the price movements of one of Australia’s most valuable commodities through this transition.

Introducing the new ABS wholesale gas price index

To facilitate better decision making and add to the empirical information available to gas industry participants, the Australian Energy Market Commission (AEMC) – rule maker for electricity and gas markets – recommended price transparency in contracts be improved through the establishment of an ABS wholesale gas price index. This approach maintains the sanctity of confidential agreements, while shining a light on movements in average wholesale gas prices.

The ABS established three new Producer Price Indexes for wholesale gas, one at the national level and two disaggregated to the east coast market and Western Australian market. During the consultation and development process, the ABS was able to collect historical data from September 2015 to September 2017 and will now be published on a quarterly basis.

As shown in the graph below, average wholesale gas price movements on a national basis were flat up to the June 2016 quarter. From there they increased by around 35 percent to September 2017, driven by east coast prices which increased by around 55 percent. The ACCC’s Gas Inquiry 2017-2020 Interim Report found average gas prices received by producers on the east coast in Q2 2016 ranged from around $3.50/GJ to $5.90/GJ. We note these are wholesale prices only and do not include the additional pipeline transportation and retail costs faced by end-users.

Because the index measures the average change in a basket of representative domestic gas contracts, actual price movements felt by participants will be higher and lower. Some contract prices may currently be escalated against measures of inflation or oil, both of which have witnessed low growth rates recently. On the other hand, as legacy contracts roll off and new contracts are added to the sample, we are likely to witness a step change in average price escalation, given the tight supply/demand outlook for gas on the east coast.

The new ABS index will provide insights valuable to industry, regulators and governments

While the new ABS index won’t solve the current gas crises, it’s a useful tool to observe how the trend in average wholesale gas prices is changing over time and will assist when negotiating new contracts, during price arbitrations and generally when considering trading strategies.

The new ABS gas price index shines some light on the opaqueness of gas supply agreements, increasing the transparency and quality of information available in the market. Higher quality information should lead to more informed decision-making and contribute to better outcomes for consumers.

Further information on the index can be found on the ABS website:

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