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%.
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.
According to the ACCC, joint venture agreements that allow for coordination in production and marketing may have a detrimental effect on competiton.
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.
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.
Michele joined Fideres in 2018 after completing his MSc in Finance at Warwick Business School. Since joining, Michele has worked on a number of financial and non-financial projects, spanning from pre-filing to class certification. His field of experience encompasses cases on benchmark manipulation, order-book spoofing, bid-ask spread inflation, cryptocurrency manipulation and healthcare antitrust among others. In addition, in order to address the projects’ needs, Michele has built numerous software solutions, including statistics and visualization packages and ETL pipelines.
