AN AUSTRALIAN government funded report into the future of gas markets shows that while demand for liquefied natural gas is expected to grow, supply conditions are becoming increasingly competitive.

The Gas Market Report 2015, released by the Chief Economist of the Department of Industry, Innovation and Science, said Australia was well placed to meet medium term demand growth from India and China.

In China, total gas consumption is expected to more than double by 2030. Further, India’s LNG demand is expected to nearly double by 2019-2020, while it seeks to provide reliable electricity to more than 300 million people for the first time.

At the same time, Australia’s LNG exports are expected to rise from 23.2 million tonnes in 2013-2014 to 80 million tonnes in 2019-2020.
However, the report said the LNG outlook beyond 2020 was unnclear due to the highly competitive market that was expected to emerge between gas and alternative energy sources such as nuclear, renewables and coal.

“Therefore the cost competitiveness of gas will be a key determinant of the outlook beyond 2020,” the report said. “The price needs to be low enough to sustain and improve the share of natural gas in total primary energy consumption, but high enough to encourage investment in new gas supply.”

“In the case of either low or high prices, there may be constraints on investment, and excess capacity would be expected to decline between 2020 and 2030,” the report said.

In the short term, however, prices for most commodities are forecast to remain below their peaks as markets adjust to a period of growing output but lower demand growth.

“Any price increases over the next few years are likely to be a result of a cut in supply as higher cost producers exit the market or curtail production,” the report said.

While new sources of LNG supply were coming online in response to tight LNG market conditions, it was likely capacity would grow at a faster rate than demand over the next five years.

Overcapacity in the world’s oil supply, brought on by the growth in US shale oil production, would keep oil prices low – and with them, many long-term LNG contracts.

“This means that the low LNG spot prices, which have emerged as a result of the excess liquefaction capacity, are coinciding with low contract LNG prices,” the report said. “Australia’s new LNG projects are delivering their first gas cargoes into a market characterised by growing excess capacity and low prices.”

There would be an excess of LNG capacity over the next five years, but significant uncertainty would surround Asian demand, with nuclear restarts in Japan and domestic production in China causing a threat to Australian export hopes.

“However, the Office of the Chief Economist’s bottom-line forecast is a very large increase in export earnings from now through to the end of the decade, with volume increases outweighing the impact of lower prices.”

An announcement from Resources minister Josh Frydenberg said Australia’s reputation as a stable and reliable supplier of LNG and its proximity to key markets gave it a competitive advantage to meet this demand.

But the report also noted that the eastern Australian gas market was undergoing a major transition initiated by the rapid expansion of coal seam gas production required to supply the Queensland Curtis LNG, Australian Pacific LNG and Gladstone LNG projects.

This production growth had led to concerns about the outlook for gas demand including diversion of gas from the domestic market, escalation of wholesale gas prices and reductions in gas market share.

Modelling released in the report said that wholesale prices in the Eastern Australian gas market were likely to rise significantly as LNG production started from Gladstone and as legacy contracts are renegotiated.

“The analysis finds that gas reserves on the east coast are sufficient, provided no additional LNG trains are constructed, but gas production capacity is the key constraint,” the report said. “As gas production in the Cooper Basin and Queensland is directed to the LNG plants, the southern markets will have to rely almost completely on production from the Otway, Bass and Gippsland basins.”
“The analysis points to a potential shortfall in supply over time as these reserves deplete and production capacity declines, which will require supplementary supplies from the north,” the report said.

“In short, the international gas spot price, rather than the long-run netback price, is likely to be the main incluence on domestic gas demand and prices, mediated by the short-run marginal costs of LNG production.”

Mr Frydenberg said in his announcement that the government was focused on the issue and was working on reform measures to improve the way the market works and to boost competition.

But Australian Pipelines and Gas Association chief executive Cheryl Cartwright said market reform would do little to influence supply.
“It is also important that governments at both state and federal levels look beyond lifting the current moratoriums that apply to natural gas exploration in Victoria and New South Wales,” she said.

“While these should certainly be removed as soon as possible, it remains to be seen whether that alone will increase supply.”

Chief executive of the Australian Petroleum Production and Exploration Association Malcolm Roberts said coherent energy policy frameworks were needed to address the tightening gas supply market in eastern Australia.