Inquiry into the east coast gas market

Inquiry into the east coast gas market—April 2016

www.accc.gov.au

Inquiry into the

east coast gas market

April 2016

Inquiry into the east coast gas market—April 2016

ISBN

AustralianCompetitionandConsumerCommission

MarcusClarkeStreetCanberraAustralianCapitalTerritory

©CommonwealthofAustralia

ThisworkiscopyrightInadditiontoanyusepermittedundertheCopyrightActallmaterialcontainedwithinthisworkisprovided

underaCreativeCommonsAttributionAustralialicencewiththeexceptionof

• the Commonwealth Coat of Arms

• the ACCC and AER logos

• any illustration, diagram, photograph or graphic over which the Australian Competition and Consumer Commission does not hold

ThedetailsoftherelevantlicenceconditionsareavailableontheCreativeCommonswebsiteasisthefulllegalcodefortheCCBY

AUlicence

RequestsandinquiriesconcerningreproductionandrightsshouldbeaddressedtotheDirectorCorporateCommunicationsACCC

GPOBoxCanberraACTorpublishingunit@acccgovau

Importantnotice

TheinformationinthispublicationisforgeneralguidanceonlyItdoesnotconstitutelegalorotherprofessionaladviceandshouldnotbe

reliedonasastatementofthelawinanyjurisdictionBecauseitisintendedonlyasageneralguideitmaycontaingeneralisationsYou

shouldobtainprofessionaladviceifyouhaveanyspeciﬁcconcern

TheACCChasmadeeveryreasonableeorttoprovidecurrentandaccurateinformationbutitdoesnotmakeanyguaranteesregarding

theaccuracycurrencyorcompletenessofthatinformation

Partieswhowishtorepublishorotherwiseusetheinformationinthispublicationmustcheckthisinformationforcurrencyandaccuracy

priortopublicationThisshouldbedonepriortoeachpublicationeditionasACCCguidanceandrelevanttransitionallegislation

frequentlychangeAnyqueriespartieshaveshouldbeaddressedtotheDirectorCorporateCommunicationsACCCGPOBox

CanberraACTorpublishingunit@acccgovau

ACCC

wwwacccgovau

iii

Inquiry into the east coast gas market—April 2016

Contents

Executivesummary 

EastCoastGasInquirykeyﬁndings 

EastCoastGasInquiryrecommendations 

ACCCfuturework 

Background 

 ThedevelopmentofLNGtriggeredsigniﬁcantstructuralchangesintheeastcoastgasmarket 

 TheLNGprojectshavedisruptedthegassupply–demandbalanceintheeastcoastgasmarket 

 Thegasmarketwillnotbethesameforindustrialgasusers 

 LNGhasacceleratedthegrowthanddevelopmentofthegasindustry 

 LNGfundamentalsinﬂuencegaspricesintheeastcoastgasmarketwithdierentdynamics

emerginginQueenslandandthesouthernstates 

 PricesinQueenslandareshapedbyLNGfundamentals 

 Pricesinthesouthernstatesdependonthelevelanddiversityofsupply 

 Thesupplyoutlookacrosstheeastcoastgasmarketremainsuncertain 

 Alargevolumeofgasreservesandresourcescouldbedevelopedtomeetexpected

marketdemand 

 Therearesigniﬁcantcommercialuncertaintiesassociatedwithdevelopmentof

reservesandresources 

 Policydecisionsaectingthelevelanddiversityofgassupplyhavethepotentialtocause

signiﬁcantpriceeects 

 Riskmanagementmechanismshavebecomemoreimportantandnewmechanismsshould

besupported 

 Tighteninggassupplyhascreatedconsiderableuncertaintyforallgasmarketparticipants 

 GSAsarebecominglessﬂexibleformanagingdemandrisks 

 Storagefacilitieshaveanincreasinglyimportantroletoplayinmanagingdemandrisks 

 Liquidityintradingmarketsiscurrentlylimited 

 Thegasmarketisopaqueandisnotsignallingexpectedsupplyproblemseectively 

 Additionalgasmarketinformationwillimprovemarketcompetitiveness 

 Thelackofpricinginformationimpedescompetitivebargaining 

 Pipelinesarerespondingtomarketchangesbutthereisevidenceofmonopolypricing 

 Mostpipelineoperatorsarerespondingtothechangingmarket 

 Therearefewconstraintsonthebehaviourofexistingpipelines 

 Pipelineswithmarketpowerareusingthatpowerandthisistobeexpected 

 Monopolypricingbypipelinesadverselyaectseconomiceciency 

 Strengtheningthegaspipelineaccessregimewillimproveeconomiceciencyinthegasmarket

andrelatedmarkets 

 HowpipelinesareregulatedinAustraliaandotherjurisdictions 

 Limitationsinthegasaccessregimemeanitdoesn’tprovideaneectiveconstraintonpipelines 

 Thegasaccessregimeshouldbestrengthenedtoprovideamoreeectiveconstrainton

pipelineoperators 

 Transportcapacityandhubservicescanbefurtherunlockedtoincreaseecientuse 

 Alternativetransportationoptionsexistoncontractcarriagepipelines 

 Thereareissuesthatmayaectthetake-upofsecondarycapacity 

 Pipelinecapacityandgasﬂowscanbefurtherunlocked 

 Therearesomeproblemsonregionalpipelines 

 FurtherimprovementsintheWallumbillaGSHcouldresultinmoretrade 

 Energybodiesandparticipantsareworkingtogethertofacilitatetheecientuseofpipeline

andhubservices 

Inquiry into the east coast gas market—April 2016

Acronyms 

Glossary 

AppendixRecentinquiriesandreports 

AppendixTheInquiry’stermsofreference 

AppendixPublicsubmissionstotheInquiry 

AppendixTheregulatorystatusoftransmissionpipelines 



Inquiry into the east coast gas market—April 2016

Executive summary

Thedevelopmentandconstructionofthethreeliqueﬁednaturalgas(LNG)projectsin

Queenslandstartinginlatetriggeredunprecedentedchangesintheeastcoast

gasmarket



Intheperiodfromabouttotheendofdomesticindustrialgasusersstartedto

approachthemarketseekingnewgassupplyagreements(GSAs)inanticipationofmanylarge

long-termGSAscomingtoanendManyindustrialusersreportedthattheyeithercouldnotget

oersforgassupplyduringthisperiodforandbeyondorreceivedfewoersathighprices

withlessﬂexibletermsandconditionsincludingshortercontractdurations

Suppliersandtheirpeakbodiesbycontrastwerestatingpubliclythatthegasmarketwas

functioningwellandthatplentyofGSAswerebeingexecutedTheseconﬂictingclaimsabout

theavailabilityofoersforgassupplyandthecompetitivenessoftheeastcoastgasmarket

formedpartofthegenesisofthisInquiry

TheInquiryusedtheAustralianCompetitionandConsumerCommission’s(ACCC)information

gatheringpowersunderPartVIIAoftheCompetitionandConsumerAct(CCA)to

investigatetheconﬂictingclaimsofindustrialusersandsuppliersTheInquiryfoundthatmany

industrialusersdidexperiencerealdicultiesduringthisperiodandthattheywerereceiving

fewifanyrealoersforgasTheoersthattheydidreceivewereoftenatsharplyhigherprices

andonstrict‘takeitorleaveit’terms

Domesticsupplierswereeitherunwillingorunabletomakeﬁrmoersforgassupplyfor

andonwardsTheywereeitheralreadyfullycontractedreviewingtheirsupplyarrangements

andstrategiesinnegotiationtosecuretheirownsuppliesorinthecaseoftheLNGprojects

focussedonensuringgassupplyforLNGproductionratherthansupplyingadditionalgasfor

domesticusersThiscombinationoffactorsledtogreatuncertaintyforindustrialgasusersinthe

domesticmarket

Therearenowmoregassupplyoersavailableinthemarketbuttheyarefromfewersources

ofsupplyhigherpricedoftenforshorterdurationsandwithtighternon-pricetermsand

conditionsOtherproblemsalsoremaininthemarket

ThedevelopmentoftheLNGplantscausedmajorstructuralchanges

andmarketdisruptioncreatingwinnersandlosers

AustraliahasbeneﬁttedandwillcontinuetobeneﬁteconomicallyfromthethreelargeLNG

projectsinQueenslandTheseprojectsareboostingGDPandemploymentandprovidinga

particularbeneﬁttotheQueenslandeconomyespeciallyinsomeruralandregionalareas

Howeverthedramaticchangeinthesupply-demandbalanceandnewcontractualarrangements

forconventionalgastosupporttheLNGprojectshaveledtomarketdisruption

EastcoastgasdemandisexpectedtosoarfromaroundPJperannumintoaround

–PJperannumin–duetoexportsfromtheLNGprojectsLNGprojectsare

supplementingsupplyfromtheirowncoalseamgas(CSG)reservesbycontractinggasfrom

conventionalreserveswhichpreviouslyservedthedomesticmarketparticularlyfromthe

CooperBasin

Eastcoastgaspriceshavehistoricallybeenlowbyinternationalstandardsbutrecentprice

increasesarelikelytoerodethiscompetitiveadvantageThenewmarketdynamicsandthe

transitionalphaseofthegasmarkethadaparticularlynegativeeectonsomeindustrialusers

Theeectsonindustrialusersvarydependingonthealternativesavailabletothemtheextentof

theirtradeexposureandtheiruseofgasforfeedstockorenergyorbothManyusershavefew

ornoalternativestogasavailabletothemGascanbepercenttopercentofinputcosts

 The‘eastcoastgasmarket’isaphrasethathasbeenadoptedforthepurposeofthisInquirytodescribeageographicarea

thatincludesQueenslandNewSouthWalesAustralianCapitalTerritoryVictoriaSouthAustraliaandTasmaniaItisnotan

economicorlegaldeﬁnitionofanymarketforCCApurposes



Inquiry into the east coast gas market—April 2016

forsomegasintensiveindustriesanduptopercentofcostsforsomechemicalproduction

Marginreductionsforindustrialuserscantypicallyrangefromtopercentagepoints

dependingontheirindustryandthelevelofgaspriceincreases



Theuncertaintyaroundgas

availabilityandpricingresultedinsomeindustrialusersdeferringinvestmentschoosingshorter-

termGSAsorreducinggasusage

Wholesalegascostsmakeuppercenttopercentoftotalresidentialgasbills



depending

onthestateForexamplehouseholdbillscouldincreasebypercentinNewSouthWalesand

percentinVictoriaifwholesalegaspricesrosebyGJ



TheeastcoastgasmarketisnowalsomoredirectlyexposedtointernationaloilandLNGprices

viaLNGexportcontractstheLNGspotmarketandsomerecentdomesticcontractswith

explicitoil-linkedpricingThishastranslatedintohigherandmorevolatiledomesticgasprices

InternationaloilandLNGpriceshavefallenfromveryhighlevelsupuntilmid-totherecent

muchlowerpricesInternationaloilandLNGpricechangessuchasthesehavebeenandwill

continuetobeafactoraectingpricesintheeastcoastgasmarket

InresponsetothechangeddynamicsoftheeastcoastgasmarkettheInquiryrecommends

• reconsideringtheapproachbeingtakenunderregulatoryregimesforgasdevelopmentin

ordertoalleviatetheimpactofthethreemajorfactorsaectingsupply

• addressingpipelinesectorproblemsthatexacerbategassupplyandpricingissuesinthe

domesticmarket

• improvingmarketoperationsandincreasingthelevelofmarkettransparency

Theseissuesareaddressedinturn

 Threemajorfactorsareaectingsupply

Whileitisclearthattherearesucienteastcoastreservestomeetlikelydemandforthe

foreseeablefutureitisnotatallclearwhetherthesereserveswillbedevelopedinatimely

fashiontomeetdemandatanyparticularpointintime

Therearethreekeyfactorsfeedingintotheuncertaintyaboutfuturegassupplyonthe

eastcoast

• GasﬂowstotheLNGprojectswhichareremovinggasfromthedomesticmarket

• Thelowoilpricewhichisresultingindeclininginvestmentingasexplorationandlower

productionforecastsforbothdomesticandLNGprojects

• Moratoriaandregulatoryrestrictionswhichareaectingonshoregasexplorationand

developmentinNewSouthWalesVictoriaTasmaniaandpotentiallytheNorthernTerritory

TheparticipationoftheLNGprojectsinthedomesticgasmarkethaschanged

marketﬂows

TheLNGprojectsthatpreviouslysuppliedtheQueenslanddomesticmarkethavestopped

oeringsigniﬁcantadditionalﬁrmsuppliestodomesticuserstoconcentrateonensuringa

smoothbuild-uptoLNGproductionSomeLNGprojectsarealsosupplementingself-supplyby

contractinggasfromreserveswhichpreviouslyservedthedomesticmarketparticularlyfrom

theCooperBasinThesechangeshavecauseddisruptiontothemarket’spreviousgasﬂows

andhaveresultedinchangedsupplydynamicsparticularlyinthesouthernstatesIftheLNG

projectsseektomaximiseproductioncapacityoftheirLNGtrainsgaswillcontinuetoﬂow

toQueensland

 AssumingastartingwholesalepriceofGJanda–GJgaspriceincrease

 OakleyGreenwoodGasPriceTrendsReviewDecember

 AssumingbaselinewholesalegaspricesofGJinVictoriaandGJinNewSouthWalesestimatedbyOakley

Greenwood(GasPriceTrendsReviewDecember)



Inquiry into the east coast gas market—April 2016

Thedomesticgasmarketisnowmoreexposedtointernationaloilprices

Anothermajorfactoraectingthesupplyoutlookforgasintheeastcoastgasmarketisthe

increasedexposuretooilpricesTheLNGprojectsarelinkingtheeastcoastgasmarkettothe

internationalLNGmarketwhichislinkedtooilpricesThislinkagehasaectedexpectations

aroundfuturedomesticgaspricesAsoilpricesfalltheexpectedreturnsfromproductionand

reservesfallbalancesheetssuerandthelevelofexplorationanddevelopmentdeclinesIn

additionnumerousupstreamproducersrelyonproﬁtsfromoilproductiontofundexploration

anddevelopmentandtomaintainhealthybalancesheets

TherealaveragepriceofoilinthepostOPECperiodisaboutUSbarrel



Thislong-term

averageispunctuatedbygreatswingsinthepriceofoilForexamplethepriceofoilasat

AprilwasaboutUSperbarrelafteraveragingaboveUSperbarrelformostof

theperiodfromtoThishaslefttheeastcoastgasmarketcaughtinaclashofcycles

whererisingdomesticgaspricesarecoincidingwithoilpricesthatremainlowafterasteepfall

Thisisdrivinguncertaintyaboutfuturesupplyduetodecliningspendingonexplorationand

developmentInvestmentfundinghasalsodeclinedascapitalmarketsbecomeincreasingly

concernedbytheriskproﬁleoftheupstreamsectoroftheindustryincludingforprojectswhich

seektosupplythedomesticmarket

Regulatoryrestrictionswillaectfuturesupply

Policydecisionsmadebygovernmentsandregulatorsaectthelevelanddiversityofsupply

intheeastcoastgasmarketInparticulartherearemoratoriaandotherregulatoryrestrictions

inNewSouthWalesVictoriaandTasmaniapreventingorimpedingonshoregasexploration

anddevelopmentandconsiderationisbeinggiventoamoratoriumonfrackingintheNorthern

TerritoryTheInquiryrecognisestheimportantenvironmentalandsocialconsiderations

underpinningthesepolicydecisionsTheInquiryrecommendsthatproposalsforgasexploration

anddevelopmentshouldhoweverbereviewedonacase-by-casebasisThesereviewsshould

takeaccountofarangeofconsiderationsincludingthecostsandbeneﬁtstothedomesticgas

marketandtoindustrialusersinparticularaswellasenvironmentalandsocialconcernsThe

greaterthelevelanddiversityofsupplylocatedclosetodemandcentresthemoredynamicand

competitivetheeastcoastgasmarketwillbe

Thesupplyoutlookintheeastcoastgasmarketremainsuncertainto

andbeyond

Sucientgasproductioniscurrentlyforecastintheeastcoastgasmarkettomeetdomestic

demandandexistingLNGexportcommitmentsuntilatleastevenwithoutgasfromthe

Arrowproject(chart)Howeveritisimportanttonotethatthisrequiresthedevelopmentof

reservesinprojectsthatarecurrentlyundevelopedThereremainsuncertaintyoverthecurrent

viabilityofsomeofthesedevelopmentsparticularlyduetolowoilprices

 –averagedollars



Inquiry into the east coast gas market—April 2016

Chart ForecastgassupplyanddemandbalanceintheeastcoastgasmarketexcludingArrow–

Forecast supply and demand (PJ)

Domestic demand and LNG export GSAs Domestic demand and maximum LNG capacity

500

1000

1500

2000

2500

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Undeveloped supply—other producers

Undeveloped supply—LNG projectsDeveloped supply

Source ACCCanalysisbasedondataobtainedduringtheInquiryAEMO’sNationalGasForecastingReportandEnergyQuest

EnergyQuarterlyMarch

Withoutfurtherandextensiveinvestmentincurrentlyundevelopedgasreservestheremay

besigniﬁcantunfulﬁlleddemandontheeastcoast(chart)ExceptinrelationtoArrow’s

gasreservestheproductionforecastsshowninchartbelowreﬂectspeciﬁcprojectsThe

relevantgassupplierscurrentlyexpecttomeettheseforecastsviathoseprojectsAdditional

developmentwouldberequiredtoproduceenoughgastofullyusetheproductioncapacityof

theLNGtrains

Chart Unfulﬁlleddemandandforecastofproductionfromidentiﬁedundevelopedprojects–

Forecast supply and demand (PJ)

Unfulﬁlled demand (domestic demand and LNG export GSAs)

Unfulﬁlled demand (domestic demand and maximum LNG capacity)

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

200

400

600

800

1000

1200

1400

1600

Undeveloped supply—Arrow (hypothetical)

Undeveloped supply—other producersUndeveloped supply—LNG projects

Source DataobtainedbytheACCCduringtheInquiryEnergyQuestEnergyQuarterlyMarchandAEMO’sNationalGas

ForecastingReport

Notes UndevelopedproductionforecastfortheLNGprojectsandotherproducersisbasedonthesamedataasinchart

‘Undeveloped—Arrow(hypothetical)’isahypotheticalestimatebasedonpublicsources

Therearesigniﬁcantcommercialuncertaintiesassociatedwiththetimingofthedevelopment

ofcurrentlyundevelopedreservesInparticularalargeproportionoffutureproductioninthe

marketisexpectedtocomefromunconventionalCSGﬁeldsinQueenslandwhichareprimarily

beingdevelopedbytheLNGprojectsTheneedforcontinualreinvestmentinCSGinfrastructure



Inquiry into the east coast gas market—April 2016

createsongoingcommercialandtechnicaluncertaintyovertheexacttimingandvolumeof

futuregasfromtheseunconventionalreserves

Addingtouncertaintyinthesupplyoutlookisalackofclearinformationaboutthelikely

timingandsizeofthedevelopmentoftheArrowreservesTheArrowJointVentureholdsthe

mostsigniﬁcantuncommittedgasreservesontheeastcoastChartshowsahypothetical

developmentpathforArrow’sgasbasedonpubliclyavailableinformationbuttheInquiryisnot

awareofanyspeciﬁcbusinessplantodevelopArrow’sgas

Thereislittleprospectofasigniﬁcantincreaseinsupplyfromtheexistingproductionbasinsin

thesouthernstates



SomeproducersintheCooperBasinando-shoreVictoriahaveramped-

upproductiontomeetnewsupplycommitmentsandthismayacceleratethedeclineintheir

conventionalreservesoverthemediumtermProductioncostsforexistingconventionalreserves

areincreasingasthegaswhichiseasiertoextractisusedDevelopmentofreplacementreserves

iscurrentlylaggingandmaynotbeavailablesoonenoughTraditionalsourcesofsupplysuchas

theCooperOtwayandGippslandbasinsfaceincreasingcostsandchallengingdecisionsabout

potentialnewﬁeldexpansionsinthecurrenteconomicconditionsIntheabsenceoftimely

additionalinvestmentthereispotentialforasigniﬁcantreductioninsupplyfromtraditional

sourcesinthesouthernstates

InNovembertheNorthernTerritorygovernmentannouncedthatithadselectedJemena

toconstructapipeline(theNorthernGasPipelineNGP)toconnecttheNorthernTerritorywith

theeastcoastgasmarketfortheﬁrsttimeWhilevolumessuppliedoverthispipelinearelikely

toberelativelymodestatﬁrstJemenahasstatedthatthepipelinewillbescalableThereare

potentiallyverylargeshalegasresourcesintheNorthernTerritorywhichwillhaveabetter

chanceofbeingcommerciallydevelopedoncetheyareconnectedtoalargedemandsource

Itisunclearwhattheultimatesizeoftheseresourcesmightbeoroverwhattimehorizonthey

mightbeextractedbuttheNorthernTerritoryrepresentsapotentiallargesourceofsupply

fortheeastcoastgasmarketprovidedthatdevelopmentoftheshalegasresourcesisnot

preventedbypotentialfutureregulatoryrestrictions

DierentpricingdynamicsapplyinQueenslandandthesouthernstates

ThecommissioningoftheLNGprojectshasinﬂuencedthepricingdynamicsinQueenslandand

thesouthernstatesindierentwaysPricesinQueenslandarenowexpectedtobeshapedby

theLNGprojectfundamentalswhilepricesinthesouthernstatesarelikelytoalsodependon

theavailabilityanddiversityofsupplyinthosestates

InQueenslandfuturepricesareexpectedtobeshapedbyLNGnetbackpricesThethreeLNG

projectsareforecasttohaveenoughgastomeettheircontractualcommitmentsintheshort-

tomedium-termTheymayhoweverrequirefurthergastofullyutilisetheirLNGfacilitiesor

coveranyunexpectedshortfallsinmeetingtheircontractualexportcommitmentsWhilethis

continuesdomesticuserswillcompetewithLNGprojectsforgasanddomesticgaspricesin

QueenslandwillbeshapedbyLNGnetbackprices

LNGnetbackpriceatWallumbillaiscalculatedbytakingtherelevantLNGexportpriceinAsia

andsubtractingtheshort-runcostsassociatedwithshippingandliquefaction(chart)This

calculationdoesnotmakeanyallowancesforrecoveryofﬁxedcostsorinvestedcapitalwhich

aresunkcostsandarenottypicallytakenintoaccountinshort-termcommercialdecisions

 SouthernstatesincludeVictoriaNewSouthWalesSouthAustraliaTasmaniaandtheAustralianCapitalTerritory



