Supply shortfall in Australia’s east coast gas market for 2022 “increasingly likely”, ACCC report finds

On 17 August 2021, the Australian Competition and Consumer Commission (ACCC) released the July 2021 Interim Report for its Gas Inquiry 2017-2025. The Gas Inquiry seeks to provide regular information on the supply and pricing of gas to December 2025.

Shortfall concerns

The ACCC's latest report has found that although gas prices in the East Coast Gas Market through to February 2021 remained low, domestic spot and liquefied natural gas (LNG) prices have since risen.  Additionally, the number of offers for supply being made for 2022 and beyond has dropped significantly, with the ACCC forecasting a potential 2 PJ shortfall for the Market in 2022 if LNG producers export all of their (101 Petajoules (PJ)) forecast surplus production.  This has prompted the ACCC to describe the supply outlook for 2022 as “the most finely balanced [it has] ever reported”. 

The report reinforced the “real prospect” of a shortfall in Australia’s southern states (South Australia, New South Wales, the Australian Capital Territory, Victoria and Tasmania), as gas production and withdrawals from storage in 2022 is forecast to be less than demand by 6 PJ.  Such a shortfall could be further exacerbated if supply from undeveloped reserves does not eventuate and gas powered generation / generator demand is higher than forecast. 

In December 2020, LNG producers entered into a new Heads of Agreement with the Australian Government (New HOA), which operates over 2021-2023 and commits LNG producers to only offer uncontracted gas to the international market if, prior to this, “equivalent volumes of gas have first been offered with reasonable notice on competitive market terms to the Australian domestic gas market”.  The Report noted that:

• the new HOA may prove vital to address potential shortfalls in 2022 and noted that LNG producers are expected to have approximately 101 PJ of uncontracted gas in Queensland; 
• although in previous years a shortfall could have been resolved by more gas being supplied from Queensland, the tighter supply-demand balance for Queensland in 2022 provides a limited scope for this strategy. 

Domestic price outlook for 2022

Prices offered for 2022 supply by both gas producers and retailers were relatively stable over the second half of 2020, between $6/gigajoule (GJ) to $8/GJ.  These prices were higher than offers for supply in 2021 (which, for the same time period in 2021, ranged between $5.50 and $7.61/GJ).  Interestingly, for the first time since the beginning of the Gas Market Inquiry, despite the tight supply outlook in the southern states prices have been consistently below buyer alternative levels since mid-2020.  

Pipelines and storage

The report noted that proposed LNG import terminals will not be in a position to supply gas to the domestic market until 2023 at the earliest, and indicated that pipelines and storages are likely to play a prominent role in meeting future demand as supply in the southern states tightens.  However, transportation and storage prices remained high, and the report noted market power of pipeline operators remained a concern.

On 3 May 2021, Energy Ministers released a Decision Regulation Impact Statement outlining a package of reforms to improve gas pipeline regulations. The Report indicates that these reforms, which are being finalised and are expected to commence in mid-2022, will assist to constrain the market power of pipeline operators and provide greater pricing transparency.  The Report identifies key proposed changes contained in the reforms, namely that:

• all pipelines will be required to provide third party access;
• pipeline operators will be required to comply with the National Gas Rules pipeline interconnection principles and rules on cross subsidising new capacity; and
• the Australian Energy Regulator will more actively monitor the behaviour of pipeline operators.

What this means for you

The findings contained in the Report identify key gas supply and demand trends for the short and long-term. 

You should also be aware of upcoming reports from the ACCC, namely the next interim Gas Inquiry report which is expected to be issued in early 2022 and the ACCC’s LNG netback price series review (expected to be completed by 30 September 2021).