Forward gas market in pipeline
It passed with little comment, but gas prices will rise 50 per cent over the next few years as eastern states move towards export price levels after the completion of a string of 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 was in Western Australia when it 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 1998 following an explosion at Longford.
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 start early next year. The market will be launched in the second quarter of 2014.
A number of groups - from gas suppliers and users such as AGL, Origin, 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 advisory groups such as Energy Action are keen to benefit from, given the nascent unmet gas demand in some markets due to the market power of suppliers.
The completion of the various gas export projects in Queensland could see its total gas demand rise to about 1500 petajoules by 2016, up from 240 petajoules now.
At present, the east coast gas market consumes about 700 petajoules of gas annually.
Australian Energy Markets Operator forecasts put the projected east coast gas market at between 3300 PJ and 6500 PJ in 2031. But the upper limit of this projection includes second-stage expansions of some of the projects, which is unlikely to occur if the US enters the gas export market in a big way, as some anticipate.
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 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 such a market failed. The 100 gigajoule futures contract 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.
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 for gas delivered to the core east coast markets of Adelaide, Sydney and Brisbane, along with a wholesale market for Victoria.
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 the investors in the large export gas projects.
Financial institutions are not expected to participate in the new market, since it demands physical delivery, although once the market is operational it will generate an index that may then present opportunities for financial trading.
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