Inquiry into the east coast gas market—April 2016

Chart Illustrativeshort-runLNGnetbackpricingexample

0.45

Shipping

costs

Delivered ex-ship

price in Asia

Free on Board

price in Gladstone

LNG netback at

Wallumbilla

Shipping

losses

Fuel gas

Variable

opex

8.10

7.40

6.70

0.25

0.55

0.15

Notes NumbersareinGJTheillustrativeroundedﬁguresinthischartarebasedonthesameLNGnetbackcalculationsinbox

inchapter

PricesinthesouthernstatesarealsolikelytobeinﬂuencedbyLNGnetbackpricesbutthecost

oftransportinggastoorfromWallumbillahascreatedarangeofpotentialpricingoutcomes

(theshadedregioninchart)

Iftherearesucientsupplyalternativesavailablefordomesticgasbuyersinthesouthernstates

competitionwilldrivesuppliersinthesouthernstatestooeragaspriceclosertotheirnextbest

salesalternativeIfthisalternativeistosellgastotheLNGprojectsinQueenslandthepricethat

supplierswouldreceiveistheLNGnetbackpriceatWallumbillalessthecostoftransportinggas

toWallumbillaandtheprocessingcostsatMoomba



(theselleralternative)

Ontheotherhandiftherearefewsupplyalternativesavailabletoagasbuyerthenproducers

canchargeapriceapproachingthebuyer’snextbestalternativeIfthisalternativeistobuy

gasproducedinQueenslandthepricethatagasbuyerwouldhavetopayforthisgasisthe

LNGnetbackpriceatWallumbillaplustransportcostsfromWallumbillatothebuyer’slocation

(thebuyeralternative)

Thesigniﬁcantgapbetweenthebuyerandselleralternatives(cappedatthebuyer’smaximum

willingnesstopayandwithaﬂoorofthemarginalcostofsupply)representstherangeof

possiblepricingoutcomesingassupplynegotiationsinthesouthernstatesThepricesat

eachendofthisrangeareunlikelytoberealisedinpracticeforanumberofreasonsincluding

becausethegasmarketisunlikelytobeperfectlycompetitiveorfullymonopolisticthe

negotiatingpartiesdonothaveperfectinformationaboutthestateofthemarketandtheymay

havedierentexpectationsaboutthecurrentandfuturemarketconditionsAlsothebuyer’s

willingnesstopaywillvarybybuyerthemarginalcostofsupplywillvarybysupplierand

bothwillvarythroughtimeNeverthelessthereisstillaconsiderablerangeofpossiblepricing

outcomesWherethedomesticgaspriceswillultimatelyendupislikelytodependonavailability

anddiversityofgassupplyinthesouthernstates

ToillustratetheimportanceofthegaspricerangeatanoilpriceofUSbarrelwhichis

aroundtherealaveragepriceofoilinthepostOPECperiodagaspriceofGJmaysee

mostindustrialgasusersstayinproductionwhileagaspriceofGJmaynot(seechart)

 ProcessingisrequiredtoensurethegasmeetstherequiredspeciﬁcationfortheLNGprojects



Inquiry into the east coast gas market—April 2016

Chart BargainingframeworkforgassupplynegotiationsinSydney

Transport costs

Conceptual buyer’s maximum willingness to pay

Conceptual marginal cost of supply

Gas price

AU$/GJ

Bargaining price range at Sydney

Not to scale

$30 $55

Oil price

US$/barrel

$7.20

$2.50

$12.00

$7.30

LNG netback—buyer alternative

LNG netback—seller alternative

Note Thegapbetweenthebuyerandselleralternativesconsistsoftwocomponents—thecosttothebuyeroftransportinggas

fromWallumbillatotheirlocationplusthecosttotheselleroftransportinggasfromthebuyer’slocationtoWallumbilla

includingprocessingatMoombaandgaslosses

Theﬂooristhesupplier’smarginalcostofsupplyandtheceilingisthebuyer’smaximumwillingnesstopayThebuyer’s

maximumwillingnesstopayandthemarginalcostofsupplyinthischartarepurelyillustrative

Inthisillustrativeexampletheselleralternativepriceatanoilpriceofbarrelisbelowthemarginalcostofsupplysothe

marginalcostofsupplywouldsettheﬂoorforbargaining

TheillustrativepricesinthisexampleassumeoilpricespercentageconversionratesandaﬁxedexchangerateThese

assumptionsdonotholdforwiderrangesofoilpricesSydneywaschosenasanillustrativelocation

DecliningproductionintheOtwayandBassbasinsredirectionofgasfromtheCooperBasin

toQueenslandmoratoriaandotherregulatoryrestrictionsonon-shoregasexplorationand

developmentinNewSouthWalesVictoriaandTasmaniahavecombinedtoseverelyreduce

theavailabilityanddiversityofsupplyinthesouthernstatesThismeansthatdomesticusers

inthesoutharebecominghighlyreliantongasproducedbytheGippslandBasinJointVenture

(GBJV)



Inthesecircumstancesthereisunlikelytobesucientcompetitioninthesouthtoconstrain

theGBJVfromchargingapriceapproachingthebuyeralternativeThismeansthattoincrease

competitionandputdownwardpressureonpriceschangesareneededtoencourageincreased

supplyandalargernumberofsupplierstothedomesticmarketparticularlyinthesouth

IncreasedcompetitioncouldpotentiallyresultinsoutherngasuserspayinguptoGJlessfor

theirgasbymovingthepricenegotiationoutcomeclosertotheselleralternativethanthebuyer

alternativeHowevertheextentofpotentialgainsisaectedbythefactorsmentionedearlier

andcouldbelimitedfurtherifnewgassupplyhasahighcostofproductionorislocatedfar

fromthekeysoutherndemandcentres

Gasreservationpoliciesshouldnotbeintroduced

Gasreservationpoliciesseektoshielddomesticusersfromtheeectsoflinkingtoexport

marketsTheyincludepoliciestorequireapercentageshareofgasreservesorproductionto

beplacedinthedomesticmarketorexportcontrolswhichrequirealicenceforexportinggas

subjecttocertainconditionssuchasanationalinteresttestwhichcouldincludeconsiderations

oftheimpactondomesticsupply

Intheshorttermsuchpoliciesmayreducepricesfordomesticusersasadditionalgasisforced

ontothedomesticmarketaboveecientmarketdemandTheseartiﬁciallyreducedprices

weakentheeconomicincentivesforfurthergasexplorationandappraisalInadditionnewgas

 TheInquirynotesthatAGLrecentlyreachedanagreementwithCooperEnergytobuyuptoPJofgasfromSoleproject

overeightyearsanduptoPJsperannumfromtheMantaprojectThiscouldresultinnewalternativegassupplycoming

outoftheGippslandBasinalthoughthisisarelativelysmallvolumeofgas



Inquiry into the east coast gas market—April 2016

projectswhicharescaledtothedomesticmarketmaybeforcedoutofthemarketduetopoor

economicreturnsOvertimereservationpolicieswouldreducethelikelihoodofnewsources

ofgasbeingdevelopedtothedetrimentofthelevelanddiversityofsupplyfordomestic

gasusers

InamarketthatisfacingsupplyissuesarisingfromLNGmoratoriaandalowoilpricefurther

impedimentstogassupplydevelopmentwouldbedetrimentalandsoshouldnotbeintroduced

MarketdevelopmentscompeltheACCCtorevisitGBJVjointmarketingarrangements

Theeectofthecurrentlackofdiversityofsuppliersinthesouthernstatesisexacerbatedby

theexistingjointmarketingarrangementsoftheGBJVTheACCCconductedapreliminary

reviewoftheGBJVjointmarketingarrangementsinTheACCCdecidedtotakenofurther

actionatthattimebutadvisedthejointventurepartnersthatitmightrevisitthematteriffuture

marketdevelopmentswarranteddoingso

TheInquiryhasfoundthattheGBJVnowholdssigniﬁcantmarketpowerasaresultofthe

changedcompetitivedynamicsinthesouthernstatesThemarkethaschangedsigniﬁcantly

sinceparticularlyforsoutherngasusersTheInquiryconsidersthatjointmarketingby

theGBJVmayhaveamoredetrimentalimpactoncompetitionthaninthepastandthisissue

warrantsreconsiderationbytheACCC

Recommendations

 Governmentsshouldconsideradoptingregulatoryregimestomanagetherisks

ofindividualgassupplyprojectsonacasebycasebasisratherthanusingblanket

moratoriaGovernmentsshouldtakeintoconsiderationthesigniﬁcanteectsthat

moratoriaandotherrestrictionsongasdevelopmentmayhaveongasusers

 Gasreservationpoliciesshouldnotbeintroducedgiventheirlikelydetrimentaleecton

alreadyuncertainsupply

ACCCfuturework

 TheACCCwillconsiderthecompetitiveeectofthejointmarketingarrangementsofthe

GBJVinlightofcurrentmarketdynamicsforthepurposesofsoftheCCA

 Pipelinesectorproblemsexacerbategassupplyandpricingissuesin

thedomesticmarket

Whiletheavailabilityanddiversityofgassupplyiscriticaltheeciencyofthegasmarketisalso

criticallydependentontheeciencyofthetransmissionsectorthepricespipelineoperators

chargefortransportationservicesandtheabilityofthissectortorespondtochange

Pipelineoperatorsarerespondingtomarketneedsbutthereisevidenceofmonopoly

pricinggivingrisetohigherpricesandeconomicineciencies

Thedemandfortransportationservicesischangingandthelevelofﬂexibilityrequiredbysome

marketparticipantsisincreasingPipelineoperatorshaveingeneralrespondedwelltothe

changesunderwaybyoeringmoreﬂexibleservicesandcarryingoutmajorinvestmentsmost

ofwhichhavebeenfullyunderwrittenbymedium-tolong-termgastransportationagreements

(GTAs)withshippersTheseresponsesareprovidingformoredynamicpipelineﬂowsanda

greaterdegreeofpipelineinterconnection

Whilepipelineoperatorshavebeenrespondingtothechangesthereisevidencethatalarge

numberofexistingpipelineshavebeenengaginginmonopolypricingForexampletherates

ofreturnsomepipelineoperatorshaveassumedwhendeterminingthepriceofaccesstothe

incrementalinvestmentsthathaveoccurredinthelastthreeyearsare–timeshigherthan

thebenchmarkreturnonequitytheAustralianEnergyRegulator(AER)hasestimatedingas

regulatorydecisionsoverthisperioddespitetheseinvestmentsbeingusuallyfullyunderwritten



Inquiry into the east coast gas market—April 2016

byshipperGTAsTheyarealsosubstantiallyhigherthanthereturnadoptedinthewinningbid

fortheNGP

Thereisalsoevidenceonsomepipelinesofexcessiveasavailableandinterruptiblechargesand

forwardhaulchargesthatare–timeshigherthantheywouldbeifthepipelinewasregulated

Oneoperatorhasalsoestimateditisearningpercentmoreinoverallpipelinerevenuethan

itwouldifitwasregulatedAnotherpipelineownerthatisfacingdecliningvolumesistryingto

maintainanoverallrateofreturnthatistimeshigherthanthereturnitestimateditwould

earnifitwassubjecttoregulation

TobeclearmonopolypricingisnotacontraventionoftheCCAFurtheritislegitimateand

expectedcommercialbehaviourInamarketeconomywheretheproﬁtmotivedrivesprivate

enterpriseitisexpectedthatﬁrmsthatdonotfaceeectivecompetitionorathreatof

suchcompetitionwillengageinsuchbehaviourMonopolypricingcanneverthelesshavea

detrimentaleectoneconomiceciencyandconsumers

MaterialgatheredbytheInquiryindicatesthatmonopolypricingisgivingrisetohigherdelivered

gaspricesforusersandinsomecaseslowerex-plantpricesforproducersThisisinturngiving

risetoarangeofeconomicinecienciesintheeastcoastgasmarketandinupstreamand

downstreammarketsthecostsofwhichwillultimatelybebornebyconsumersTheInquiry

hasalsoheardspeciﬁcexamplesfrommarketparticipantsofexcessivetransportationcharges

resultingin

• lowerthanecientlevelsofinvestmentinexplorationandreservesdevelopment

• lowerthanecientlevelsofgasuseandinvestmentinfacilitiesthatusegas

• distortionsingasﬂowsacrossthemarketandgasfailingtoﬂowtowhereitisvalued

themost

Underthebargainingframeworkpresentedinchartmonopolypricingonpipelinesbetween

Wallumbillaandthesouthernstateswillalsoaecttherangeofpossiblegaspriceoutcomesfor

domesticusersevenifbuyersdonotphysicallytransportgasovertheseroutesThiseectcan

beseeninchartwhichshowsthatareductionintransportationchargeswouldnarrowthe

rangeofpossiblepricingoutcomesInanenvironmentwheredomesticgasusersinthesouthern

statesarelikelytopayapriceapproachingthebuyer’salternativeeliminatingtheeectof

monopolypricingontransportationchargeswouldreducethebuyeralternativeandtherefore

reducethemaximumpriceinthebargainingpricerangeWheredomesticgaspriceswill

ultimatelyendupwithinthebargainingpricerange(foragivenoilprice)islikelytodependona

numberoffactorsincludingtheavailabilityanddiversityofgassupplyinthesouthernstatesas

wellasonthelevelofthepipelinecharges



Inquiry into the east coast gas market—April 2016

Chart BargainingframeworkforgassupplynegotiationsinSydneywithlowertransportcosts

Transport costs

Conceptual buyer’s maximum willingness to pay

Conceptual marginal cost of supply

Gas price

AU$/GJ

Bargaining price range at Sydney Bargaining price range at Sydney with lower transport costs

Not to scale

$55

Oil price

US$/barrel

$12.00

$11.00

$8.30

$7.30

LNG netback—buyer alternative

LNG netback—seller alternative

Notes Pipelinetarisoneachoftherelevantpipelines(MSPSWQPQSN)werereducedbypercentinthisillustrativeexample

Transportationcostsunderthebuyer’sandseller’salternativeincludegaslossesandinthecaseoftheseller’salternativealso

includeprocessingcostsatMoombaInthisexamplegaslossesandprocessingcostsareassumedtobeunchanged

Thegasaccessregimeisnotconstrainingthebehaviourofpipelinesandshouldbe

strengthened

Theabilityandincentiveofexistingtransmissionpipelinestoengageinmonopolypricingisnot

beingeectivelyconstrainedbycompetitionfromotherpipelinescompetitionfromalternative

energysourcestheriskofstrandingthecountervailingpowerofshippersorthethreat

ofregulation

ThetransmissionsectorisalreadysubjecttoanaccessregimeundertheNationalGasLaw

(NGL)andtheNationalGasRules(NGR)butlessthanpercentofthetransmissionpipelines

ontheeastcoastarecurrentlysubjecttoanyformofregulationThisisinstarkcontrasttoother

comparablejurisdictionssuchastheUnitedStatesNewZealandandtheEuropeanUnion

wherethevastmajorityoftransmissionpipelinesaresubjecttoeconomicregulationbecauseit

hasbeenrecognisedthatpipelinescanwieldsubstantialmarketpower

Notonlyarefewtransmissionpipelinesregulatedbutthethreatofregulationisalsofailingto

imposeaneectiveconstraintonthebehaviourofanumberofunregulatedpipelinesThisis

becausethecurrenttestforregulationundertheNGL(the‘coveragecriteria’)whichlargely

mirrorsthedeclarationcriteriainPartIIIAoftheCCAisunlikelytobemetbythemajority

oftransmissionpipelinesgiventhecharacteristicsofthemarketThecriteriaarealsoasthe

ProductivityCommissionhasnoted



notdesignedtoaddressthemarketfailurethathasbeen

observedinthisInquirywhichismonopolypricingthatgivesrisetoeconomicineciencieswith

littleornoeectonthelevelofcompetitionindependentmarkets

ToaddressthislimitationtheInquiryrecommendsthatthecurrenttestforregulationbe

replacedwithanewtestwhichfocusesonwhether

• thepipelineinquestionhassubstantialmarketpower

• itislikelythatthepipelinewillcontinuetohavesubstantialmarketpowerinthemediumterm

 ProductivityCommissionFinalReportNationalAccessRegimeOctoberpp–InthisreporttheProductivity

CommissionnotedthattoolsotherthanPartIIIAmayberequiredwhereanexerciseofmarketpowerhasnoeecton

competitioninadependentmarket

“Wherecompetitionisnotdisruptedbutmonopolypricingexistsitmaybethecasethatadierentformofinterventionis

justiﬁedForexamplesomeindustries(suchasairports)aresubjecttopricessurveillanceunderPartVIIAoftheCCAand

declarationcouldsupersedetheuseoftheselessintrusiveapproachesMonopolypricingmayalsobeaddressedthrough

pricingregulationunderindustryspeciﬁcaccessregimes(suchasisthecaseforelectricitynetworks)”



Inquiry into the east coast gas market—April 2016

• coverageofthepipelinewillorislikelytocontributetotheachievementoftheNationalGas

Objective(NGO)(forexamplebypromotingecientinvestmentoperationandortheuse

ofnaturalgasservicesforthelong-terminterestsofconsumersofnaturalgas)

Incontrasttothecoveragecriteriathistestbetterreﬂectsthecharacteristicsofthemarketand

willprovideamoreeectiveconstraintonthebehaviourofpipelineoperatorsThetestisalso

consistentwiththeprinciplesembodiedintheNGOandpolicymakers’originalintentionswhen

implementingthisregime



WhiletheInquiryissatisﬁedoftheneedtomovetothisnewtestithasnotbeenpossibleas

partofthisprocesstoconsultwithmarketparticipantsonthespeciﬁcmatterstobeconsidered

whenapplyingthistestorhowitshouldbeimplementedTheInquirythereforerecommendsthe

AEMCbeaccordedresponsibilityforcarryingoutfurtherconsultationontheseissues

Inadditiontothelimitationimposedbythecurrenttestforregulationdiscussedabovesome

featuresoftheNGRmeanthatevenifapipelineissubjecttofullregulationitmaystillbeableto

exercisemarketpowerForexampleexpansionsofafullyregulatedpipelinemaynotbesubject

toregulationSimilarlynon-contestableservicesprovidedbyafullyregulatedpipelinemaynot

besubjecttoanexantereviewbytheAER

Furtherthelimitedavailabilityofinformationonthecostspipelineownersincurinproviding

servicesandtherelationshipbetweenthesecostsandthepriceschargedforservicesmayalso

belimitingtheabilityofshipperstodeterminewhetherornotthepricestheyareoeredare

costreﬂectiveandtonegotiateeectivelywithpipelineoperators

TheInquirymakesanumberofrecommendationsonhowtoaddresstheselimitations

Recommendations

 TheCOAGEnergyCouncilshouldagreetoreplacethecurrenttestfortheregulation

ofgaspipelines(thecoveragecriteria)intheNGLwithanewtestThistestwouldbe

triggerediftherelevantMinisterhavingregardtotheNationalCompetitionCouncil’s

recommendationissatisﬁedthat

• thepipelineinquestionhassubstantialmarketpower

• itislikelythatthepipelinewillcontinuetohavesubstantialmarketpowerinthe

mediumterm

• coveragewillorislikelytocontributetotheachievementoftheNGO

TheCOAGEnergyCouncilshouldalsoasktheAEMCtocarryoutfurtherconsultationon

thespeciﬁcmattersthatshouldbeconsideredwhenapplyingthistestandhowitshould

beimplementedandtoadvisetheCOAGEnergyCounciloftheamendmentsthatwould

needtobemadetotheNGLandtheNGRtogiveeecttothisnewtest

 TheCOAGEnergyCouncilshouldasktheAEMCtoreviewParts–oftheNGRand

tomakeanyamendmentsthatmayberequiredtoaddresstheconcernthatpipelines

subjecttofullregulationmaystillbeabletoexercisemarketpowertothedetrimentof

consumersandeconomiceciencyIncarryingoutthisreviewtheAEMCshouldalso

considerwhetheranychangescanbemadetothedisputeresolutionmechanisminthe

NGLandNGRtomakeitmoreaccessibletoshipperssothatitprovidesamoreeective

constraintonthebehaviourofpipelineoperators

 Thestatedobjectiveofthegasaccessregimewhenitwasoriginallyimplementedinwastheestablishmentofa

frameworkforthirdpartyaccesstogaspipelinesthatwouldamongstotherthingspreventtheabuseofmonopolypower

bypipelineoperatorsandproviderightsofaccessonfairandreasonabletermsforboththepipelineoperatorandusersSee

