Key Points
- The Australian Competition and Consumer Commission (ACCC) has recently released two inquiry reports on the Eastern Australian Natural Gas Market.
- It has raised the following issues: significant increase in wholesale gas prices, Liquefied Natural Gas (LNG) plants divert gas from the domestic market, creating a domestic deficit and evidence of monopoly pricing at the pipeline operation level.
- Fideres has independently reviewed these issues in light of available evidence.
Gas Prices
As of 2015, the Australian Energy Market Operator estimated the Eastern Gas Market size at approximately AUD 1,4bn. Fideres found that, over the past 2 years (2015-2017), average wholesale spot gas prices have increased by approximately 290%.
Source: AER, Fideres’s Calculations
The market has seen a structural shift from a ‘buyer’s market’ to a ‘seller’s market’. Since 2010, natural gas prices have increased from approximately AUD3/GJ to over AUD9/GJ. Approximately 90% of wholesale gas prices are determined by Gas Supply Agreements and spot market prices, and the remaining 10% by transportation charges.
LNG Exports
The supply of natural gas in the Eastern Australian Gas market has significantly changed since LNG exports began in 2015.
Many LNG plants have large export contracts with foreign buyers and, due to punitive non-delivery clauses, Australian plants resort to diverting LNG away from domestic markets in order to fulfil their obligations under export contracts. There is also evidence of production-side constraints that may affect pricing. However, after netting out exports we find that production (supply) still exceeds demand, indicating that the alleged production constraints may not be the main reason for the increase in gas prices.
Source: AER, Fideres’s Calculations
According to the ACCC, joint venture agreements that allow for coordination in production and marketing may have a detrimental effect on competition.
Pipeline Operation
The ACCC also found that pipeline operators’ market power may affect pricing. Fideres found that there is high market concentration in terms of distance covered by pipes and ownership.
Source: AER, Fideres’s Calculations
Further Analysis
Australian regulators and policymakers have made numerous attempts to improve transparency and data availability in the gas market. If the complex and opaque nature of the market is tackled, there is potential to analyse the supply-pricing dynamics further.
Russell joined Fideres in 2014. He is member of the management team and is responsible for clients in the UK, Europe and Australia. His current role at Fideres is focused on business development. In the past, Russell has acted as a consulting expert in many large legal cases in the US and UK for a variety of industries. In particular, he leads the pharmaceutical antitrust team in relation to generic drug price-fixing allegations, labour economics team in relation to wage suppression and has carried out expert work in financial markets claims involving swap mis-selling and fund management excess fees. Russell has completed his MBA at Imperial College Business School and his BSc in Accounting and Finance at the London School of Economics and Political Science. He is a Chartered Financial Analyst (CFA) charter holder.
