NGP and East Coast Gas Prices

It has been frequently asserted by Santos and some others, without any transparent market analysis, that Narrabri gas production would result in “increasing competition in the domestic gas market and put downward pressure on gas prices”(Santos, Applicant Submission to DPIE, July 2020).

However, this pressure will not actually occur unless the two Santos GLNG (Gladstone LNG^[1]) trains at Gladstone are full, which they never have been, and won’t be with any currently known east coast gas reserves.

If the Santos GLNG trains and other Curtis Island LNG plants were full of gas, additional east coast gas production would create additional supply for the domestic market.  However, the trains are not full, and with any additional gas, Santos obtains a higher commercial value by meeting its LNG contract commitments and/or utilising its unfilled LNG capacity than it would by selling that gas at a discount into the east Coast domestic market.

Whenever Santos has spare LNG capacity in its GLNG plant, and/or is liable for penalties for non-supply under the long-term contracts it has signed, Santos achieves a higher value for gas that is used for GLNG exports rather than selling domestically. 

The only reason that Santos would have to sell Narrabri gas into NSW would be if it achieved an equivalent commercial return for the sale of that gas to NSW as it would for sale as LNG exports.  

As a consequence, Narrabri gas provided to NSW will simply be sold under contracts for the same high LNG-linked price as is currently observed in the market as shown below.

At the reported historical GLNG utilisation rate of 75%, Santos LNG sales would be 6 million tonnes p.a.  That is due to a gas shortage of  100 PJ p.a.  (1.8 million tonnes p.a. of LNG), that are currently required by Santos to meet full contractual commitments of 7.8 million tonnes p.a (Productivity Commission data).

Due to the lack of available gas for GNLG, even after taking a large portion of gas needed for the east coast domestic market, Santos is reported as having negotiated LNG offtake contracts down from 7.8 million tonnes p.a. to 6.0 million tonnes p.a. (EnergyQuest, Feb 2019).

GLNG utilisation will actually drop even further in the future as reserves in eastern Australia are depleted.

As the plot below shows (ACCC 2020 forecast with the NGP contribution added), the LNG trains in Queensland will simply not have enough supply by 2030.  NGP gas would be, in any case, be a very small contribution to supply, with no ability to affect the east coast market prices, as noted by the DPIE.

Considering the forecasts above, it is inevitable that one or two LNG trains at Curtis Island will need to be shut (closed down) in some time prior to 2030, perhaps even as soon as 2025. 

This will occur with or without the NGP, as a number of experienced gas industry analysts have already observed.  

There was simply never enough gas available in the Eastern States to supply six LNG trains and the domestic market.

The higher price of export LNG compared to east coast gas prices prior to 2015, after all, is the reason that Santos and the other LNG projects in Queensland built an LNG project; once a series of partially full LNG facilities were built, the east coast gas marker was forever linked to the international LNG price; which in turn is linked to the international oil price. Gas consumers in NSW, Victoria and Queensland are reluctant to accept the reality of this, and continue to hope that east coast gas prices can be delinked from oil price (LNG price).

A Santos representative, in an interview on ABC business early in 2020, claimed that while Narrabri gas would be expensive to produce (at the low oil prices prevailing in early 2020) that “oil prices will not stay low forever”.  What Santos was effectively saying is that when oil prices rise, LNG prices will increase, and Narrabri gas will then be economic – at a relatively high price.  This is in direct contradiction to any assertion that the NGP will reduce prices.

The plot below shows how this market dynamic will play out at US$45/bbl oil.  The pain for east coast gas user at a more “normal” US$60/bbl will be even greater. And the volume of NGP, being too small to fill the six LNG trains at Gladstone, will do nothing to change this price linkage.

At current domestic STTM (Sydney) price of around $5.00/GJ on 22^nd July 2020^[2], Santos would be unlikely to develop the NGP as the development cost is higher than the domestic price, which makes it clear the overarching rationale for Santos is to use the NGP to divert other gas to GLNG for LNG exports and avoid the estimated $2.00/GJ future penalties for not being able to meet contract commitments.

The quickest and most cost-effective  way to deliver lower cost gas to NSW would be for Santos to shut one LNG train and create a supply excess for domestic gas.  Shutting an LNG train would cost significantly less than developing the NGP.  Much of the LNG train book value has already been written off by Santos.

Note on DPIE Market Observations at IPCN Hearing

Even the DPIE, for a different reason, as it has not analysed the impact of the unfilled Santos LNG capacity on east coast market dynamics, concedes that the NGP will do little to reduce gas prices:

A representative of the Department of Planning has conceded the Narrabri Gas Project is probably too small to drive down gas prices at Monday’s public hearing into the Narrabri Gas Project.

On the first day of the Independent Planning Commission’s (IPC) hearing into the project, Department of Planning, Industry and Environment (DPIE) Executive Director of Resource Assessments David Kitto said the $3.6 billion scheme is a relatively “small gas project”.

“I think it would be fair to say that we are not saying in our assessment that the Narrabri Gas Project would reduce [NSW] gas prices,” he told the inquiry^[3].  Which is an interesting observation – as Santos is claiming the opposite.

As The Australian subsequently reported, it’s no surprise that “…A fresh spat has broken out over Santos’ promise that gas prices will fall should its 3.6bn Narrabri coal-seam gas project in NSW proceed, with claims the State’s Planning Department contradicted the energy [company]”. However, the DPIE is correct.

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^[1] Gladstone LNG or GLNG is a liquefied natural gas (LNG) plant in Queensland, Australia; The GLNG Joint Venture arrangement is Santos 30%; PETRONAS 27.5%; Total 27.5%; and KOGAS 15%.

^[2] https://www.aemo.com.au/energy-systems/gas/short-term-trading-market-sttm/data-sttm/data-dashboard-sttm

^[3]https://www.theland.com.au/story/6840951/narrabri-gas-project-would-not-reduce-prices-department-chief-says/?cs=4963