NationalThirdPartyAccessCodeforNaturalGasPipelineSystemsNovemberp



Inquiry into the east coast gas market—April 2016

 TheCOAGEnergyCouncilshouldasktheAEMCtoexplorehowthescopeofthe

informationdisclosurerequirementsintheNGLshouldbeexpandedtorequireall

pipelinesoperatingonanopenaccessbasis(thatisregulatedandunregulatedpipelines)

topublishﬁnancialinformationthatshipperscanusetodeterminewhetherornotthe

pricestheyareoeredbypipelineoperatorsarecostreﬂectiveThepublicationofthis

informationwouldenableshipperstonegotiatemoreeectivelywithpipelineoperators

andtoidentifyanyexerciseofmarketpowermorereadily

TheInquiryiscognisantoftheeectthatregulationcanhaveoninvestmentinnovationandthe

othercostsandrisksthatregulationcanexposepartiestoTherearehoweveralreadysucient

safeguardsintheNGLandNGRthataredesignedtoamelioratetheseeectsincluding

amongstothersthe-yearno-coverageoptionforgreenﬁeldspipelinestheprotectionthe

NGLaccordscommerciallynegotiatedcontractsthepossibilityoffullorlighthandedregulation

andtheavailabilityofmeritsreviewTheInquiryisnotrecommendinganychangestothese

elementsofthecurrentregime

 Marketoperationandtransparencyshouldbeimproved

TheAEMChasbeenundertakingitsEastCoastWholesaleGasMarketandPipelineFrameworks

ReviewatthesametimeasthisInquiryTheAEMC’sfocushasbeenongasmarketdesign

includingthefurtherdevelopmentofwholesalegastradingmarketsimprovedpipelineaccess

andimprovedinformationprovisionviatheBulletinBoardTheInquirysupportsincreased

transparencyandinformationinthemarket

TheInquiryhasfocussedonthreekeyareastoimprovetransparencyandmarketoperation

• improvingtheeectivenessofsupplysignalsbyincreasingtransparency

• theroleandevolutionofriskmanagementmechanismsinthemarket

• facilitatingmoreecientuseofpipelinecapacityandhubservices

Thegasmarketisopaqueandinﬂexibleandisnotsignallingexpectedsupply

problemseectively

Theeastcoastgasmarketlackstransparencyinmanyareasincludingthelevelofreservesand

resourcescurrentandexpectedfutureproductiongaspricestransportationpricesandthe

levelandavailabilityofstorageTwoareasinparticular—thelevelofreservesandresourcesand

thelackofanindicativepriceforgas—greatlyhinderthemarket’sabilitytorespondtochanges

ingasavailabilityanddomesticgasprices

FollowingthedevelopmentoftheLNGprojectsandtheincreasedlevelofuncertaintyinthe

marketthesearenowimportantissuesthatshouldbeaddressed

Reportingofreservesandresourcesneedstobeconsistentandtransparent

Thereisalackoftransparencyaroundreportingofreservesandresourcesintheeastcoast

gasmarketGasuserslackclearinsightintoactualreservepositionswhennegotiatingfornew

supplycontractswhichprovidesanadvantagetolargeincumbentswithgreaterknowledgeof

themarketandreservepositionsReservecalculationsarebasedonanumberofassumptions

includingﬁnancialandoilpriceassumptionswhichareoftenundisclosedRecentimpairments

inreserveholdingsbymajoroilandgascompaniesshowthedicultyinrelyingonreserve

statementswhenassumptionsarenotknown

Thereisnoclearconsistentandaccuratereportingofinformationonreservesandresources

TheAustralianStockExchange(ASX)reportingrequirementsonlyapplytolistedcompanies

anddierentlistedcompaniesreportatdierenttimesandatdierentlevelsofgeographical

aggregationUnlistedcompaniesandthoselistedoverseasmaynotreportatallmakingithard

toassessreservesandresourcesonaﬁeldbasinorstatebasisWhilethereareprivateproviders

ofmarketinformationtheyalsorelyonincompleteandimperfectinformationsupplemented

byassumptions



Inquiry into the east coast gas market—April 2016

InadditionthestatesterritoriesandtheCommonwealthallcollecttheirowngeological

informationandreserveandresourcedataTherequirementsforcompaniestosupplythisare

inconsistentacrossjurisdictionsandthereleaseofinformationpubliclybyeachjurisdictionvaries

widelyThesharingofinformationanddatabetweenjurisdictionsisalsoinconsistentandlimited

Standardisedreporting(onestandardnotmany)wouldbeneﬁtproducersuserspolicy

makersandpotentialnewparticipantsinthemarketPolicydecisionsbasedoninconsistentor

inadequateinformationanddataaremorelikelytoresultinunwantedramiﬁcationsunintended

consequencesandpoorpolicyoutcomesforthemarket

Recommendations

 Allexplorersandproducersincludingnon-ASXlistedcompaniesshouldreport

consistentreserveandresourceinformationacrosstheeastcoastgasmarketReporting

shouldbebasedoncommonpriceassumptionsinthecalculationofreservesand

resourcesGasreserveandresourceinformationshouldbedisplayedontheGasMarket

BulletinBoardconsistentwiththeCOAGEnergyCouncilGasMarketDevelopmentPlan

toenhancethemarketinformationavailabletoBulletinBoardusers

 TheCOAGEnergyCouncilshouldensurethatthegeologicalandreserveresource

informationcollectedbythestatesandterritoriesandtheCommonwealthisconsistent

non-duplicativeandsharedWherethisinformationismadepublictheEnergyCouncil

shouldensurethatitisinaconsistentformat

Improvedpriceinformationwouldpromotecompetitivebargaining

InformationaboutgaspricesispartialprovisionalandmostlyprivateThesepricinginformation

gapsimpairbargainingAlotofpricinginformationisprivateandparticulartospeciﬁccontracts

andnegotiationsBecauseofthisthereisalargedisparitybetweenthelevelandaccuracyof

informationavailabletoparticipantssuchasproducersandretailersthatparticipateinmany

tradesarelargeroraremoreverticallyintegratedandparticipantssuchasindustrialgasusers

thatareinevitablylessfrequentlypartiestonegotiationsandagreementsWhilesomedisparity

hasalwaysexistedthedisparitywidenswhenthenumberofoersmadebysuppliersis

reducedWhenfewoersarebeingmadeindustrialusershavelessinformationtoworkwith

CurrentlynoaccurateandusefulindicativepriceisreadilyavailabletothemarketConﬁdential

bilateralcontractscontinuetodominategivingparticipantslimitedinsightintopricinglevels

MarketsandhubsremainrelativelythinlytradedsopricesmaynotberepresentativeWhilea

gasfuturesmarketisemergingithaslimiteddepthsofarThereislimitedsharedunderstanding

ofwhatLNGnetbackpricemeansfordomesticgasmarketparticipantshowitiscalculated

andhowitshouldbereﬂectedinthedomesticmarketThislackofreadilyavailablepricing

informationalsofavourslargeincumbentsinpricenegotiations

TheAEMCisworkingonwaystodevelopamoreliquidhub-basedindicativepricebutthisis

likelytotakesometimetoemergeTheABSisinvestigatingagaspriceindexwhichwould

showpricetrendsbutnotabsolutepricesDevelopingandpublishingotherindicativeprices

wouldenhancemarkettransparency

Recommendations

 AEMOshoulddevelopandpublishamonthlyLNGnetbackpricetoWallumbillawitha

clearexplanatoryframeworkandinputs

 TheAEMCshouldconsultwithgasusersaboutthepotentialbeneﬁtsofrequiringAEMO

ortheAERtopublishaperiodicpriceseriesofactualcommoditygaspricespaidto

producerseitherfortheeastcoastgenerallyorforVictoriaandQueenslandAnyprice

seriesshouldbeweightedbyvolumeandbebasedoncommonlyobservedtakeorpay

percentagesandloadfactors



Inquiry into the east coast gas market—April 2016

Riskmanagementmechanismsareevolvingandproposednewmechanismsshould

besupported

TheevolvinggasmarkethascreatednewchallengesforusersSuppliersandusersare

respondingtothechangesinmarketconditionsbyalteringtheirapproachtocontractingSome

risksarebeingshiftedfromproducerstogasbuyersAsaresultbuyersarebeingforcedto

adoptalternativeapproachestomanagetheirexposure

ThescopeforgasuserstomanagedemandvariationsthroughGSAsisdiminishingasproducers

oercontractsofshorterdurationwithlessvolumeﬂexibilityTotheextentthatcontractual

ﬂexibilityisavailableitisbecomingmoreexpensive

Storageandshort-termtradingoptionsareincreasinglyimportanttousersduetothereduction

incontractualﬂexibilityparticularlyforgasbuyersinthesouthernstateswithﬂexibleloads

DemandforstorageisexpectedtoincreaseItisimportanttomonitorpotentialbarriersto

accessingstorageparticularlyinsouthernmarketsAtpresentthereisnoevidencethataccess

tostoragecapacityonreasonabletermsisasigniﬁcantbarriertoentrytosmallerretailersinthe

eastcoastgasmarketbutthismaybecomeamoresigniﬁcantissueinthefutureifthevolume

ofgasavailableforsupplyintothemarketincreases

Measurestopromotegreaterliquidityinshorttermtradingmarketsshouldbeencouraged

Somegasmarketparticipantsintheeastcoastgasmarketaretradinggasontheexisting

DeclaredWholesaleGasMarket(DWGM)theShortTermTradingMarkets(STTMs)andorthe

WallumbillaGasSupplyHub(GSH)tosupporttheirgasvolumerequirementsThisstrategyis

mostsuitableforbuyerswithsigniﬁcantﬂexibilityintheirday-to-daygasdemandrequirements

Alackofconﬁdenceandliquidityinthesemarketsisadisincentiveforgasproducersandgas

userstoincreasetheirrelianceongastradingTheAEMC’sDraftStagereportoutlinesseveral

proposedcurrentandpotentialreformstomarketoperations

• ReformtheexistingDWGMinVictoriatoestablishacleanerwholesalemarketprice

• FurtherdeveloptheWallumbillaGSHiftradingliquiditydoesnotemerge

• AllowanopportunityfortheMoombahubproposedfortodevelopbutreviewwhether

oneortwonorthernhubswouldbestpromoteliquidity

Greaterliquidityinwholesalegasmarketswouldimprovepricediscoveryandhelpmarket

participantstomanagevolumeﬂuctuationsItwouldalsofacilitatenewentrybyretailersin

downstreamgasmarketsTheInquirysupportstheAEMC’swideconsiderationofmarket

participantviewsontheappropriatenumberandtype(voluntaryormandatory)oftrading

marketsSomemarketparticipantsmayfavourexistingSTTMandDWGMarrangements

becausetheyhavefoundsucientliquiditytoparticipateinthemtodatebuttheAEMCshould

testwhetherotherarrangementscouldgeneratemoreliquidity

Toincreaseparticipationintradingmarketsstepscanandshouldbetakentoreducethe

transactioncostsassociatedwithtradinginthosemarketsincludingthecostsoftransporting

gastothemInthelongrunhoweversigniﬁcantimprovementinparticipationandliquiditywill

bebestsupportedbyanincreaseinthediversityofgasmarketparticipantsandthevolumeof

gasinthemarketForcingproducerstosellintotradingmarketsinplaceofsupplyunderGSAs

toretailersisnotsupported

Recommendation

TheAEMCshouldconsiderhowtomonitorchangesintheleveloftradingﬂexibility

availabletogasbuyersovertimeandhowthetradingandotherrisksofhavingto

purchasegasandtransportationservicesonaday-aheadbasiscanbestbemanaged

Thegasspeciﬁcationmayaectmarketliquidity

GasspeciﬁcationisanemergingissuethatmayaectmarketliquidityinthefutureGasfrom

dierentreservoirsandbasinsvariesincompositionGasfromtheQueenslandCSGﬁeldsisa

drygaswithlowlevelsofheavierhydrocarbonsWhileCSGisinterchangeablewithconventional

gasfromtheCooperBasinortheoshoregasbasinsformostdomesticgasusersthe



Inquiry into the east coast gas market—April 2016

QueenslandLNGprojectshavebeendesignedforadrygassuchasCSGasfeedstockThis

distinctionisleadingtopotentialgasspeciﬁcationissuesthatcouldbifurcatetheeastcoastgas

marketIfthisoccursgasusersinQueenslandmayhavetopayadditionalprocessingcoststo

meetastandardthatisnotrequiredfortheiruse

Recommendation

TheCOAGEnergyCouncilshouldmonitortheemergingissueofseparategas

speciﬁcationsintheeastcoastgasmarketThisissuehasthepotentialtoimpedethe

freeﬂowofgasacrosstheeastcoastgasmarketandimposeadditionalcostsonsome

marketparticipantsTheCOAGEnergyCouncilshouldensurethatanycostsassociated

withanon-standardgasspeciﬁcationarebornebythemarketparticipantsthatrequire

thatalternativespeciﬁcation

Transportationcapacityandhubservicescanbefurtherunlockedtoincrease

ecientuse

Increasingandimprovingaccesstosecondarypipelinecapacityandhubserviceswouldincrease

eciencyinthepipelinesector

Secondarytradingofpipelinecapacityshouldbestreamlined

Gastransportationisdominatedbylong-termbilateraltradesSomesecondarytradingis

occurringacrosstheentireeastcoastbutshort-termtradesarelesswidespreadoccurring

mostlyinQueenslandandSouthAustralia

TheInquiryhasnotfoundevidencethatprovisionswithinGTAspreventsecondarytrading

Thereisalsonoevidenceofsystemicwithholdingofcapacityonmajortransmissionpipelines

Thereishoweverevidenceofretailerswithholdingcapacityonsomesmallerregionalpipelines

wherearetailerhascontractedallthecapacityThereisnotransparencyaroundtheutilisation

ofregionalpipelineswhichputsindustrialusersatadisadvantagewhennegotiatingaccess

topipelinecapacityWithholdingofcapacityonregionalpipelinesbyincumbentsisrestricting

competitionforsupplyfromotherretailers

Somepipelineoperatorsarecharginghighpricesforaccesstosecondary(asavailableor

interruptible)capacityThisindicatesalackofcompetitionbetweenpipelineoperatorsand

shippersforsecondarycapacityTherearesituationswhereapipelineoperatorisinsertingitself

betweenawillingsellerandbuyerofexcesscapacityincreasingthecoststimetakenand

transactioneortforthesellerandbuyerForexamplegastrademayberestricteduntilboth

buyerandsellerregisterthedeliverypoint

TheAEMChasproposed

• Acapacitytradingplatformthatshipperscanusetotradesecondarycapacityanonymously

uptothenominationcut-otime

• Acompulsoryday-aheadauctionforcontractedbutun-nominatedpipelinecapacitythat

wouldbetriggeredafterthenominationcut-otime

Ithasalsoproposedreformstomakecontracttermsandconditionsfortrademorestandardised

TheInquirysupportstheseproposalsastheyarelikelytoincreasethetradeofsecondary

capacityParticipantsidentiﬁedtotheInquirydicultiesinjointlycoordinatingcommodityand

transportationandcoordinatingtransportacrossmultipleassetownersThissuggestspotential

beneﬁtsfromcentralisedplatformsfortradingcommodityandtransportationHowevera

broadercost-beneﬁtassessmentoftheauctionbeforeimplementationwouldbebeneﬁcialand

shouldincludetheeectsontheﬂexibilityofthegasandelectricitymarkets

TheInquiryhasfoundthatshort-termtradescanoccurrelativelyquicklyifamasteragreement

isinplacewithtermsandconditionsagreedThissuggeststhatreformstostandardisetermsin

primaryandsecondarycapacitycontractsmayresultinlargebeneﬁtsregardlessofwhetherthe

auctionproposalproceeds



Inquiry into the east coast gas market—April 2016

Recommendation

TheAEMCshouldconsiderrequiringtheintroductionofacentralisedcapacity

tradingplatformtofacilitatesecondarycapacitytradingandday-aheadauctioningof

unutilisedcapacity

ACCCfuturework

 TheACCCwillconsiderwhethertheavailabilityorpricingofcapacityonregional

pipelinesraisesanyconcernsasapossiblecontraventionofthemisuseofmarketpower

provisionsortheexclusivedealingprovisionsoftheCCA

Competitionforgashubservicesshouldbepromoted

Hubservices(compressionandredirectionservices)areanincreasinglyimportantcomponent

oftheeastcoastgasmarketHubservicesareoftenbundledwithtransportationbutare

increasinglybeingpricedseparatelyPricesforservicesattheWallumbillaGSHarehigh

particularlyforinterruptibleserviceswhicharesoldbytheowneroftheassetsprovidingthese

servicesThehighinterruptiblepricingindicatesthethreepartiesholdingallthecontracted

capacitymaynotcurrentlybecompetingwiththeassetownerAEMO’soptionalhubservices

modelwhichwillintroduceatradingplatformforsparecapacitymayhelppromotemoretrade

andcompetitionTheInquiryconsidersthatauctioningofunutilisedcapacityifrecommended

forpipelinesshouldalsobeintroducedforhubs

APAhastakenstepsinconjunctionwithAEMOtoimprovetransparencyaroundgasﬂows

intotheWallumbillacompoundwhichservicestheWallumbillaGSHSomeconcernsremain

howeveraboutthevisibilityandpricingoftheactualhubservicesbeingdelivered

Recommendation

TheAEMCshouldconsiderthebeneﬁtsofashort-termauctionprocessforhubservices

ifitdecidestoimplementtheday-aheadauctionforpipelineservices

Theeastcoastgasmarkethaschangedfundamentallyandwillnotchangebacktoitsprevious

dynamicsThedevelopmentoftheLNGprojectshaspermanentlychangedthewaythegas

marketoperatesThetransitionhasbeenandwillcontinuetobedicultformanyparticipants

Itisencouragingthatchangesarealreadyhappeningtoimprovetheoperationofthemarket

drivenbothbyparticipantsandtheAEMCThisInquiryusedtheACCC’scompulsoryinformation

gatheringpowerstounderstandthetruedynamicsofthemarketTheInquiry’sﬁndingswill

informparticipantsandpolicymakerswhilethespeciﬁcrecommendationsifimplementedwill

leadtoabetterfunctioningandmorecompetitivemarket



Inquiry into the east coast gas market—April 2016

Figure Pipelinenetworkandgasproduction

Source EnergyQuestEnergyQuarterlyMarchEnergyQuestunpublishedproductiondataandpublishedconsumptiondata

Notes ThegasandtransportationpricesarebasedoninvoicesinQprovidedbyproducersandpipelineoperatorsand

excludeGST

ThepriceofwholesalegasisanaverageweightedbyactualvolumesuppliedintherelevantperiodThepriceforVictoria

includestheOtwayBassandGippslandbasinsThepricefortheCooperBasinincludesthreesuppliers

Therangeofwholesalegaspricesacrossbasinsis–GJ

ActualpricesinGSAsandGTAsvaryduetodierencesinkeycommercialtermsincludingloadfactortake-or-payorcapacity

commitmentscontractlengthandthetimeatwhichthepriceswereagreedorreviewed

$5.11/GJ

NSW

155

Vic

208

Tas

Qld

265

$0.64–0.68/GJ

$0.59–0.63/GJ

$0.68/GJ

$1.16–1.36/GJ

$0.87–1.23/GJ

$0.85/GJ

Amadeus

Basin

Cooper Basin

Otway Basin

Bass

Basin

Mt Isa

Tennant

Creek

Ballera

Moomba

Adelaide

Pt Campbell

Moomba to

Sydney

Pipeline

Moomba to

Adelaide

Pipeline

QSN Link–South

West Qld Pipeline

SEA Gas

Pipeline

Vic Transmission

System/Vic–NSW

Interconnect

Carpenteria

Gas Pipeline

Northern Gas

Pipeline

(under construction)

