UK-Australia resources firm BHP has called for participants in eastern Australia's gas market to use an independent gas index as part of an effort to improve transparency and break an extended impasse between producers and consumers over prices.
Longstanding disagreements between producers and consumers over prices intensified after domestic gas prices started to rise following the start of LNG exports from the Queensland port of Gladstone in 2014.
Industrial consumers have complained that the LNG exports linked domestic gas prices with values in the international market, resulting in a rise in domestic prices. This has prompted some consumers to push for eastern Australia gas prices to be linked to the US Henry Hub gas price, which — despite being an international benchmark — they see as likely to bring down domestic prices.
Major producer BHP is prepared to offer a proportion of its gas supply to an index each day and report its daily deals in order to provide liquidity and depth to the gas trading market in eastern Australia, the company's Australian head of energy, Sam Bartholomaeus, said at the Australian Domestic Gas Outlook (ADGO) 2021 conference last week.
BHP owns 50pc of the Gippsland Basin joint venture, eastern Australia's largest offshore gas-producing venture. ExxonMobil holds the remaining 50pc.
BHP, which is also a major producer of iron ore, hard coking coal and thermal coal, led the push by producers to switch the iron ore market to spot pricing in place of annual benchmark negotiations. A similar change needs to occur in the eastern Australia gas market, and a move away from the current debate among producers and consumers where each side is at odds over pricing, Bartholomaeus said.
There is "absolutely no logical basis" for the linkage of Henry Hub to eastern Australia gas prices, Australian independent Senex managing director Ian Davies said at ADGO.
The US domestic gas market is 50 times the size of the market in eastern Australia and serves a population that is 15 times bigger and far more concentrated geographically, Davies said. The Henry Hub index is also supported by a significantly bigger, more liquid upstream gas sector, a pipeline network that is 12 times as large as that in Australia and is heavily subsidised by the lucrative shale oil production, Davies said.
Another option pushed by industrial consumers is the linkage of LNG-netback prices based on Asian spot LNG prices to ensure internationally competitive pricing, Davies said. Senex produces gas from onshore fields in Queensland, mainly for sale to domestic customers.
"LNG prices have no relevance to non-LNG domestic producers in respect of marketing our gas volumes," Davies said. "You only have to look at the ASX reports of Australian LNG producers to see that their average realised domestic gas prices are consistently lower than their average realised LNG prices."
Senex reported an average realised gas price of A$6.20/GJ ($4.72/GJ) in October-December 2020. The Argus Australia Gladstone LNG fob price, which is an LNG netback indicator calculated by subtracting freight and costs associated with production from the delivered price of LNG to Asia-Pacific, averaged A$9.40/GJ in the same period. This meant that Senex was selling gas at around one-third below the LNG netback price from Gladstone over the same period.
"We believe the true dynamics of the east Coast market are best reflected by an independent domestic gas index," BHP's Bartholomaeus said.
BHP has been working to boost interest in the AVX and AWX domestic gas indexes published by Argus, which is the only price reporting agency assessing spot prices for gas for deliveries to Wallumbilla and Victoria. Both indexes are month-ahead assessments.
"BHP is open to price, report and transact term volumes off a credible domestic gas index — we welcome other industry participants to join us in this pursuit," Bartholomaeus said.
