Disruption risks ignite gas futures market

The exposure of all players will be significantly higher from 2015, writes Brian Robins.

It passed with little comment, but eastern Australian gas prices will rise 50 per cent over the next few years as they move towards export price levels as a result of the completion of a string of export gas projects in Queensland.

Along with prompting large energy users to reduce their gas usage or diversify energy sources, the price - and volume - surge will bring with it significant risk for gas suppliers if disruptions occur and they are unable to meet contractual commitments.

The last big disruption to domestic gas users was in Western Australia when the state lost a third of its supply in 2008.

On the east coast, the largest disruption was the loss of supplies to Victoria for two weeks in the spring of 1998 following an explosion at Longford, although other incidents have occurred, such as in early 2004 when an explosion at Moomba in central Australia cut shipments for several weeks at a time of light demand, along with the winter of 2007 when AGL diverted gas from NSW, which affected some users for a time.

But the exposure of all players will be significantly higher from 2015 when the first of Queensland's export projects comes on stream.

As a result, a forward gas market is being developed, with trial trading to commence from early 2014 with the market to be launched in the second quarter of 2014.

A number of groups - from gas suppliers and users such as AGL and Origin to users such as EnergyAustralia and Stanwell, to financial institutions such as Macquarie Bank, ICAP and Goldman Sachs - are working on the new market.

But along with helping reduce risk for the gas exporters, a key outcome of a public market is price transparency, which large gas users such as EnergyAustralia and energy advisory groups such as Energy Action are keen to benefit from, given the nascent unmet gas demand in some markets.

The completion of the various gas export projects in Queensland could see its total gas demand rise to around 1500 petajoules by 2016 up from just 240 petajoules now. At present, the east coast gas market consumes an estimated 700 petajoules of gas annually.

Forecasts drawn up by the Australian Energy Markets Operator put the projected east coast gas market at between 3300 and 6500 petajoules in 2031. However the upper limit includes proposed second stage expansions of some of the projects, which are unlikely to occur if the US enters the gas export market in a big way.

And the level of domestic gas demand may also hinge on future carbon reduction policies if there is a change of government in Canberra, in the light of the number of gas-fired power stations being planned.

Work on the gas futures market began 18 months ago, not long after an earlier proposal for a gas futures market traded on the ASX failed.

The ASX contract was a 100 gigajoule futures contract, which was never traded. It claimed to have industry support, but the lack of an emissions trading scheme, coupled with the restructure of the industry that has occurred since, left this market stillborn.

It was intended to be priced off the Victorian wholesale market, although this market will be overshadowed by the sheer size of the gas flowing through Wallumbilla- which is near Roma in southern Queensland - and the prospective risk.

The contract being developed is a forward contract and is significantly larger, at 1 terrajoule, which is intended primarily for gas producers to trade positions across three basic products - day ahead delivery, delivery on the day in hand, and a forward product with physical delivery up to a month ahead.

A short-term trading market exists already for gas delivered to the core markets of Adelaide, Sydney and Brisbane, along with a wholesale market for the larger Victorian market. The short term market is primarily a "residual" market, which enables retailers to trade their residual market exposure, usually their daily anticipated surplus or undersupply.

This market is estimated to account for around 10 per cent of the annual volumes supplied into each of these cities, but it is a physical market, as distinct from a futures market.

The new contract will be based on the gas passing through the hub at Wallumbilla, where gas can be priced supplying Queensland, NSW and South Australia, but given their size, the key risk exposure to be managed is by investors in the large export gas projects.

It is not expected that financial institutions will participate in the new market, since it demands physical delivery, although once the market is operational, it will generate an index which may then present opportunities for financial trading.

This will mirror the way the US gas market developed.

There, the Henry hub pipeline in Louisiana, where four inter-state pipelines intersect, provides the basis for the spot US gas market, as well as the NYMEX gas contract.

The nearest equivalent in Australia is at Wallumbilla, where gas supply pipelines to Brisbane and Gladstone (for the export projects) as well as to the Cooper Basin intersect, allowing ready price discovery and supply.

The hub also connects several local gas sources such as Silver Springs and Spring Gully, which adds to its attraction in basing the market off it.