Amadeus Gas

Pipeline

Darwin

$0.77/GJ

$0.98/GJ

$4.30/GJ

$1.14–1.64/GJ

LNG

Export

335

Brisbane

Curtis

Island

LNG

Roma to

Brisbane

Pipeline

GLNG

Pipeline

APLNG

Pipeline

Wallumbilla to

Gladstone Pipeline

$0.43–0.95/GJ

$4.15/GJ

$1.91–3.38/GJ

$1–1.28/GJ

$0.71–1.23/GJ

Surat

Bowen

Basins

Gippsland Basin

Roma

(Wallumbilla)

Hobart

Sydney

Longford

Tasmanian

Gas Pipeline

Qld Gas

Pipeline

Eastern Gas

Pipeline

$/GJ = weighted average wholesale price

paid for gas in Q1 2015

$/GJ = monthly range of prices paid for ﬁrm

pipeline capacity in Q1 2015, calculated

assuming 100% load factor

Annual consumption (PJ/pa) for period

ending Dec. 2015

* Production charts show annual

production ending Dec. 2015

Dominant pipeline ﬂow

Bi-directional ﬂow capability

APA group

APA group (part owned)

Epic Energy

Jemena

Other

Gas basins

Gippsland production*

252 PJ/pa

BHP Billiton

49%

Exxon

49%

Nexus/SGH

Energy

Toyota Tsusho

AWE

11%

Benaris

11%

BHP Billiton

20%

Mitsui

Origin

33%

Prize Petroleum

Santos

13%

Otway/Bass production*

98 PJ/pa

Cooper production*

100 PJ/pa

Senex

<1%

Beach Energy

22%

Drillsearch

Origin

14%

Santos

63%

Surat/Bowen production*

634 PJ/pa

QCLNG

(Shell, Tokyo Gas,

CNOOC)

42%

GLNG

(Santos, Petronas

Total SA, Kogas)

Arrow

(Shell, PetroChina)

APLNG

(Origin, Conoco

Phillips, Sinopec)

43%

Other



Inquiry into the east coast gas market—April 2016

East Coast Gas Inquiry key ﬁndings

Gassupply

 Domesticpurchasersofgasparticularlyindustrialusersexperiencedanunprecedented

changeintheirabilitytoobtaingasespeciallyintheperiodfromabouttotheendof

forgastobesuppliedinandbeyondWhenseekinggastheyreceivedfewifany

realoersOersreceivedwerehighpricedwithlimitedvolumesovershorterperiodsof

timehadmorerestrictivetermsandconditionsandsomewereon‘takeitorleaveit’terms

 Moregassupplyoersarenowavailablebutathigherpricesforshorterdurationsand

withmorerestrictivenon-pricetermsandconditionsDomesticindustrialusersmayhave

seenmarginreductionsof–percentagepointsdependingontheindustryandthe

wholesalegaspriceincreasesHouseholdgasbillsmayincreasebypercentinNewSouth

WalesandpercentinVictoriawithwholesalegaspriceincreasesofforexampleGJ

 Thereliabilityoffuturegassupplyisaectedbythreesigniﬁcantfactorscoinciding

• SigniﬁcantdemandfromtheLNGprojectswhichhasdivertedgasfromtraditionalsources

ofdomesticsupply

• Lowoilpricesreducingtheabilityandincentiveofproducersacrosstheentireeastcoast

gasmarkettoexploreforanddevelopgas

• Moratoriaononshoregasexplorationanddevelopmentandotherregulatoryrestrictions

inNewSouthWalesVictoriaandTasmaniaandpotentiallytheNorthernTerritory

prohibitingnewgassupply

 ThefuturesupplyoutlookisuncertainFuturedomesticandLNGdemandwillrequire

extensivedevelopmentofundevelopedgasreservesSucientgasiscurrentlyforecast

tobeproducedintheeastcoastgasmarkettomeetdomesticdemandandexistingLNG

contractcommitmentsuntilatleastbutthereisuncertaintyoverthetimingofsome

developmentsparticularlyduetolowoilprices

 ThereisaneedformoresourcesofgassupplyparticularlyinthesouthernstatesThegas

usersinthesestatesarebecomingoverlydependentonthejointlymarketedGBJVgasIf

theiralternativetodealingwiththeGBJVistotransportgasfromQueenslandsouthern

usersmayhavetopayconsiderablymoreforgasthantheyareotherwiselikelytopayin

acompetitivemarketThisisexacerbatedbythehighcostoftransportationIncreasing

thelevelanddiversityofsupplylocatedclosetosoutherndemandcentreswillimprove

thecompetitivedynamicsinthesouthandislikelytoleadtobetterpricingoutcomesfor

domesticusers

Gastransportation

 PipelineoperatorshaverespondedtothechangesunderwayinthemarketThereis

howeverevidencethatalargenumberofpipelineoperatorshavebeenengagingin

monopolypricingThisgivesrisetohigherdeliveredgaspricesandishavinganadverse

eectontheeconomiceciencyoftheeastcoastgasmarketandupstreamand

downstreammarketsthecostsofwhichwillultimatelybebornebyconsumersThere

isalsoevidencethattheabilityandincentiveofexistingpipelineoperatorstoengagein

thisbehaviourisnotbeingeectivelyconstrainedbycompetitionfromotherpipelines

competitionfromalternativeenergysourcestheriskofstrandingthecountervailingpower

ofshippersregulationorthethreatofregulation

 Thecurrentgasaccessregimeisnotimposinganeectiveconstraintonthebehaviourofa

numberofunregulatedpipelinesThecurrenttestforregulationundertheNationalGasLaw

(NGL)(thecoveragecriteria)isnotdesignedtoaddressthemarketfailurethathasbeen

observedinthisInquirythatismonopolypricingthatresultsineconomicineciencies

withlittleornoeectonthelevelofcompetitionindependentmarketsOthergapsinthe

regulatoryframeworkarealsoallowingpipelinesthataresubjecttoregulationtocontinueto

engageinmonopolypricingInformationasymmetriesarelimitingtheabilityofshippersto

identifyanyexerciseofmarketpowerandtonegotiateeectivelywithpipelineoperators



Inquiry into the east coast gas market—April 2016

 Lessthanpercentofthetransmissionpipelinesontheeastcoastarecurrentlysubjectto

regulationundertheNGLandNationalGasRules(NGR)Thisisindirectcontrasttoother

comparablejurisdictionssuchastheUnitedStatestheEuropeanUnionandNewZealand

wherethevastmajorityoftransmissionpipelinesareregulatedItiswellrecognisedinthese

jurisdictionsthatpipelinescanwieldsubstantialmarketpowerevenwhereproducersand

usershaveanumberoftransportationoptions

Marketoperationandthelevelofmarkettransparency

 ThegasspeciﬁcationrequiredbytheLNGprojectsisdierenttothespeciﬁcationrequired

byothergasusersThisdierencehasthepotentialtoimpedethefreeﬂowofgasacrossthe

eastcoastgasmarketandimposeadditionalcostsonsomemarketparticipantspotentially

bifurcatingthemarketandreducingliquidityandopportunitiesfortradingandarbitrage

Lackoftransparencyandinformationaboutthelevelofreservesandcommodityand

transportpricesarehinderingecientmarketresponsestothechangingconditionsandare

notsignallingexpectedsupplyproblemseectively

Tradingoflonger-termcapacityheldbyshippersisoccurringacrosstheeastcoastShorter-

termcapacitytradesarealsooccurringbutnotonallpipelinesThereisnoevidenceof

withholdingofcapacitybyshippersonmajoreastcoastpipelines

Howeverthereisevidencethatcapacityisbeingwithheldbyincumbentsonsomeregional

pipelineswhichisrestrictingcompetitionforsupplyfromotherretailers

APAhastakenstepsinconjunctionwithAEMOtoimprovetransparencyaroundgas

ﬂowsintotheWallumbillacompoundwhichservicestheWallumbillaGSHSomeconcerns

remainastothetransparencyofactualhubservicesbeingdeliveredandthepricingof

thoseservices

Riskmanagementmechanismsarebecomingmoreimportantforbuyersandespecially

industrialusersasthetermsandconditionsofsupplyaretightenedbysuppliersThese

includestorageandgastradingmechanismssuchastheSTTMsTheliquidityofgas

tradingmechanismsiscurrentlylimitedInthelong-runliquiditywillbebestsupportedby

anincreaseinthediversityofgasmarketparticipantsandthevolumeofgassupplyinthe

marketoverallAtpresentthereisnoevidencethataccesstostoragecapacityonreasonable

termsisasigniﬁcantbarriertoentrybysmallerretailersintheeastcoastgasmarketThis

maybecomeamoresigniﬁcantissueinthefutureifthevolumeofgasavailableforsupply

intothemarketincreases



Inquiry into the east coast gas market—April 2016

East Coast Gas Inquiry recommendations

Gassupply

 Governmentsshouldconsideradoptingregulatoryregimestomanagetherisksof

individualgassupplyprojectsonacasebycasebasisratherthanusingblanketmoratoria

Governmentsshouldtakeintoconsiderationthesigniﬁcanteectsthatmoratoriaandother

restrictionsongasdevelopmentmayhaveongasusers

 Gasreservationpoliciesshouldnotbeintroducedgiventheirlikelydetrimentaleecton

alreadyuncertainsupply

Gastransportation

 TheCOAGEnergyCouncilshouldagreetoreplacethecurrenttestfortheregulationofgas

pipelines(thecoveragecriteria)intheNGLwithanewtestThistestwouldbetriggeredif

therelevantMinisterhavingregardtotheNationalCompetitionCouncil’srecommendation

issatisﬁedthat

• thepipelineinquestionhassubstantialmarketpower

• itislikelythatthepipelinewillcontinuetohavesubstantialmarketpowerinthemedium

term

and

• coveragewillorislikelytocontributetotheachievementoftheNationalGasObjective

TheCOAGEnergyCouncilshouldalsoasktheAEMCtocarryoutfurtherconsultationon

thespeciﬁcmattersthatshouldbeconsideredwhenapplyingthistestandhowitshouldbe

implementedandtoadvisetheCOAGEnergyCounciloftheamendmentsthatwouldneed

tobemadetotheNGLandtheNGRtogiveeecttothisnewtest

 TheCOAGEnergyCouncilshouldasktheAEMCtoreviewParts–oftheNGRandto

makeanyamendmentsthatmayberequiredtoaddresstheconcernthatpipelinessubjectto

fullregulationmaystillbeabletoexercisemarketpowertothedetrimentofconsumersand

economiceciencyIncarryingoutthisreviewtheAEMCshouldalsoconsiderwhetherany

changescanbemadetothedisputeresolutionmechanismintheNGLandNGRtomakeit

moreaccessibletoshipperssothatitprovidesamoreeectiveconstraintonthebehaviour

ofpipelineoperators

 TheCOAGEnergyCouncilshouldasktheAEMCtoexplorehowthescopeoftheinformation

disclosurerequirementsintheNGLshouldbeexpandedtorequireallpipelinesoperating

onanopenaccessbasis(thatisregulatedandunregulatedpipelines)topublishﬁnancial

informationthatshipperscanusetodeterminewhetherornotthepricestheyareoered

bypipelineoperatorsarecostreﬂectiveThepublicationofthisinformationwouldenable

shipperstonegotiatemoreeectivelywithpipelineoperatorsandtoidentifyanyexerciseof

marketpowermorereadily

Marketoperationandthelevelofmarkettransparency

 Allexplorersandproducersincludingnon-ASXlistedcompaniesshouldreportconsistent

reserveandresourceinformationacrosstheeastcoastgasmarketReportingshouldbe

basedoncommonpriceassumptionsinthecalculationofreservesandresourcesGas

reserveandresourceinformationshouldbedisplayedontheGasMarketBulletinBoard

consistentwiththeCOAGEnergyCouncilGasMarketDevelopmentPlantoenhancethe

marketinformationavailabletoBulletinBoardusers

 TheCOAGEnergyCouncilshouldensurethatthegeologicalandreserveresource

informationcollectedbythestatesandterritoriesandtheCommonwealthisconsistent

non-duplicativeandsharedWherethisinformationismadepublictheEnergyCouncil

shouldensurethatitisinaconsistentformat

 AEMOshoulddevelopandpublishamonthlyLNGnetbackpricetoWallumbillawithaclear

explanatoryframeworkandinputs



Inquiry into the east coast gas market—April 2016

 TheAEMCshouldconsultwithgasusersaboutthepotentialbeneﬁtsofrequiringAEMOor

theAERtopublishaperiodicpriceseriesofactualcommoditygaspricespaidtoproducers

eitherfortheeastcoastgenerallyorforVictoriaandQueenslandAnypriceseriesshould

beweightedbyvolumeandbebasedoncommonlyobservedtakeorpaypercentagesand

loadfactors

TheAEMCshouldconsiderhowtomonitorchangesintheleveloftradingﬂexibilityavailable

togasbuyersovertimeandhowthetradingandotherrisksofhavingtopurchasegasand

transportationservicesonaday-aheadbasiscanbestbemanaged

TheCOAGEnergyCouncilshouldmonitortheemergingissueofseparategasspeciﬁcations

intheeastcoastgasmarketThisissuehasthepotentialtoimpedethefreeﬂowofgas

acrosstheeastcoastgasmarketandimposeadditionalcostsonsomemarketparticipants

TheCOAGEnergyCouncilshouldensurethatanycostsassociatedwithanon-standardgas

speciﬁcationarebornebythemarketparticipantsthatrequirethatalternativespeciﬁcation

TheAEMCshouldconsiderrequiringtheintroductionofacentralisedcapacity

tradingplatformtofacilitatesecondarycapacitytradingandday-aheadauctioningof

unutilisedcapacity

TheAEMCshouldconsiderthebeneﬁtsofashort-termauctionprocessforhubservicesifit

decidestoimplementtheday-aheadauctionforpipelineservices

ACCC future work

 TheACCCwillconsiderthecompetitiveeectofjointmarketingarrangementsoftheGBJV

inlightofcurrentmarketdynamicsforthepurposesofsoftheCCA

 TheACCCwillconsiderwhethertheavailabilityorpricingofcapacityonregionalpipelines

raisesanyconcernsasabreachofthemisuseofmarketpowerprovisionsortheexclusive

dealingprovisionsoftheCCA



Inquiry into the east coast gas market—April 2016

Background

Therehasbeensigniﬁcantindustryandpublicconcernregardingthecompetitivedynamicsof

theeastcoastgasmarketThedevelopmentofliqueﬁednaturalgas(LNG)exportprojectsin

Queenslandhasexposeddomesticgasuserstointernationalgaspricesfortheﬁrsttimeand

thereareincreaseduncertaintiesaboutthefutureavailabilityofgasfordomesticuse

VariouspublicinquiriesandreportshavebeencarriedoutorcommissionedbyCommonwealth

andstategovernmentstriggeredbyLNGdevelopmentsandtheconcernsofindustry

participantsabouttheeectofthesedevelopmentsontheirbusinesses



Theseinquiries

andreportshaveexaminedvariousaspectsofthesupplyofgasintheeastcoastgasmarket

andofteninvolvedpublicconsultationsAlistofanumberoftheseinquiriesandreportsisat

appendix

Manyoftheseinquiriesandreportscommentedthatdomesticgasusershadexperienced

dicultiesinﬁndingreasonablegassupplyoersandraisedconcernsaboutrapidly

increasinggaspricesanddeterioratingnon-pricetermsandconditionsAnumberofinquiries

recommendedareviewofthestateofcompetitioninthedomesticgasindustrytoidentifyand

assessthepresenceofanymarketpowerandanyexerciseofsuchpowerparticularlyresulting

fromthedevelopmentstriggeredbytheLNGprojects

Previousinquiriesintothesupplyofwholesalegasintheeastcoastgasmarketreceived

conﬂictingreportsfromgassupplierstheirassociationsandgasusersaboutprevailingsupply

anddemandconditionstheextentofactivegassupplynegotiationsandthesupplyoutcomes

Itwasdicultfortheseinquiriestoassesscompetingclaimsabouttheseissuesascritical

informationaboutgassupplyagreementsandcontractualnegotiationsincludingpriceand

othertermswasunavailableduetoconﬁdentialityrestrictions

OnApriltheAustralianCompetitionandConsumerCommission(ACCC)received

anoticefromtheMinisterforSmallBusinessthatrequiredittoundertakeaninquiryintothe

competitivenessofwholesalegaspricesandthestructureofthegasindustry(theInquiry)

underPartVIIAoftheCompetitionandConsumerAct(Cth)(CCA)Acopyofthisletter

attachingthetermsofreferencefortheInquiryisatappendixTheACCCwasrequiredtogive

thereporttotheMinisterwithinmonthsofthereceiptofthenotice

TheInquirycommencedonAprilwiththepublicationofaninquirynoticeinthe

AustralianGovernmentGazetteandinnewspapers

TheInquirywasconductedbytheChairmanoftheACCCMrRodSimsandCommissioners

DrJillWalkerandMrRogerFeatherston

OutlineoftheInquiryprocess

AsnotedabovetheACCCheldtheInquiryinaccordancewiththepublicinquirypowers

containedinPartVIIAoftheCCA

Submissions

TheACCCreleasedanissuespaperonJuneItoutlinedtheissuesonwhichtheACCC

wasseekinginformationandcommentsanddescribedhowsubmissionstotheInquirycould

bemadeTheACCCreceivedpublicsubmissionsAwiderangeofinterestedpartiesmade

submissionsincludingproducersretailersusersandindustryrepresentativegroupsAlistof

partieswhomadepublicsubmissionsisatappendixAllpublicsubmissionsareavailableonthe

ACCC’swebsite



 ThisincludesinquiriespreviouslyconductedbytheCommonwealthDepartmentofIndustryandSciencetheProductivity

CommissiontheAustralianEnergyMarketCommission(AEMC)theNSWLegislativeCouncilSelectCommitteeand

theVictorianGasMarketTaskforceTheAEMCiscurrentlyconductingitsEastCoastWholesaleGasMarketandPipeline

FrameworkReviewandaReviewoftheVictorianDeclaredWholesaleGasMarket(togethertheAEMCEastCoastGas

MarketReview)

 Seehttpswwwacccgovauregulated-infrastructureenergyeast-coast-gas-inquiry-issues-paper



Inquiry into the east coast gas market—April 2016

Anumberofpartiesalsoprovidedsubmissionswhichtheyrequestedbetreatedasconﬁdential

Informationdocumentshearingsandconﬁdentiality

TheACCCalsoexerciseditsinformationgatheringpowersundertheCCAAmongstother

thingstheseprovisionsenabletheACCCtoissuenoticestoobtaininformationanddocuments





andtosummonapersontoappearataninquirytogiveevidenceandproducedocuments





TheACCCalsoconsultedinformallywithanumberofinterestedpartiesandobtaineddatafrom

severalindustrydataproviders

TheInquiryconductedtwopublichearingsinMelbourneonJulyandinSydneyon

AugustRepresentativesofnineinterestedpartiesgaveevidenceatthesehearings

ThetranscriptsofthesehearingsareavailableontheACCC’swebsite



TheACCCissueda

numberofnoticestoobtainconﬁdentialinformationanddocumentsandsummonedanumber

ofwitnessestogiveevidenceandproducedocumentsatahearingThesehearingswereheld

inprivate

TheseprocesseshaveenabledtheACCCtoinvestigateissuesthatarecommerciallysensitiveto

witnessesandotherinterestedpartiesprovidingsubmissionswithoutaectingthecompetitive

positionandcommercialrelationshipsofthosepartiesThisreportdisclosessomeaspectsof

thematerialobtainedviatheseprocesseswheretheACCCconsiderssuchdisclosurewouldbe

inthepublicinteresteventhoughtherelevantpartyhasnotagreedtothedisclosureInthese

instancestheACCCconsultedwiththerelevantwitnessandortheircompany(asappropriate)

beforedoingso

IntotaltheACCCheldprivatehearingswithgasproducersgasretailersandgascustomers

consultedwithoverinterestedpartiesandreceivedarounddocuments(including

contractsandinvoicesinternalcompanyreportsandcorrespondenceandotherinternal

companydocuments)

TheACCCwishestothanktheindustryforitsconsiderableassistanceandcooperation

throughouttheInquiry

Structureofthereport

ThisreportispresentedinthreesectionsTheﬁrstsectionwhichisthefocusofchapters

toconsidersvariousissuesrelatingtotheavailabilityandsupplyofgasasacommodityThis

includesanalysisofgasdevelopmentgasproductionandthedynamicsofpastpresentand

likelyfuturecommoditygaspricingintheeastcoastgasmarket

Thesecondsectionwhichisthefocusofchaptersandconsidersthemechanismsavailable

togasbuyersformanagingtherisksassociatedwiththechangingdynamicsofgasavailability

andpricingintheeastcoastgasmarketandpossiblestepsthatcouldbetakentoimprovethe

levelsofﬂexibilityandtransparencyavailabletoparticipantsintheeastcoastgasmarket

Thethirdsectionwhichisthefocusofchapterstoconsidersvariousissuesrelatingtothe

transportationofgasfromgasﬁeldstothelocationswheregasisconsumedbyusersThis

includesanassessmentofthemarketpowerofgaspipelineoperatorsandofwhethercurrent

regulatorysettingsforgastransportationservicesareappropriate

InpreparingthisreporttheACCChasbeenconsciousthatmanyaspectsoftheeastcoastgas

markethavebeenexploredinconsiderabledepthinpreviousinquiriesTheACCChasnotsought

toreplicatetheoutputofthoseinquiriesincludinginformationaboutthestateofthegasmarket

thathasbeenmadepubliclyavailableasresultofthoseinquiriesInsteadithasfocusedon

assessingandevaluatingthespeciﬁcadditionalinformationthatithasbeenabletoobtainunder

PartVIIAoftheCCAandonusingthatinformationtoevaluatecompetingclaimsaboutmarket

dynamicsmarketconditionsandthebehaviourofmarketparticipants

 SectionZKoftheCCA

 SectionSoftheCCA

 Seehttpswwwacccgovauregulated-infrastructureenergyeast-coast-gas-inquiry-sydney-public-hearingand

httpswwwacccgovauregulated-infrastructureenergyeast-coast-gas-inquiry-melbourne-public-hearing



Inquiry into the east coast gas market—April 2016

1 The development of LNG triggered signiﬁcant

structural changes in the east coast gas market

SincetheﬁrstcargoofLNGwasexportedfromCurtisIslandinQueenslandonJanuary

fourofthesixtrainsatthethreeLNGprojectsunderconstructionhavecommencedproduction

WhilenotalltheLNGprojectshavereachedpeakproductiontheyhavetriggeredsigniﬁcant

structuralchangesintheeastcoastgasmarket



ItisuncertainiftherapidgrowthinthecombineddemandofthethreeLNGprojectswill

bematchedbyanincreaseingasproductionoverthelifeoftheLNGprojectsThishas

precipitateduncertaintyaboutthefuturesupply-demandbalanceintheeastcoastgasmarket

ThisuncertaintyhasbeenexacerbatedbyGLNGpurchasingsubstantialvolumesofgasinthe

domesticmarketoverthepastﬁveyearstosupplementproductionfromitscurrentlyinadequate

reservesAlargeportionofthisgasisfromtheCooperBasinwhichhistoricallysuppliedthe

southerndomesticmarketThesepurchasesarereducingthevolumeofgasavailabletothe

domesticmarketanddisruptinggasﬂowsinthesouthernstates

Coincidingwiththegrowinguncertaintyaboutfuturegasavailabilitymanylong-termdomestic

GSAsexpireovertheyearsthroughAnticipatingpotentialgassupplychallengesa

numberofindustrialgasusersapproachedgassuppliersintheperiodfromabouttothe

endoftosecuregasforsupplyinandbeyondManyquicklyfoundthattheyhad

feweroptionsforgassupplythanpreviouslyandsomeusersencountereddicultiesgetting

anyoersatallforsupplyincertainperiodsWhereoersweremadetheywereoftenat

substantiallyhigherpricesandonlessﬂexibletermsthaninthepastOnoccasionsalackof

clearcommunicationfromgassuppliersampliﬁeduserconcernsanduncertaintyaboutthestate

ofthegasmarket

Whilethegasmarketisgraduallysettlingdownuncertaintiesaboutsupplyavailabilityand

pricingpersistIndustrialgasusersarenowexposedtohigherandmorevolatiledomestic

priceswhichareinﬂuencedbyﬂuctuatinginternationalLNGandworldoilpricesThisislikelyto

remainafeatureoftheeastcoastgasmarketintothefutureRecentlowoilpriceshaveprovided

somepricereliefbuthavealsostiﬂedinvestmentrequiredtobringonadditionalgaswhich

perpetuatesuncertaintiesaboutavailabilityofgasIndustrialusersareadaptingtheirpractices

foracquiringgasinresponsetoincreasedpricingandsupplyuncertaintiesbutlimitedpublicly

availableinformationandriskmanagementmechanismsaremakingthischallenging

WhiletheLNGprojectshavecreateddicultiesforindustrialusersintheshorttermtheyhave

alsoencouragedandacceleratedmarketdevelopmentsthatmaybeneﬁtallmarketparticipants

inthelong-runTheLNGprojectshaveacceleratedgrowthanddevelopmentofthegas

reservesbaseacrosstheeastcoastgasmarketalthoughthishasalsocontributedtotherapid

riseinlong-runmarginalproductioncostsThesurgeinthegrowthofgasproductionandthe

emergingneedofsomegassupplierstotransportgasacrosstheeastcoastgasmarkethasled

tovarioustransmissionpipelinesbeingbuiltexpandedormodiﬁedtoﬂowinbothdirections

whichhasincreasedtheconnectivityofthetransmissionpipelinenetworkintheeastcoastgas

marketIthasalsoledtotheestablishmentoftheWallumbillaGasSupplyHub(Wallumbilla

GSH)andsomemarketparticipantsrelyingmoreonshort-termtradingmarkets

Boxprovidesanoverviewofthegassupplychainintheeastcoastgasmarket

 The‘eastcoastgasmarket’isaphrasethathasbeenadoptedforthepurposeofthisInquirytodescribeageographicarea

thatincludesQueenslandNewSouthWalesAustralianCapitalTerritoryVictoriaSouthAustraliaandTasmaniaItisnotan

economicorlegaldeﬁnitionofanymarketforCCApurposes



Inquiry into the east coast gas market—April 2016

Box Thegassupplychainintheeastcoastgasmarket

Thereareanumberofstepsintheeastcoastgasmarketthatneedtobeundertakenforgas

tobesuppliedtoendusers

Export

Domestic

demand

Conversion

to LNG

Storage

TransmissionProcessingProduction

Reserves

Source ProductivityCommissionExaminingBarrierstoMoreEcientGasMarketsMarchp

Gassupplybeginswiththeexplorationandappraisalofpotentialgassourcestoprove

thepresenceofcommerciallyviablegasreservesInproductionprojectsgasisextracted

throughwellsandprocessedtoseparatemethanefromimpurities(suchasnitrogencarbon

dioxideorsulphurdioxide)andanyproducedwaterisremovedandtreatedInsomeﬁelds

gasproductionisalsoassociatedwiththeproductionofothervaluablepetroleumproducts

includingcrudeoilcondensate(lightoils)andnaturalgasliquids(forexampleethane

propanebutaneisobutaneandpentane)

Theprocessedgasistransportedthroughhighpressuretransmissionpipelinestodemand

centres—citiesregionalareasandtheLNGexportfacilitiesMostlargeindustrialgasusers

drawtheirgasdirectlyfromtransmissionpipelines

Ateachdomesticdemandcentrethetransmissionpipelinesconnecttolowpressure

distributionnetworksThedistributionnetworkisthenusedtodelivergastosmaller

industrialandcommercialusersandhouseholdsEnergyretailerstypicallypurchasegas

fromproducerspackageitwithtransmissionanddistributionservicesandselltoresidential

commercialandsmallerindustrialcustomers

Storagefacilities(eitherundergrounddepletedgasﬁeldsordomesticLNGstorage)and

typicallylocatedclosetodemandorproductioncentresandareusedtoaugmentsupplyat

timesofpeakdemandandmanagevariationsingasproduction

AttheLNGfacilitiesinGladstonethegasiscooledandcondensedintoaliquidloaded

ontospeciallydesignedshipsandtransportedtodestinationportsmostlyinAsiaAtthe

destinationporttheLNGisstoredregasiﬁedandtheninjectedintolocaldistribution

networks

 TheLNGprojectshavedisruptedthegassupply–demandbalance

intheeastcoastgasmarket

 Growthingasproductionmaynotmatchthegrowthingasdemand

ThesimultaneousconstructionofthethreeLNGprojectsinQueenslandhascreatedarapid

surgeindemandintheeastcoastgasmarketThetotalvolumeofgasconsumedbydomestic

usersinpriortocommencementofexportwasaboutPJperannum



Bythetime

allsixLNGtrainsinQueenslandreachfullproductionin–thetotaldemandontheeast

coastwillrisetoabout–PJperannum



Giventhisrapidgrowthtimelydevelopment

ofgasresourcesontheeastcoastiscriticaltoensuringthatadequatesupplyisavailablefor

bothdomesticgasusersandLNGexports

 BasedondatafromAEMO’sNationalGasForecastingReportandincludescommercialandresidentialcustomers

industrialcompaniesandgaspoweredelectricitygenerators

 BasedondatafromAEMO’sNationalGasForecastingReportanddatacollectedbytheInquiry



Inquiry into the east coast gas market—April 2016

TherearesubstantialPgasreservesandCresourcesavailableintheeastcoastgasmarket

(table)



HoweverthetimingofthedevelopmentofPreservesthathavenotbeen

committedtoproductionandCresourceswillultimatelydependontheeconomicsof

developingthesereservesandresourceswhentheyarerequired

Table PreservesandCresourcesontheeastcoastasatFebruary

Preserves

(PJ)

Cresources

(PJ)

Coalseamgas(CSG)  

Conventional  

Shaleandother  

Total  

Source EnergyQuestEnergyQuarterlyMarch

Chartshowstheprojectedmedium-termsupplyanddemandforecastintheeastcoastgas

marketThischartexcludestheCSGreservesheldbytheArrowProjectajointventure

betweenShellandPetroChinaasitscommercialplanshavenotyetbeenannouncedfollowing

themergerbetweenShellandBGTheproductionforecastisbasedlargelyondataprovidedto

theInquirybykeyproducersintheeastcoastgasmarketandissplitbetween‘developedsupply’

and‘undevelopedsupply’dependingonwhetherinvestmenttodevelopreservesinparticular

ﬁeldshasalreadybeensanctioned

Chart ForecastgassupplyanddemandbalanceintheeastcoastgasmarketexcludingArrow–

Forecast supply and demand (PJ)

Domestic demand and LNG export GSAs Domestic demand and maximum LNG capacity

500

1000

1500

2000

2500

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Undeveloped supply—other producers

Undeveloped supply—LNG projectsDeveloped supply

Source ACCCanalysisbasedondataobtainedduringtheInquiryAEMO’sNationalGasForecastingReportandEnergyQuest

EnergyQuarterlyMarch

Note ThetoplineaggregatesAEMO’s‘medium’domesticdemandforecastwithLNGplant’sproductioncapacitywhilethesecond

lineaggregatesthesamedomesticdemandforecastwithLNGexportcommitmentsThethreeshadedareasrepresentthe

aggregatedproductionforecastsofalltheproducersintheeastcoastgasmarketThe‘developedsupply’forecastisbased

onallcurrentlyproducingorsanctionedprojectswhilethe‘undevelopedsupply’forecastsarebasedongasﬁeldswhichhave

beenidentiﬁedascontainingPreservesbutnotyetsanctionedforproduction

Chartshowsthatsucientgasiscurrentlyforecasttobeproducedintheeastcoastgas

markettomeetthedomesticdemandandexistingexportcontractualcommitmentsinthe

mediumtermevenwithoutgasfromArrow



Howeverwhetherthetimingandvolumesof

 P(provedandprobable)isameasureofgasreservesthatareestimatedasatagivendatetobecommericallyviable

toproduce(thatisthereisatleastpercentprobabilityofrecoveringavolumeequaltoorinexcessoftheestimate)

C(contingent)isameasureofgasresourcesestimatedasatagivendatetobepotentiallyrecoverablefromknown

sourcesbuttheproject(s)arenotyetconsideredmatureenoughforcommercialdevelopmentduetooneormore

contingencies

 Thisanalysisdoesnottakeintoaccountanyconstraintswithintheeastcoastgastransmissionordistributionsystems

whichmaycreatelocalisedsupplyconstraintsatparticularpointsintimeTheanalysisisalsobasedonannualproduction

forecastssodoesnotaccountforseasonalvariabilitiesindemand



Inquiry into the east coast gas market—April 2016

theseforecastswillberealisedisdependentonthedevelopmentofundevelopedﬁeldsbythe

LNGprojectsandotherproducersintheeastcoastgasmarketThetimingoftheproduction

ofthisgaswillultimatelydependonwhetheritiseconomictoinvestinthedevelopmentof

theseﬁeldswhentheyarerequired(discussedfurtherinchapter)ThemajorityofPreserves

includingundevelopedreservesarelocatedinCSGﬁeldsinQueensland



ChartdoesnotincludeforecastsofproductionfromcontingentgasresourcesThe

contingentresourcesconsistofgasfromconventionalreservoirsCSGandtightgasresources

acrossanumberofbasinsTheseresourcesareconsideredtobemorechallengingtodevelop

economicallyduetobeingtechnicallydiculttoextractlocatedremotefromsupporting

infrastructuresuchastransmissionpipelinesandorhavinghighlevelsofinertgasesor

othercontaminantsthatrequireconstructionofadditionaltreatmentfacilitiesThetiming

ofdevelopmentoftheseresourceshasbeenhinderedbythelowoilpricewhichhasstiﬂed

explorationandappraisalinvestmentbyproducersacrosstheeastcoastgasmarketandmade

manyofthesecontingentresourcesuneconomictoextractatthistime

IftheeconomicsofLNGwarranttheLNGprojectsmayseektosellLNGoninternational

marketsinexcessoftheirexistingcontractualcommitmentstomaximisetheproductionoftheir

LNGplantsChartshowsthatthereiscurrentlyinsucientgasforecasttobeproduced

intheeastcoastgasmarkettomeetboththedomesticdemandandallowLNGprojectsto

fullyutilisetheirLNGplantcapacity(thegapbetweenthetopdemandlineand‘undeveloped

supply—otherproducers’area)Thisgapisinﬂuencingdecisionsmadebygasproducerson

theeastcoastandresultingindomesticgaspricesbeinginﬂuencedbyLNGnetbackprices

(discussedfurtherinchapter)

Akeysourceoffuturegassupplyintheeastcoastgasmarketthatcouldﬁllthisgapisthe

ArrowEnergyprojectwhichhasanestimatedPJofPCSGreservesinQueensland



In

FebruaryBGandShellcompletedamerger



whichmaycreateaclearerpathforArrow

gasreservestomarketWhileatthetimeofwritingtherehadnotbeenanyannouncements

regardingthefuturedevelopmentofArrowreservestheInquiryexpectsthatthemajorityof

Arrow’sreservesarelikelytobecommittedtoLNGexportstojustifytheirdevelopmentAnother

potentialsourceoffuturesupplycouldbegasfromtheNorthernTerritorydeliveredviathe

plannedNorthernGasPipeline(NGP)





Whilegasproducerswillrespondtothepricesignalsinthelongrunthemedium-termsupply

outlookfortheeastcoastgasmarketremainsuncertaininthecurrenteconomicenvironment

(discussedfurtherinchapter)

 TheLNGprojectshavechangedhistoricalgasﬂowsintheeastcoastgasmarket

TheLNGprojectsarenotoeringsigniﬁcantadditionalﬁrmsupplytodomesticusersin

Queensland

HistoricallysomeoftheLNGjointventurepartiesweremajorsupplierstoQueensland’s

domesticgasmarketHoweveronceinvestmentdecisionsweretakenandconstruction

commencedtheLNGjointventurepartiesshiftedtheirfocustoensuringasmoothtransitionto

LNGproductionSomeLNGprojectsgaveevidencetotheInquirythatwhiletheywillcontinue

tomeettheirexistingdomesticcommitmentstheydidnotexpecttobeinapositiontoconsider

signiﬁcantadditionalﬁrmsuppliestodomesticusersuntiltheirLNGproductionstabilisedand

plateauedThiswillgivetheLNGprojectstimetobetterunderstandtheiractualwellproduction

anddeclineratesandtheproductivepotentialoftheirundevelopedreserves

HoweveronceproductionplateaustheLNGproducerswillhaveeconomicincentivesto

maximisethevalueofanygastheyproduceinexcessoftheirexistingLNGexportcommitments

TheLNGprojectsarelikelytoseektosellthisgastothehighestvalueuserwhichcouldbeeither

 ApproximatelypercentofPgasreservesestimatedintheeastcoastgasmarketasatFebruaryweremadeupof

CSG—EnergyQuestEnergyQuarterlyMarchtable

 EnergyQuestEnergyQuarterlyMarchtable

 SeeACCCmergerregisterhttpregistersacccgovaucontentindexphtmlitemIdfromItemId

 ThisplannedpipelinewaspreviouslyreferredtoastheNorthEastGasInterconnector



Inquiry into the east coast gas market—April 2016

domesticusersorinternationalLNGspotbuyersLowLNGspotpriceswouldpotentiallymake

domesticsupplymoreattractive

ProductionfromtheCooperBasinhasbeenre-directedtoQueensland

AtthetimethethreeLNGprojectsweresanctionedtheextenttowhichtheyexpectedtorely

onreservesownedbythemtomeettheircontractualexportcommitmentsvariedAPLNGand

QCLNGprimarilyexpectedtomeettheirLNGneedsthroughdevelopmentofresourcesowned

bythemBycontrastGLNGalwaysexpectedtosourcegasfromotherproducersintheeast

coastgasmarkettosupplementitsCSGreserves



Thisisreﬂectedinchartwhichshows

thatthetotalproductioncapacityofthetwoGLNGtrainssigniﬁcantlyexceededthevolumeof

gasthatGLNGcouldproducefromitsPCSGreservesatthetimetheprojectwassanctioned

Chart ExpectedLNGplantproductioncapacityandPCSGreservesoftheLNGprojects

APLNG

GLNG QCLNG

20 year

production

capacity

2P reserves

as at FID

2P reserves

as at Feb.

2016

20 year

production

capacity

2P reserves

as at FID

2P reserves

as at Feb.

2016

20 year

production

capacity

2P reserves

as at FID

2P reserves

as at Feb.

2016 incl.

Arrow

Origin Energy (37.5%)

ConocoPhillips (37.5%)

Sinopec (25%)

Santos (30%)

Petronas (27.5%)

Total (27.5%)

Kogas (15%)

Shell (QGC) (73.75%)

CNOOC (25%)

Tokyo Gas (1.25%)

10 580

13 784

11 775

9160

9980

7000

8915

Arrow

18 221

9306

5546

5005

Note NumbersareinPJ

Sources ProductioncapacityestimatesarebasedonpubliclyannouncedLNGplantnameplatecapacityconvertedintoPJsplusfuel

gas(estimatedatpercentofcapacity)PreservesasatFebruaryaresourcedfromEnergyQuestEnergyQuarterly

MarchtableOrigin’sASXannouncement‘AustraliaPaciﬁcLNGFinalInvestmentDecision’JulySantos’

mediarelease‘GLNGprojectsanctioned—FinalinvestmentdecisiononUSbillion-trainmtpaproject’January

BGGroup’smediarelease‘BGGroupsanctionsQueenslandCurtisLNGproject’October

AllthreeLNGprojectsexpecttoincreasethesizeoftheirPreservesovertimethroughreserve

optimisationandfurtherexplorationandappraisalactivitiesWhilethePreservesofthethree

LNGprojectshavegrownoverthepastﬁveyearsthePreservesofGLNGarestillwellshort

ofthevolumerequiredtofullymaximisetheproductioncapacityofitstwotrainsTomeetthis

shortfallGLNGhaspurchasedsubstantialvolumesofgasoverthepastfewyearsfromarange

ofgassuppliersintheeastcoastgasmarket(table)QCLNGhasalsoannouncedthatithas

purchasedsomegasfromthirdparties

 Santos’mediarelease‘SantostosupplyPJofportfoliogastoGLNG’October



Inquiry into the east coast gas market—April 2016

Table PubliclyannounceddomesticgaspurchasesbytheLNGprojects–

Dateannounced Seller Buyer Quantity

(PJ)

Commences Term

(years)

Oct– Santos GLNG   

May- Origin GLNG   

Oct- OriginSGandCombabula GLNG   

Nov- Origin QCLNG   

Dec- Origin GLNG –  

Mar- WestSide GLNG   

Q Other GLNG   

Q Other GLNG   months

Sep- Senex GLNG –  

Dec- AGL GLNG   

Source EnergyQuestEnergyQuarterlyMarchtableandSantos’mediarelease‘GLNGsignsgaspurchaseagreementwith

AGL’December

CriticallyasigniﬁcantportionofthisgashascomefromtheCooperBasinGasfromtheCooper

BasinwashistoricallyanimportantsourceofsupplyfortheSouthAustralianmarketviathe

MoombatoAdelaidePipelineSystem(MAPs)andfortheNewSouthWalesmarketviathe

MoombatoSydneyPipeline(MSP)RedirectionofgasfromtheCooperBasintoQueenslandhas

reduceddiversityofsupplyavailableinthesouthernstatesadverselyaectingthecompetitive

dynamicsinthosestates(discussedinchapter)

TherehavebeenconcernsamongsomemarketparticipantsthatLNGexportagreements

maycontainstrictgasdeliveryconditionsincludingpenaltyclausesforfailuretomeetLNG

supplycommitmentswhichwoulddictatethedecisionsoftheLNGjointventurepartiesThe

InquirydidnotidentifyanysuchclausesNeverthelesstheriskofdamagingtheirinternational

reputationasadependableLNGsupplierandthethreatofGSAterminationundercertain

non-compliancesituationsprovidemajorincentivesforLNGjointventurepartiestomeettheir

contractualexportcommitmentseveninalowoilpriceenvironment

 Thegasmarketwillnotbethesameforindustrialgasusers

Thedomesticgasmarketontheeastcoastwashistoricallycharacterisedbylong-termGSAs

andgasbuyerstypicallyhadfewdicultiesrenegotiatingtheirGSAswhentheyexpiredGas

suppliedtoindustrialusersunderlong-termGSAswashistoricallypricedusingacost-plus

formulainwhichthecontractpricepaidforgasbyuserswascalculatedbasedonthecostof

productionplusamarginandescalatedwithinﬂationNon-pricetermssuchastheduration

ofGSAspricereviewmechanismsquantities(includingﬂexibilityondeliveredquantities)and

deliverylocationsweretypicallyrolledoverfromoneGSAtoanotherandremainedrelatively

stableHowevertheintroductionoftheLNGsigniﬁcantlyalteredthecontractinglandscapein

theeastcoastgasmarket

 Initialre-contractingdicultiesandconﬂictingcommunicationfromgas

suppliersampliﬁeduncertaintiesforindustrialgasusers

Previousinquiriesintothesupplyofwholesalegasintheeastcoastgasmarketreceived

conﬂictingreportsfromgassuppliersandindustrialgasusersaboutprevailingsupplyand

demandconditionstheextentofactivegassupplynegotiationsandthesupplyoutcomes

Itwasdicultfortheseinquiriesandgovernmentpolicymakersmorebroadlytoassess

competingclaimsaboutthesemattersascriticalinformationrelatingtoGSAsandcontractual

negotiationswasunavailableduetoconﬁdentialityrestrictions

TheInquiryusedtheACCC’scompulsoryinformationgatheringpowerstoovercomethese

restrictionsandgainaninsightintosupplier-userinteractionoverthepastfewyearsTheInquiry

foundthatintheperiodfromabouttotheendofthedomesticusersintheeastcoast

gasmarketenteredarecontractingphaseasmanylong-termlegacydomesticGSAsweredue



Inquiry into the east coast gas market—April 2016

toexpireoverthecomingyears(chart)Alargenumberofindustrialgasusersapproached

gasretailersandproducersthathistoricallysuppliedthedomesticmarketseekinggassupplyfor

variousyearsfrom

Chart GasvolumesunderdomesticGSAsforsupplyfromasatNovemberbybasin

Annual contracted supply (PJ)

20332028202320182013

100

200

300

400

500

600

700

800

SydneyBassOtway Surat/BowenGippsland Cooper/Eromanga

SourceCoreEnergyEasternAustralianGasOutlookp

TheevidenceobtainedbytheInquiryhasconﬁrmedthatovertheperiodfromabout

throughtotheendofanumberofindustrialusersencountereddicultiesinsecuring

gasforsupplyinandbeyondTheyfoundthattheyhadfeweroptionsforgassupplythan

previouslySomegassuppliersdeclinedtomakeanyoersforsupplyintherequestedperiod

whileothersindicatedthattheycouldonlysupplygasforparticularyearsratherthantheentire

periodWhereoershadbeenmadetheywerelargelyathigherpricesandonlessﬂexible

termsthaninthepastThescarcityofoersforgassupplymadeitdicultforindustrialusersto

assesswhetherthepricestheyhadbeenoeredwerecompetitiveandfuelledtheiruncertainty

aboutthefutureavailabilityofgas

Inadditionanumberofindustrialusersgaveevidencethattheyobservedachangeinthe

attitudeandbehaviourofsomegassuppliersTheseincludedsomesellersnotresponding

toapproachesmadebyusersinatimelymannerdrawingoutnegotiationsnotfollowingup

onoerstobuyersorotherwisemakingcompletionofthenegotiationsverydicultInone

instanceafterseveralmonthsofnegotiationsasellerdecidedtoincreasethepriceatthe

lastmomentwhenaGSAwasclosetoexecutionOnanotheroccasionabuyerwasgivenan

unreasonablyshortperiodoftimetorespondtoanoerpreventingthemfromfollowingdue

diligencewithintheircompanythatwouldhavebeennecessarytoaccepttheoer

TheInquiryfoundthatthewillingnessorabilityoftheLNGprojectsgasproducersandkey

retailerstomakegasoersintheperiodfromabouttotheendofwashinderedby

thebroadmarketuncertaintiesassociatedwiththestart-upoftheLNGplantsuncertainties

associatedwithfuturegasoutlookandfuturedomesticpricesaswellasotherfactorsspeciﬁc

toindividualsuppliersTheLNGprojectsgenerallydeclinedtooersigniﬁcantadditionalﬁrm

supplycommitmentstodomesticuserstoconcentrateonsecuringgastomeettheLNGplant

start-uptimeframesSomeproducerswerefullycontractedforcertainyearsasaresultof

theirexistingcommitmentstotheLNGprojectsorotherpartiesTheretailersgenerallyhad

sucientvolumesofgastosellforandbutsomeoftheretailershaddicultiesin

makingoersofsupplyforthisgasduetoimpendingpricereviewsintheirownGSAswithgas

producersSomeretailerswerealsointhemarketthemselvesseekingtopurchasegasforre-

supplypost

Theevidencegivenbybothindustrialusersandgassuppliersconﬁrmsthattherewasadicult

contractingperiodfromabouttotheendofforallmarketparticipantsTheInquiry



Inquiry into the east coast gas market—April 2016

didnotﬁndevidenceofgassuppliershoardinggasInsteadtheevidencesuggeststhatgas

supplierswerereactingtorapidlychangingcommercialdynamicsinanuncertainenvironment

HowevertheInquiryfoundthatintheperiodswhenparticularsupplierswerenotactiveinthe

markettheywereoftennottransparentwithindustrialusersaboutthereasonsfortheirlimited

engagementAtthesametimethesesuppliersweresensitiveaboutpublicperceptionsand

werekeentodemonstratetheirparticipationinthemarketviaoersorexecutedagreements

Gassuppliersortheirrepresentativebodiesmadepublicstatementsaboutthestateofthe

contractingmarketwhichmadenoreferencestothechallengesexperiencedbymarket

participantsandinsteadportrayedthemarketasfunctioningwell

ForexampleonJanuaryTheAustralianPetroleumandExplorationAssociation(APPEA)

issuedamediareleasestating

Inrelationtotherecommendationforanindustry-ledinitiativetoprovidemore‘information’to

themarketAPPEAnotesthegasmarketalreadyhasabundantinformationavailabletoitThe

rangeofgassupplyagreementsthathavebeenstruckoverthelastmonthssuggeststhat

thereisenoughinformationavailabletoallowsupplycontractstobeconcludedbetween

willingbuyersandsellers



Thisstatementwasfollowedbyalistofagreementsforgassupplyreproducedinotherpublic

statementsHoweveronlyahandfulofagreementsonthislistwerebetweentheestablishedkey

gassuppliersandindustrialusersThemajorityoflistedagreementswerebetweenproducers

andeithertheLNGjointventurepartiesretailersorotherproducersSomealsoinvolved

agreementsenteredintobyjuniorexplorersforthepotentialsupplyofgasfromprojectsthat

hadnotyetbeensanctionedFurthertheInquiryfoundevidencethatsomesupplierbehaviour

includingtheirapproachtoindividualoersofsupplywasmotivatedatleastinpartbythelikely

publicperceptionoftheiractions

Inanopaquechanginganduncertainmarketthenatureofthesecommunicationsampliﬁedthe

concernsanduncertaintiesofindustrialusersmakingitincreasinglydicultforthemtomake

informedbusinessdecisions

 Domesticgaspricesarenowhigherandmorevolatileduetotheinﬂuenceof

internationalLNGandoilprices

DomesticmarketparticipantsarenowexposedtointernationalLNGandoilprices

AlltheparticipantsintheeastcoastgasmarketarenowexposedtointernationalLNGand

oilpricesTheLNGjointventurepartiessellLNGoninternationalmarketsandaredirectly

exposedtointernationalLNGpricesTheLNGjointventurepartiesarealsodirectlyexposedto

theworldoilpricesthroughtheirexportGSAsEachoftheLNGprojectswasunderpinnedby

largefoundationexportGSAswithbuyersfromChinaJapanMalaysiaandKoreatounderwrite

theirlumpyhighcostandriskyinvestmentsTheLNGpricesundertheseGSAsaresetata

percentageoftheJapaneseCustoms-ClearedCrude(JCC)pricewhichcloselytracksother

majoroilindexes(BrentCrudeWestTexasIntermediateTapisetc)





ByintroducingtheexportoptiontheLNGprojectshaveexposeddomesticmarketparticipants

tointernationalLNGpricesTheinternationalLNGpricesnowinﬂuencethedomesticgas

pricesthroughLNGnetbackpriceswhicharecalculatedbysubtractingthecostofshipping

liquefactionandtransmissionfromthespotorcontractLNGpricesTheLNGnetbackpricesare

becomingimportantindicativepricesforsomedomesticusersparticularlyinQueenslandThis

islikelytoremainafeatureofthedomesticgasmarketintothefutureandhassomebeneﬁts

inthelongtermasLNGpricesareachievedinacompetitiveinternationalmarketandthe

calculationoftheLNGnetbackpriceisrelativelytransparent(discussedfurtherinchapters

and)

 APPEA’smediarelease‘StudyshowsgasmarketisdeliveringforallAustralians’January

 JCCisamonthlyvolume-weightedaveragepriceofJapaneseoilimportspublishedbytheJapaneseGovernment



Inquiry into the east coast gas market—April 2016

ThepurchasesbytheLNGprojectsarealloil-linkeddirectlyexposingthesuppliersofgas

tooilpricesSomenon-LNGproducersintheeastcoastgasmarkethavealsointroduced

oil-linkedpricinginGSAswithdomesticgasretailersorotherproducers(refertoboxfor

anexplanationofhowoil-linkingworks)Theseproducershaveexpressedapreferencefor

commodity-basedreferencepricingandconsiderthatoilindexationisappropriategivenitslink

toLNGpricesandnewLNG-drivenmarketdynamicsintheeastcoastgasmarketThepresence

ofoil-linkedmechanismsinGSAsmeansthatthepricespaidbythegasbuyersunderthose

GSAswilladjustquiterapidlyinresponsetothechangingoilprices

Whereascertainproducersalsoappeartobekeentointroduceoil-linkedtermsintotheirGSAs

withindustrialuserstheInquiryhasonlyfoundacoupleofsuchagreementsFurthertheInquiry

hasfoundthattheretailersdonotappeartobeintroducingoil-linkedtermsintotheirGSAswith

industrialusersWhileanumberofdomesticusersexpressedconcernsduringtheInquiryabout

theincreasedprevalenceofgassupplyoersbasedonanoil-linkedpricingmechanismthe

pricesinGSAsofthevastmajorityofdomesticindustrialuserscontinuetobebasedonﬁxed

formulasThisprovidesgreatercertaintyofpricestoindustrialusersoverthetermoftheGSA

(excepttotheextentthattheGSAissubjecttoapricereview)

Howeverthepricespaidbydomesticindustrialusersunderlong-termGSAsarenevertheless

inﬂuencedbyoilpricesandwilladjusttoreﬂectthosepricesduringGSApricereviewsoratthe

re-contractingstageThisisbecausethedomesticpricesarenowinﬂuencedbytheLNGprices

whichareinturninﬂuencedbytheoilprices



Inquiry into the east coast gas market—April 2016

Box Oil-linkedpricinginexportanddomesticGSAs

LNGprices-curve

InternationallyGSAsforthesupplyofLNGtypicallysetthepriceofLNGatapercentage

oftheJCCwhichisoftenreferredtoastheslopeTheslopeistypicallybetweento

percentoftheJCCandgivesthepriceofLNGinUSMMBTUwhichforAustralian

exporterswouldthenbeconvertedtoAUGJTheslopeisoftenreducedathighandlow

oilpricestolimittheﬁnancialexposureofbuyersandsellersrespectivelyinwhichcaseitis

knownasthes-curveTheGSApricemayalsocontainaﬁxedcommoditycomponent

LNG price (US$/MMBTU)

Japanese Customs-Cleared Crude price

AsasimpliﬁedexampleiftheJCCpriceforaparticularmonthisUSbarrelandaGSA’s

slopeispercentthepriceofLNGxUSMMTBUAtanexchangerateof

AUUSandusingMMBTUGJthisequatestoAUGJ

Intheeastcoastgasmarketsomeoil-linkeddomesticGSAshavepriceformulasthatare

percentoil-linkedandsomehaveacombinationofanoil-linkedcomponentanda

commoditygascomponentindexedtoinﬂationOilindexingisoftenbasedonBrentCrude

orJCCpriceswithpercentagesoftopercentdependingontheoil-linkedweightingThe

oil-linkedcomponentoftengivespricesinUSwhichaddsexchangerateriskforthebuyer

Thefollowingisasimpliﬁedexampleofapricingformulawithoil-linked(percent

weighting)andcommodity(percentweighting)componentsCurrencyandunitof

energyconversionarenotincludedinthisexample

GaspriceGJ(percentxBrentCrudeprice)(inﬂationxcommoditygasprice)

LNGandoilpricesarevolatile

LNGandoilpricescanﬂuctuatedramaticallyinresponsetochangesinthesupply-demand

balanceofthecommodityaswellaschangesinbroaderinternationaleconomicactivity

ChartshowsaveragemonthlyGSApricesforLNGdeliveredtoJapanandChinaaverage

monthlyspotpricesforLNGdeliveredtoNortheastAsiaandaveragemonthlyJCCpricesover

thepastfewyears





 ThesepricesarebasedonsuppliesfromanumberofLNGexportingcountriesnotjustAustralia



Inquiry into the east coast gas market—April 2016

Chart AveragemonthlypricesLNGGSApricestoJapanandChinaNortheastAsianspotpricesandJCC

April–January

AU$/GJ

AU$/barrel of oil

100

120

Aug 2015

Jun 2015

Apr 2015

Feb 2015

Dec 2014

Oct 2014

Jan 2016

Dec 2015

Oct 2015

Aug 2014

Jun 2014

Apr 2014

Feb 2014

Dec 2013

Oct 2013

Aug 2013

Jun 2013

Apr 2013

Japan Customs-Cleared Crude price AU$/barrel (RHS)

Japan landed LNG contract price AU$/GJ (LHS)

China landed LNG contract price AU$/GJ (LHS)

Northeast Asian Spot Price (ANEA)—landed (LHS)

Source ArgusMedia

Note ExchangeratedatafromtheReserveBankofAustraliawasusedtoconvertpricesfromUSGJtoAUGJ

ChartshowsthatmonthlyaverageLNGGSApricesreachednearlyAUGJdeliveredto

JapanandjustoverAUGJdeliveredtoChinabutdroppedto–GJdeliveredtoJapan

andGJdeliveredtoChinabyearlyThesepriceswereroughlyinparallelwithoilprices

butwerealsoinﬂuencedbytheAUUSexchangerate

ThewholesalegaspricespaidbygasusersinLNGdestinationcountrieswillbehigherthanthe

LNGpricesshowninthechartRegasiﬁcationterminalcosts



pipelinetransportationcosts

withinthedestinationcountryandtheLNGshipper’soperatingcostsandmarginwouldneed

tobeaddedtotheLNGpricetogetanideaofthelikelydeliveredpriceawholesalegasbuyer

wouldpayinthedestinationcountry

Domesticgaspricesarenowhigherandmorevolatilethaninthepast

TheInquiryobtaineddataongaspricespaidbygasbuyersunderexistingGSAsforﬁrm

supplyofgasforatleastthreemonthsandforavolumeofatleastonePJTableshowsthe

volumeweightedaveragegaspricespaidbythesebuyersinThesepricesareforgasthat

hasalreadybeenprocessedbutdonotincludethecostoftransportationIndicativepipeline

transportationchargesarealsoshownintabletogiveanideaoftheaveragedeliveredgas

pricestothemajordemandcentreseachbasinsupplies

 AregasiﬁcationterminaliswhereLNGshipsdockinthedestinationcountryandLNGisconvertedfromliquidtogas



Inquiry into the east coast gas market—April 2016

Table VolumeweightedaveragewholesalegaspricespaidinQbybasin

Basin Volumeweightedaveragewholesale

gaspriceatthebasin

(GJ)

Indicativepipelinetransportationchargesto

majordemandcentres



(GJ)

Cooper  MoombatoBrisbane



–

MoombatoAdelaide–

GippslandOtwayandBass  LongfordtoSydney–

LongfordtoMelbourne

PortCampbelltoMelbourne

OtwaytoAdelaide–

SuratandBowen  WallumbillatoGladstone–



RomatoBrisbane–

Allbasinscombined  –

Source ACCCanalysisbasedondataobtainedduringtheInquiry

Note ThepricesinthistableareexclusiveofGSTTheyarebasedonamountsactuallypaidbygasuserstogasproducersintheﬁrst

quarterofPricespaidunderbilateralGSAsreﬂectamongstotherthingsthespeciﬁcnon-pricetermsandconditions

agreedbetweenthepartiesThepricesinthistabledonottakeintoaccountthevariationsinnon-pricetermsandconditions

betweentheGSAs

Whilethepricessetoutintablereﬂecttheaveragevolumeweightedpricesactuallypaidby

domesticusersintheyarepredominantlybasedonlegacylong-termGSAsandtherefore

areheavilyinﬂuencedbypricesthathadbeenagreedinthepast(althoughpricesundera

numberoftheseGSAshavebeenvariedfollowingpricereviews)ManyoftheGSAsthathad

beenexecutedrecentlyareforsupplyfromandarethereforenotreﬂectedinthetable

Chartshowsaveragedeliveredgaspricespaidbyusersineachmajordemandcentretaking

intoaccountonlyGSAsthatareenteredintoinaparticularyear



Chart AveragedeliveredwholesalegaspricesinnewGSAsforlargeindustrialusers

2015 $/GJ

SA Qld East coast weighted averageVic Ta s NSW

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source OakleyGreenwoodGasPriceTrendsReviewDecember

Note ThischartonlyincludesGSAswithatotalcontractvolumeofatleastonePJ

Chartshowsthatsigniﬁcantpriceincreaseshaveoccurredinthepastﬁveyearsinevery

statetovaryingdegreesandhavebeenparticularlypronouncedinQueenslandEvidence

obtainedbytheInquirygenerallysupportsthesetrendsTheInquiryfoundthatdeliveredgas

pricesundersomedomesticGSAswithﬁxedpricingmechanismsexecutedrecentlyareashigh

 Thetransportationchargesinthistablehavebeencalculatedassumingtheshippertransportsitsmaximumdailyquantity

everydayoftheyear(thatisloadfactorofpercent)IftheshippertransportslesstheaveragecostperGJwillbe

higher

 MoombatoBrisbanetariisthesumoftarisfortheSouthWestQueenslandPipelineandtheRomatoBrisbanePipeline

 ThequotedpipelinetarisareforQueenslandGasPipeline

 ThetransportationcostsinchartincludeonlyrealﬁrmforwardhaultransportcostsOakleyGreenwoodindicatedthat

intransportationcostsaveragedpercentofwholesalegaspricesandgavethefollowingbreakdownVictoria

percentQueenslandpercentNewSouthWalespercentSouthAustraliapercentandTasmaniapercent



Inquiry into the east coast gas market—April 2016

as–GJSomeusersraisedconcernsinthecourseoftheInquirythatdomesticpricesin

theeastcoastgasmarketwerenowhigherthangaspricespaidbyoverseasuserspurchasing

LNGoninternationalmarketsTheevidenceobtainedbytheInquirydoesnotsupportthese

claims—domesticgaspricesintheeastcoastgasmarketarestillgenerallylowerthanpricespaid

byoverseasusersthatpurchaseLNG

ExposuretointernationalLNGandoilpriceshasincreasednotonlythelevelbutalsothe

volatilityofdomesticgaspricesintheeastcoastgasmarketPricevolatilityisnowafeature

ofallGSAsthathaveanoil-linkedpricingmechanismTableshowsindicativepricesthat

domesticbuyerswouldpayinatgivenforeignexchangeandoilpriceassumptionsbased

onasampleofdomesticoil-linkedGSAsthathavebeenexecutedinthepastfewyearsThese

pricesareforgasthathasalreadybeenprocessedbutdonotincludethecostoftransportation

Asshowninthetablepricesunderoil-linkedGSAscouldvarybyasmuchasGJdepending

onthepriceofoil

Table Indicativepricesthatwillbepaidinunderasampleofrecentlyexecutedoil-linkeddomestic

GSAs

BrentCrude(USbarrel)    

Indicativeprices(AUGJ) – – – –

Source ACCCanalysisbasedondataobtainedduringtheInquiry

Note TheindicativepricerangeswereestimatedusingUSAUexchangerateofBrentCrudeoilpricesareusedbecauseall

thecontractsinthesamplecontainpricingmechanismslinkedtoBrentCrude

Pricevolatilityaectsallgasbuyersinthemarketnotjustthosewithoil-linkedGSAsItisnow

moredicultforindustrialgasuserstopredictwhatthedomesticgaspriceswillbeinthefuture

whentheircurrentGSAexpiresTheseincreasedpricerisksareexacerbatedbyanuncertain

supplyenvironmentandalackofpricetransparencyandinformationasymmetrybetweengas

suppliersandgasbuyersThisprovidesadistinctbargainingadvantageforlargeproducersand

retailersintheirnegotiationswithindustrialgasusers

Whilepricevolatilityisoftenobservedinmanyothercommoditymarketsitisanewpricing

dynamicforindustrialgasusersintheeastcoastgasmarketOvertimeothercommodity

marketshavedevelopedmechanismstoassistmarketparticipantstomanagepriceandsupply

risks(forexamplederivativesﬁnancialproductsetc)Suchmechanismsarecurrentlylimitedin

theeastcoastgasmarketThiscreatesthepotentialforinecientpricingoutcomesthatcould

leadtoinecientinvestmentdecisionsbeingmadebothbyindustrialusersandgasproducers

Thereforethereisacaseforintroducingmeasurestofacilitategrowthinliquidityinthetrading

marketsandtoimproveavailabilityandtransparencyofpricinginformationtoassistmarket

participantstoadjusttothenewpricingdynamics(discussedfurtherinchaptersand)

 Industrialusersarerespondingtoincreasinginputcostsandriskscausedby

risingdomesticgasprices

Risingdomesticgaspriceshavehadanoticeableeectontheinputcostsofsomeindustrial

gasusersGasisamajorinputforsomeindustriesandisusedtogenerateheatinindustrial

processessuchasbrickmanufacturingandasafeedstockforsomechemicalproduction

processessuchasfertiliserplasticsandmethanolIndicativeﬁguresincludepercent

ofinputscostsforbricksandrooftilespercentforcementandaluminapercent

forfertilisers



anduptopercentforammonia



Risingdomesticgaspricesaectthe

internationalcompetitivenessofindustrialuserswhichareexposedtoglobalmarketsincluding

plasticmanufacturersandmethanolproducers

Itistechnicallypossibleforsomemanufacturersthatusegasasasourceofenergyorasa

chemicalfeedstocktoswitchtoanalternativeForexampleliqueﬁedpetroleumgascanbe

usedforammoniaproductionandcoalcanbeusedformethanolproductionHoweversome

industrialusershavegivenevidencethatswitchingwouldrequirereplacingamajorpieceof

plantandthecostofthiswouldbecommerciallyunviableFurthersomemanufacturingsuchas

 ManufacturingAustraliaImpactofgasshortageonAustralianmanufacturingMay

 IncitecPivot’spublicsubmissiontotheInquiry



Inquiry into the east coast gas market—April 2016

glassrequiresveryhightemperaturesandalternativessuchaselectricityareeitherprohibitively

expensiveperunitofenergyorcannoteectivelysupplytherequiredtemperature

Someindustrialusershavegivenevidencethattheywereabletoreducetheirgasusefor

examplebyrunningplantsbelowpeakcapacityordeferringplanstoincreaseproduction

Howeversomehavesaidthatthishashadanimpactontheoveralleciencyofoperating

certainplants

Higherdomesticgaspricesandincreasedpricevolatilityareputtingindustrialusersunder

greaterpressuretomanagetheirgascostsandincreasetheirneedforgreaterﬂexibilitywhich

isbecomingharderandmoreexpensivetoobtainInthefaceofthisuncertaintyindustrial

usersﬁndithardertomakedecisionsaboutthefutureviabilityoftheirbusinessesandabout

futureinvestmentdecisionsTherearecurrentlyfeweectiveﬁnancialinstrumentssuchas

hedgecontractsdesignedspeciﬁcallyfortheeastcoastgasmarketthatcanbeusedbymarket

participantstomanagepricerisksSomeindustrialusersarebecomingincreasinglyrelianton

marketmechanisms(withtheirowninherentrisks)tomanageincreasedgaspricerisks

Someindustrialusersarechangingtheirapproachtosourcinggastoadapttothechanging

marketAnumberofusersarenowtakingaportfolioapproachtogascontractingInstead

ofrelyingonasinglelargeﬁrmGSAtheyenteredintoarangeofsmallerGSAswithseveral

suppliersandondierenttermsThishasgiventhemadditionaloverallﬂexibilitythatwasmore

costlytoobtaininasingleGSAHoweverthisapproachisasigniﬁcantchangefromprevious

contractingpracticesTheextenttowhichthisapproachwillreducethegassupplyrisksfaced

bytheindustrialuserswilldependonanumberoffactorsincludingthedepthandliquidityof

themarketTheportfolioapproachhasalsoincreasedthetransactioncostsoftheindustrial

usersinnegotiatingandmanagingmultipleGSAs

Anumberofindustrialusersarenowusingtheshorttermtradingmarkets(STTMs)inSydney

AdelaideandBrisbaneaswellastheVictorianDomesticWholesaleGasMarket(DWGM)to

supplementtheirgasneedsTheseusersoftenengagedaserviceprovidertohelpthemtrade

intheSTTMsParticipationintheSTTMsandtheDWGMallowsuserstoreducetheiroverall

costofgasthroughopportunisticpurchasesofrelativelycheapgasinperiodswhenexcessgas

isavailableinthemarketWhilesomeindustrialusersareusingtheSTTMsandtheDWGMto

managegaspriceriskstheextenttowhichtheycanrelyonthesemechanismstomanageprice

risksiscurrentlylimited(furtherdiscussedinchapter)

Severalindustrialuserstookadirectinterestinthedevelopmentofnewgasresourcesto

managetheirsupplyrisk(box)Howeverthishasexposedthemtorisksassociatedwith

upstreamgasproductionwhichtheyhadnotbeenpreviouslyexposedto



Inquiry into the east coast gas market—April 2016

Box Newfundingmodelsforgasdevelopment—StrikeEnergy

StrikeEnergy(Strike)isanindependentoilandgascompanylistedontheAustralianStock

ExchangeStrike’sprimaryfocusisthecommercialisationofgasresourceswithinitsSouthern

CooperBasinGasProjectinSouthAustralia(operatedbyStrikewithapercentinterest

fromEnergyWorldCorporation)Strikeiscurrentlyundertakingappraisalanddevelopment

workontheprojectsaimedatprovingitscommercialviabilityinadvanceofmovingtoﬁnal

investmentdecisionandscalingupproduction

InordertoﬁnancedevelopmentofthegasprojectStrikehassignedanumberof

agreementstosupplygastoindustrialgasusersincludingOroraLimitedforPJover

yearsAustralBricksforPJoveryearsandOricaAustraliaPtyLtdforuptoPJ

overyears



Theseagreementsincludeprovisionsformilestonepaymentsoroption

feeswhenreachingspeciﬁcdecisionpoints(forexampleproceedingtoapilotproduction

testproject)Oricamadeitsﬁrstpre-paymentinMayTheseagreementsweresigned

duringtheperiodfromabouttotheendofwhenfewoerswerebeingmadefor

thesupplyofgas

Whiletheseagreementsprovideanadvantagetogasusersinpotentiallyaccessinggas

suppliesoverasubstantialperiodoftimeitalsoputsgasusersintoanunfamiliarrisk

environmentWhileStrikecontinuestomakeprogresstheprocessofobtainingsupplyfrom

theSouthernCooperBasinGasProjectischallenging

TherehavebeensimilarattemptsinthepastbyusersinWesternAustraliatogetinvolvedin

upstreamgasproductionAlcoahasutilisedanumberofstrategiestodevelopgasresources

includingtheRedGullygasproject(in)andwithcompaniesTranservEnergy(in)

andBuruEnergy(inwiththenArcEnergy)WhiletheRedGullyProjectiscurrentlyin

productionandTranservEnergyiscontinuingattemptstounlocktheWarrogasﬁelditisyet

toproducecommercialquantitiesofgasInAlcoawithdrewfromtheBuruagreement

asithadsecuredalternativegassuppliestopoweritsWesternAustralianreﬁneries

 Thegasmarketissettlingdownbutsupplyuncertaintyremainsforindustrial

users

Moregasbecameavailabletoindustrialgasusersthroughoutassomeofthefactorsthat

contributedtothescarcityofsupplyoersduringtheperiodfromabouttotheendof

wereresolvedMostindustrialgasusersappeartohavebeenabletoﬁnalisecontractual

negotiationsforthesupplyofgasforandHoweverindustrialuserscontinuetoface

uncertaintyaboutthelikelyfuturedomesticpricesandgasavailability

Lowoilpricesarecreatinguncertaintyastowhetherproducerswillmaketimelyinvestmentinto

developmentofundevelopedreservestocontinuemeetingthedemandoftheLNGprojects

anddomesticusers(discussedfurtherinchapter)Thereisalsouncertaintyonwhenandto

whatextenttheLNGprojectswillstartmakingﬁrmoersforsupplyofgastodomesticusers

oncetheyreachsteadyproductionstateTheInquirynotesthatonMarchIncitecPivot

LimitedannouncedthatithasenteredintoanewﬁrmgassupplyagreementwithQGC



Thereisuncertaintyabouttherolethatretailerswillplayinthefutureinsupplyingdomestic

industrialusersWhileallkeyretailershavenowsecuredgasfromtheGBJVforre-supplyto

domesticusersinthesouthernstatesitisunclearwhetherortowhatextenttheyallintendto

maintaintheircurrentlargeindustrialcustomerbaseForexampleAGLannouncedthatithas

acquiredsupplyover–forits‘residentialandsmallbusinessgascustomers’



TheInquiry

understandshoweverthattheGBJViscurrentlymakingdirectoerstoindustrialcustomersfor

supplyinthistimeperiod

 Strike’sASXannouncementStrikesignsnewgassupplyoptionagreementJanuary

 IncitecPivot’sASXannouncement‘IPLannouncesinterimgassupplyarrangementsforPhosphateHillFertiliser

ManufacturingPlant’March

 AGL’smediarelease‘AGLsecuresgassupplyuntilwithBassStraitagreement’April



Inquiry into the east coast gas market—April 2016

Furtherthereisuncertaintyastowhatextenttheinvestmentdecisionsbyallproducersin

themarketparticularlyinQueenslandandtheCooperBasinwillbedrivenbyopportunities

presentedbyLNGratherthantheneedsofthedomesticmarketThereappeartobeanumber

ofkeyreasonswhysupplyingtheLNGprojectsmayoftenbemoreattractivethansupplying

domesticusersTheLNGprojectshavesigniﬁcantscaleadvantagesandcanenterintolarge

long-termcommitmentsTheypotentiallyhavehigherwillingnesstopayforgasparticularly

wheninternationalLNGpricesarehighTheytypicallyhaveaﬂatdemandproﬁleandarenot

exposedtoseasonvariability

GiventheimpactofmoratoriaandotherregulatoryimpedimentsinNewSouthWalesand

Victoriaongasdevelopmentthereisapossibilitythatindustrialusersinthesouthernstates

willhavetoincreasetheirrelianceongassupplyfrombasinsthatarelocatedfurtherawayfrom

themThisexacerbatesuncertaintyforthoseusersaboutfuturegasavailability

Inanenvironmentcharacterisedbyhighandvolatilepricessuppliersmayalsoperceiveindustrial

usersasmoreriskycustomersTheInquiryfoundthatinconsideringmakingoersforsupply

ofgassomesupplierswereconcernedabouttheeectofrisinggaspricesonthecontinuing

futureviabilityofinternationaltrade-exposedgasintensiveindustrieswhichfacedcompetition

fromimportsBycontrasttheLNGprojectsarehighlyexpensivelong-termprojectswhichare

notassensitivetopriceﬂuctuations

Thechangedpricingdynamicsandprevailinguncertaintiesintheeastcoastgasmarketare

expectedtofurtherdepressdomesticdemandintheshorttomediumtermparticularlyingas

poweredgeneration(chart)

Chart Actualandforecastdomesticdemand–

Gas powered generation Industrial Residential and commercial

Annual demand (PJ)

100

150

200

250

300

350

2023202220212020201920182017201620152014

Actual

demand

Forecast

demand

Source AEMO’sNationalGasForecastingReport

Toassistindustrialusersinsuchanuncertainenvironmentitisparticularlyimportanttomake

accurateandconsistentinformationongasreservesandresourcesavailabletoenablethemto

makeinformedandecientdecisionsonconsumptionandcontractingstrategiesHowever

thereiscurrentlyalackofconsistentandadequateinformationreadilyavailableintheeast

coastgasmarketInparticulargasreservesandresourcesarereportedinanadhocmanner

withdieringrequirementsbetweenjurisdictionsThereareinconsistentrequirementsfor

companiesreportingtotheASXandforcompaniesnotlistedinAustraliaEvenwherethe

reservesorresourcesarereportedtheyarenotalwayseasytoaccuratelyinterpretbecause

theassumptionsandfundamentalsthatunderpintheircalculationsareopaqueorunknown

(discussedfurtherinchapter)



Inquiry into the east coast gas market—April 2016

 LNGhasacceleratedthegrowthanddevelopmentofthe

gasindustry

 Accesstohigherinternationalpriceshasaccelerateddevelopmentofgas

reservesandelevatedthelong-runmarginalcostofsupplyintheeastcoastgas

market

Thesizeofthedomesticdemandintheeastcoastgasmarketandhistoricdomesticpriceswere

insucienttojustifydevelopmentofthebulkofCSGresourcesintheshort-tomedium-term

TheconstructionoftheLNGfacilitieshasallowedtheLNGjointventurepartiestoconnecttheir

CSGresourcesinQueenslandwithinternationaldemandwhichwasamuchlargermarketand

placedahighervalueongasthandomesticusersThishassigniﬁcantlyincreasedthevalueof

CSGreservesandacceleratedtheirdevelopmentinQueensland

ByleavingLNGtrainswithproductioncapacityabovecontractvolumestheLNGprojects

havecreatedopportunitiesforotherproducersintheeastcoastgasmarkettosellsubstantial

volumesofgasforexportatattractivepricesThishasencouragedexplorationandappraisalof

otherunconventionalreservesintheeastcoastgasmarketforexampleintheCooperBasin

Whilefurtherinvestmentintoexplorationandappraisalhasbeenslowedbythefallingoilprices

thishasthepotentialtoincreaseagainoncetheoilpriceimproves

Howeveraccelerationofreservedevelopmentislikelytomovethecostofproductionalong

thecostcurvemorequicklythanitotherwisewouldhaveasthemostproductivereservesare

exhaustedandmoreexpensivetodevelopreservesarebroughtintoproduction

AsshownearlierintablethemajorityofthecurrentPreservesandCresourcesonthe

eastcoastconsistofCSGChartshowsthehistoricalandprojectedaveragemarginalcost

ofproductionofCSGintheeastcoastgasmarketinrealtermsThesecostestimatesinclude

drillingwellcompletiongasprocessingwatertreatmentandcompressionChartshows

averagemarginalcostshaveincreasedfromGJwhenCSGproductioncommencedin

toaroundGJforcurrentproductioninandareprojectedtoincreasetoaround

GJwhenaggregateproductionreachescurrentPreservesofPJ(allvaluesin

real)

Risingproductioncostsareduetoproductionmovingawayfromareasofhighproductionto

areaswherethecoalseamshavelessfavourablecharacteristicssuchaslowerpermeability

whichrequiremoreexpensivedrillingtechniquesoradditionalwellsTheseincreasingcosts

arebeingsigniﬁcantlymoderatedbyreductionsinproductioncostsandcostoptimisation

OptimisationhasoccurredandisexpectedtocontinuethroughtheLNGprojectssharingand

rationalisingsomefacilitiessuchaswatertreatmentplantsandpipelineswhichdefersoravoids

somecapitalexpenditureTheyhavealsocoordinatedsomeproductionandenteredintogas

swapstomakeproductionmoreecientLabourcostshavereducedasthepreviouslytight

labourmarkethaseasedDrillingeciencyhasimprovedandnewtechniqueshavereducedthe

timeandresourcesneededtodrilleachwell

Theestimatesinchartallowforcostreductionsasaresultofproductionoptimisation

Howevertherearesigniﬁcantuncertaintiesassociatedwithestimatingmarginalcostoffuture

reservesThereforeeventhoughtheproductioncostsareprojectedtorisethiscouldchangeif

gasproducersachievesigniﬁcantlygreatercostsavingsovertimethancurrentlyprojected



Inquiry into the east coast gas market—April 2016

Chart CSGproductioncostcurveintheeastcoastgasmarketasatMarch

Average marginal cost of production

(2015 $/GJ)

20 0000 40 000 60 000 80 000 100 000 120 000

140 000

Proved and probable (2P) reserves (PJ)

Historical 2P reserves Estimated average marginal cost of future 2P reserves

Current 2P reserves of 43 015 PJ (2015)

Estimated aggregate CSG

production of 2741 PJ to

31 December 2015

Source RLMSMarchcommissionedbytheACCC

Note ThekinkinthechartataboutthePJmarkwascausedprimarilybywritedownsinNewSouthWalesCSGreservesin

and

 Thegasmarketisevolvinginresponsetothechangingneedsofmarket

participants

TheintroductionofLNGhaschangedthetransportationrequirementsofsomegasproducers

andretailersintheeastcoastgasmarketThisservedasacatalystforaseriesofinvestmentsto

buildconverttobi-directionalﬂoworexpandkeytransmissionpipelinesThesedevelopments

haveincreasedtheconnectivityofthetransmissionpipelinenetworkintheeastcoastgas

marketallowinggastobetransportedtothehighestvalueusers

SomeoftherecentlycompleteddevelopmentsincludetheexpansionoftheEasternGas

Pipeline(EGP)theconversionoftheMSPintoabi-directionalpipelineandconnectiontothe

EGPtheconversionofMAPSintoabi-directionalpipelineandconnectiontotheSEAGas

PipelineandtheconversionoftheSouthWestQueenslandPipeline(SWQP)andQueenslandto

SouthAustraliaNewSouthWalesLink(QSN)intobi-directionalpipelinesAsaresultofthese

developmentsgasfromallthebasinsintheeastcoastgasmarketcannowreachQueensland

andgasproducedinQueenslandcannowbesuppliedintoeverydemandcentreintheeast

coastgasmarket

InNovembertheNorthernTerritoryGovernmentawardedJemenatherighttoconstruct

andoperateanewpipelinefromTennantCreektoMtIsa(theNGP)whichisexpectedtobe

constructedby



ThiswillnowlinkthegasresourcesintheNorthernTerritorytotheeast

coastgasmarketandislikelytoencourageincreasedexplorationandappraisalinvestment

providingtheeconomicswarrantitandpolicydoesnotdiscourageitIfsuchinvestmentis

carriedoutandresultsinsucientPreservesbeingidentiﬁedthiscouldleadtoanother

pipelinebeingconstructedconnectingMtIsatoWallumbilla



TheintroductionofLNGhasalsoincreasedthelevelofrelianceofsomegasmarketparticipants

onshort-termtradingmarketsAsmentionedearlieranumberofdomesticusersarenow

relyingontheSTTMsandDWGMtomeetsomeoftheirgasneedsTheWallumbillaGSHwas

alsoestablishedinQueenslandtosupportgastradingamongLNGparticipantsothergas

producersanddomesticusersTheLNGprojectsprovidedevidencetotheInquirythatthey

haveasigniﬁcantinterestinbeingabletoengageinshort-termtradesattheWallumbillaGSH

tomanagetheirgasneedsWhiletradingattheWallumbillaGSHtheSTTMsandDWGMisstill

relativelylimitedincreasedparticipationbytheLNGproducersanddomesticusersovertime

hasthepotentialtofacilitateanincreaseindiversityofparticipationandliquidityintradingvia

thosemechanisms

 Jemena’smediarelease‘JemenatobuildNorthEastGasInterconnector’

 ibid



Inquiry into the east coast gas market—April 2016

2 LNG fundamentals inﬂuence gas prices in the

east coast gas market, with diﬀerent dynamics

emerging in Queensland and the southern states

ThecommissioningoftheLNGexportfacilitieshassigniﬁcantlyalteredthepricingdynamics

intheeastcoastgasmarketTheLNGfacilitieshaveenabledCSGproducersinQueenslandto

accessinternationalgasmarketsandselltheirgasatLNGexportpriceswhicharehigherthan

historicgaspricespaidbydomesticusersunderbilateralGSAsByleavingsparecapacityin

theirtrainstheLNGprojectshavecreatedanadditionaldemandoptionforproducersintheeast

coastgasmarketparticularlythoselocatedinQueenslandandcentralAustralia

InthisenvironmentinternationalLNGsupplyanddemandexertsaconsiderableinﬂuenceon

domesticgaspricesinQueenslandDuetotheirproximitytoWallumbillaQueenslanddomestic

usersnowhavetodirectlycompetewithinternationaldemandforanyuncontractedgasthat

couldbemadeavailabletotheQueenslanddomesticmarket

ThenatureoftheimpactofLNGonthesouthernstatesissomewhatdierentWhilethere

ispipelineconnectivitythatenablesVictoriano-shoreproducerstodelivergastotheLNG

projectsforexport



thecostoftransportationisquitesigniﬁcantThisassistsdomesticgas

usersinthesouthernstatestocompetewiththeLNGprojectsforo-shoreVictoriangas

particularlyatloweroilprices

Howevertherehasbeenasigniﬁcantchangeinthepricingdynamicsinthesouthernstatesas

aresultofthedecisionsmadebytheCooperBasinproducersparticularlySantostocommit

signiﬁcantvolumesofgasproducedintheCooperBasintotheLNGprojectsTheCooper

BasinproducershistoricallyplayedacriticalroleincompetingwiththeGBJVformarketshare

inthesouthernstatesThereductioninthediversityofgassuppliersinthesouthernstateshas

substantiallystrengthenedthecompetitivepositionoftheGBJVandhasseverelyundermined

thebargainingpositionofdomesticusersinnegotiationwiththeGBJV

 PricesinQueenslandareshapedbyLNGfundamentals

 TheLNGprojectsareforecasttohavesucientgastomeettheircontractual

commitmentsinthemediumtermbutmaycontinuetopurchaseadditional

thirdpartygas

ThethreeLNGjointventureshaveenteredintolargelong-termLNGexportagreementsto

underpintheirsubstantialinvestmentinthedevelopmentofLNGTheseprojectsalsohave

legacydomesticGSAswhichtheyarecommittedtofulﬁlTheLNGprojectsrequiresigniﬁcant

volumesofgasinordertomeetthesecontractualcommitmentsTheextenttowhichthe

threeLNGprojectsrelyontheirownreservestomeettheircontractualcommitmentsvariesIn

particularGLNGhasbeenamaterialpurchaserofthirdpartygashavingacquiredsubstantial

volumesofgasfromarangeofthirdpartiesacrosstheeastcoastgasmarketoverthepastﬁve

years(asshownintableearlier)

TheLNGprojectscurrentlyforecastthattheywillproducesucientgasinadditiontothegas

alreadypurchasedfromthirdpartiestomeettheirexistingexportanddomesticcontractual

commitmentsinthemediumtermevenintheabsenceofArrowgas(chart)Development

ofArrowreservescouldconsiderablyimprovethesupply-demandbalance(discussedfurtherin

chapter)

 Producersino-shoreVictoriaincludethoseintheGippslandBassandOtwaybasins



Inquiry into the east coast gas market—April 2016

Chart ForecastsupplyanddemandbalanceoftheLNGprojectsinQueenslandexcludingArrow–

Forecast supply and demand (PJ)

Maximum LNG capacity and domestic GSAs

Domestic GSAs

Export and domestic GSAs

Undeveloped supply

Third party gasDeveloped supply

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035

200

400

600

800

1000

1200

1400

1600

1800

2000

Source ACCCanalysisbasedondataobtainedduringtheInquiry

Note Inthischart‘developedsupply’representsproductionfromwellswhichhavebeencompletedorwherebudgethasbeen

approvedfortheirconstruction‘thirdpartygas’representsgaspurchasedfromthirdparties‘undevelopedsupply’represents

futureexpectedproductionfromwellswhichhavenotyetbeenapprovedforconstruction‘maximumLNGcapacityand

domesticGSAs’isasumofLNGnameplatecapacityanddomesticcontractualcommitmentsoftheLNGprojects‘exportand

domesticGSAs’representsthetotalexportanddomesticcontractualcommitmentsoftheLNGprojectsand‘domesticGSAs’

showsthedomesticcontractualcommitmentsoftheLNGprojectsThischartdoesnotincludeArrowproductionforecastas

itscommercialplanshavenotyetbeenannounced

NotwithstandingthistheLNGprojectsmaycontinuetopurchaseadditionalgastomaximise

theirLNGproductionsubstituteforhighercostreservesorcoveranyunexpectedshortfallsin

meetingcontractualcommitments

TheLNGprojectshaveeconomicincentivestopurchaseadditionalgastomaximiseLNG

production

Thegapbetweenthetopdemandlineandtheseconddemandlineinchartrepresents

productioncapacityintheLNGplantsabovetheirfoundationexportGSAsthatcouldbeusedto

selladditionalLNGtypicallyonAsianspotmarketsGiventhelowmarginalcostsofliquefaction

(seesection)andthesigniﬁcantcapitalinvestmentsmadeinthesefacilitiestheLNG

projectshavestrongincentivestomaximiseLNGproduction

ThecurrentsupplyanddemandforecastsinchartindicatethatLNGprojectsareunlikely

tohavesucientgastoallowthemtomaximiseLNGproductionintheabsenceofadditional

andcurrentlyunplanneddevelopments(thisisrepresentedbytheunﬁlledgapbetween

theundevelopedsupplyandthetopdemandline)ThereforetheLNGprojectsarelikely

toseektopurchaseadditionalthirdpartygasifitwouldbeeconomicforthemtosellthat

gasinternationally

Changingresourceexpectationsandchallengingeconomicenvironmentmayalsonecessitate

purchasesofthirdpartygas

AsshownincharttheLNGprojectsrelyonproductionofgasfromtheirundeveloped

reservestomeettheircontractualcommitmentsUnliketypicalLNGventuresusinggas

extractedfromconventionalreservoirstheCSGbasedprojectsrequireongoinginvestment

inthedrillingofnewwellseveryyeartomaintainproductionNewdevelopmentsoftenneed

additionalinfrastructuretobebuiltincludingpipelinesandprocessingfacilitiesForexamplein

NovemberQGCannouncedthatithadmadeadecisiontoinvestbilliondollarsinto

the‘Charlie’projectwhichallowedforproductionfromitsexistingtenementsaspartofthe

QCLNGproject



 QGCmediarelease‘QGCdevelopmentavoteofconﬁdenceinindustry’November



Inquiry into the east coast gas market—April 2016

WhethertheLNGprojectscontinuetomakeinvestmentssucienttosustainproductionwill

dependontheeconomicsofnewdevelopmentsCurrentlysomeofthesedevelopmentshave

beenputatriskbythechallengingeconomicenvironmentprecipitatedbytheseveredownturn

inthepriceofoilSomeLNGprojectshavealsoexperienceddicultiesinextractingreserves

particularlyintheBowenBasinandhigherthanexpectedcostsofproduction(box)

InthesecircumstancestheLNGprojectscouldseektolowertheircostofsupplybypurchasing

thirdpartygastosubstituteforsomeoftheirhighcostundevelopedreservesDeferring

productionwouldallowtheLNGprojectsmoretimetoworkonimprovinggasextraction

methodsandreducingthecostbasebeforeundertakingnewdevelopments

ThereforewhetherLNGprojectscontinuetoparticipateindomesticmarketstobuythirdparty

gasdependsontheglobalenvironmentandtheeconomicsofCSGdevelopment

Box Changingexpectationsabouttherecoverabilityandthecostofextracting

CSGreserves

WhenthethreeLNGprojectsweresanctionedtherewerehighexpectationsabouttheir

productionforecastsbasedonsigniﬁcantvolumesofidentiﬁedPreservesWhilein

someareasparticularlyintheSuratBasintheinitialproductionresultshavemetand

evenexceededthoseexpectationstheLNGprojectshaveencounteredchallengeswhich

putatrisktheirabilitytosustaintherequiredlevelofproductionovertheperiodoftheir

exportagreements

• Preservesdonotfullyreﬂectthelong‘tail’associatedwithCSGproduction

• lowpermeabilityespeciallyintheBowenBasincreatesuncertaintyabouttheabilityto

economicallyrecoverthosePreservesatthistime

• higherthanexpectedcostsofdevelopingCSGreservesmayrequirehigherlong-termgas

pricestosupportdevelopmentofthosereserves

CSG‘tail’

Conventionalgaswellsingoodqualityreservoirstypicallysustainhighratesofproduction

overmanyyearsBycontrasttheproductionproﬁleofCSGwellsischaracterisedbyan

initialperiodofhighproductionfollowedbyasteepdeclineinproductionrateandalong

production‘tail’thatmaylastforadecadeormoreIfthepeakproductionperwellisless

thananticipatedortheproductionrateperwelldeclinesmorerapidlytoalowerproduction

‘tail’withtimemorewellswillberequiredtosustaintherequiredlevelofproduction

BowenBasin

SomeinitialdrillingresultsintheBowenBasinhavebeenpoorerthanexpectedasaresult

oflowpermeabilityThishasincreaseduncertaintyabouttheabilityoftheLNGprojectsto

economicallyrecoverthosePreservesintheimmediatefutureSomeoftheseprojectshave

deferreddevelopmentofthosereservesandconstructionoftheassociatedinfrastructure

untiltheydeveloptechnologytounderstandhowbesttounlockthosereserves

CSGproductioncosts

WhiletheconstructionoftheLNGtrainshasbeensmootherthanmighthavebeenexpected

giventheirsimultaneousstart-upsomeLNGprojectsfoundthecostoflabourserviceand

capitalinthecourseofconstructionandtheinitialLNGproductionphasetobehigherthan

expectedWelldevelopmentcostsarenowfallingaspressureoninputcostseasesandthe

LNGprojectsbecomemoreexperiencedatdrillingandmaintainingwells

CurrentPCSGreservesarebasedonbestestimatesoffutureproductioncostsAs

discussedinsectiontherearesigniﬁcantuncertaintiesassociatedwithestimating

futureCSGproductioncostsIfCSGproductioncoststurnouttobehigherthanexpected

thiswouldrequirehigherpricestosupportdevelopmentofthosereserveswhichcouldresult

inproductiondelaysThereforeitisuncertainwhetherthetimingandvolumesofcurrent

productionforecastsofPCSGreserveswillbemet



Inquiry into the east coast gas market—April 2016

 DomesticpricesinQueenslandareshapedbyLNGnetbackprices

Gasproducersintheeastcoastgasmarketwillhaveanexportoptionfortheirgaswhileany

oftheLNGprojectsrequireadditionalgastomeettheircontractualexportcommitmentsorﬁll

spareproductioncapacityintheirtrainsThismeansthatdomesticgasusersinQueenslandwill

havetodirectlycompetewiththeLNGprojectsforanygasthatisavailableforsupplyintothe

QueenslandmarketTheamountthattheLNGprojectswouldbepreparedtopayforthisgas

representstheopportunitycostfortheeastcoastproducersofsupplyinggastodomesticgas

usersThereforeinnegotiationwithdomesticgasuserstheproducersarelikelytobeseekinga

pricethatiscommensuratewithanamounttheLNGprojectsarewillingtopay

Thepresenceofanexportoptionwillbeakeyfeatureoftheeastcoastgasmarketintothe

futureThismeansthatthedomesticgaspricesinQueenslandwilltypicallybeinﬂuenced

byLNGnetbackprices(theLNGexportpricesnettedbacktotherelevantlocation)which

representthemaximumamountsthattheLNGprojectswouldbewillingtopaytopurchasethird

partygasWhilethisislikelytobethepredominantsituationcircumstancesmayoccasionally

arisethatwillresultindomesticpricesinQueenslandbeingtemporarilydelinkedfromtheLNG

netbackprices(Box)Theremainderofthischapterfocusesonthesituationwheredomestic

pricesinQueenslandareactivelyshapedbytheLNGnetbackprices

Box CircumstancesinwhichdomesticpricesinQueenslandmaybetemporarily

shapedbythemarginalcostofgassupplyratherthanLNGnetbackprices

Whileproducersintheeastcoastgasmarketwillgenerallyhavetheoptionofsellinggasto

theLNGprojectsthepricetheLNGprojectsmaybepreparedtopayforthisgascouldvary

IncircumstanceswheretheLNGprojectsneedadditionalgastoproduceatmaximumLNG

plantcapacityortomeetshortfallsinexportcommitmentstheLNGprojectsarelikelytobe

willingtopayapriceforthirdpartygasuptotherelevantLNGnetbackpriceTheremayalso

becircumstancesinwhichtheLNGprojectswouldonlybepreparedtobuythirdpartygas

todisplacehighercostproductioninwhichcasetheywouldonlybewillingtopayapricefor

thirdpartygasuptothemarginalcostoftheproductionbeingdisplaced



SuchascenariocouldariseforexampleiftheLNGprojectshavealreadysourcedsucient

gasreservesthatcanbedevelopedeconomicallytoﬁllthetrainsInthisenvironmentthe

domesticpricesinQueenslandmaytemporarilydelinkfromtheLNGnetbackpricesasthe

LNGfacilitieshavenosparecapacitytospurtheirdemandforgasInthiscasedomestic

gascannowonlysubstituteforgasalreadybeingsuppliedtotheLNGfacilitiesandso

thepriceislikelytobeshapedbythemarginalcostofgasproductionuntiladditionalLNG

capacityiscommissionedIfLNGpriceexpectationsarehighenoughthiswillsendasignal

totheLNGproducerstoexpandexistingLNGplantcapacityorbuildanadditionaltrainIf

eitherofthesesituationsoccurthiswillincreasedemandforgastobesuppliedtotheLNG

facilitiesandlikelyleadtoareturntopricingshapedbyLNGnetbackHoweverinvestments

inLNGproductionarelumpyhighcostandgenerallyrequirelonglead-intimesThereis

alsoconsiderableuncertaintyaboutfutureoilandLNGpriceswhichcoulddelaythesupply

responseSoanyreturntoLNGnetbackpricingmaynotbeautomatic



Inquiry into the east coast gas market—April 2016

DomesticgasproducersmayalsoviewanydelinkingfromLNGnetbackpricingas

temporaryandthismayinﬂuencetheirnegotiationswithdomesticusersparticularlyfor

longer-termGSAsTotheextentthatgasproducersviewthedelinkingfromLNGnetback

pricingastemporarytheymayconsiderdeferringproductionasanalternativetosellingto

domesticusersTheattractivenessofthismaydependonwhetherproducershavealready

committedlargeirreversibleinvestmentstothedevelopmentofgas(suchasinfrastructure

development)andtheextenttowhichtheycanreduceordeferproductionfromcommitted

developmentsItwouldalsodependontheirexpectationsaboutthefutureLNGand

domesticsupplyoutlookIfproducersseedeferringproductionastheirbestoption

producersmaystillprefertousetheLNGnetbackpricestoinformtheirnegotiationswith

domesticusers

AnotherpossiblescenariocouldariseifastheresultofinternationaloversupplyofLNGthe

LNGspotpricesbecomesodepressedthatitwouldbeuneconomicfortheLNGprojects

tosellgasintheLNGspotmarketsontopoftheirexistingcontractualcommitmentsThis

maythenhavetheeectofreducingoreliminatingtheoptionfordomesticproducersof

gastosellfurthergasatLNGspotnetbackpricesAswiththepreviousexampledomestic

pricingoutcomesmaydependonlong-termexpectationsofproducersandtheirperceived

alternativestosellingtodomesticusers

CalculatingtheLNGnetbackprice

TheLNGnetbackpriceataparticularlocationiscalculatedbytakingtherelevantLNGexport

priceandsubtractingthecostofshippingliquefactionandtransmission



WhichspeciﬁcLNG

exportpriceisrelevantdependsonthepurposeforcalculatingtheLNGnetbackpriceFor

workingouttheeconomicsofLNGspotsalesthestartingpointistheLNGspotpricewhich

ﬂuctuateswithinternationalsupplyanddemanddynamicsForworkingouttheeconomicsof

theLNGprojectsmeetingtheirlong-termcontractualexportcommitmentsthestartingpoint

istheLNGexportGSApricewhichﬂuctuateswithchangesinthepriceofthecommodityto

whichthepricingformulaintheexportGSAislinked



ChartillustrateshowadeliveredLNGpricetranslatesintoanupstreamgassalespricethat

canbecomparedtopricesinthedomesticmarket

Chart CalculatingtheLNGnetbackpriceatWallumbilla

Shipping

costs

Shipping

losses

Fuel gas

Variable

opex

LNG plant

tari

Delivered ex-ship

price in Asia

Free on Board

price in Gladstone

LNG netback

at Wallumbilla

Long-run

LNG netback

price

Pipeline

tari

AU$/GJ

Illustrative short-run LNG netback pricing Long-run LNG netback pricing

 TheLNGnetbackpricesarestilllikelytosetaceilingforanamounttheLNGprojectsarewillingtopaywhichwould

becomerelevantiftheLNGnetbackpricesweretofallbelowthemarginalcostofproduction

 LNGisgenerallytradedinUSdollarsandmillionsofBritishthermalunitssoLNGexportpricestypicallyneedtobe

convertedintoAUGJforcomparisonwithdomesticgasprices

 ThepricingmechanismintheexportGSAsofthethreeQueenslandLNGprojectsislinkedtotheJapaneseCustoms

ClearancecrudeoilindexalthoughthepreciserelationshipvariesbetweenGSAs



Inquiry into the east coast gas market—April 2016

The‘Deliveredex-ship’(DES)pricerepresentsthedeliveredpriceofLNGatthedestination

portTheDESpriceisnettedbacktoGladstonebysubtractingtheshort-runshippingcosts

andshippinglossesTheshippingcostsreﬂectthecostofshippingLNGfromGladstonetothe

destinationportincludingshipchartercostsfuelportfees(loadanddischarge)andinsurance

TheshippinglossesreﬂectthecostofthevolumeofgaslostduringtransitasaresultofLNG

boil-o

The‘Freeon-Board’(FOB)pricerepresentsthepriceofLNGatthepointitisloadedontoa

shipatGladstoneTheFOBpriceisnettedbacktotheLNGnetbackpriceatWallumbillaby

subtractingtheshort-runcostofliquefactioncomprisingofthecostoffuelgasandoperating

expenditureThecostoffuelgasreﬂectsthecostofthevolumeofgasconsumedduring

theliquefactionprocesswhichprimarilyconsistsofthegasusedtofueltheLNGplantThe

operatingexpenditurereﬂectsthevariablecostoftheliquefactionprocessincludingtheuse

ofrefrigerantsrotatingequipmentmaintenancecostsservicesupportagreementcostsand

operatingsparesTheLNGnetbackatWallumbillaistheappropriateLNGnetbackpricetouse

forcomparisontodomesticgaspricesatWallumbilla

ThecalculationoftheLNGnetbackpriceatWallumbilladoesnotincludeanyallowancefor

theﬁxedcostsofLNGproductionortherecoveryofthecapitalinvestedintheLNGfacilities

(includinggastransmissionpipelinesfromwellheadstotheLNGplant)Thisisbecausethose

investmentsrepresentsunkcostswhicharenormallynottakenintoaccountinmakingshort-

termcommercialdecisionsThismeansforexamplethatiftheLNGprojectshavespareLNG

productioncapacitytheyshouldbewillingtopurchasethirdpartygasforre-saleonLNGspot

marketsaslongasthesumofthepurchasepriceandthemarginalliquefactioncostsisbelow

theFOBLNGsalesprice

Thelong-runLNGnetbackpriceinchartispresentedasahollowbarbecauseitisa

conceptualﬁgurerepresentingthepricelevelatwhichtheLNGprojectswouldmakean

acceptablecommercialreturnontheirinitialinvestmentsintheLNGfacilitiesTheLNGjoint

venturepartiessanctionedtheseprojectsonthebasisofanexpectationthattheywould

beabletoearnthemarginsrepresentedbythebarslabelled‘LNGplanttari’and‘Pipeline

tari’consistentlythroughoutthelifeoftheprojectgeneratingtherequiredrateofreturn

ontheinvestedcapitalWhetherthesemarginswillberealisedwilldependonmanyfactors

particularlythelong-termLNGpricesandtheirabilitytooptimisethecostofproductionoftheir

ownreserves

TocalculatetheapplicablepriceatanotherlocationintheeastcoastgasmarkettheLNG

netbackpriceatWallumbillaneedstobeadjustedtoaccountforthecostofgastransmission

toorfromtherelevantlocationDomesticusersoutsideQueenslandneedtoaddthecost

oftransportinggasfromWallumbillatotheiro-taketocalculatethegaspricebasedon

LNGnetbackthattheycouldcomparewithadeliveredgasoerfromanothersupplier

BycontrastgasproducersoutsideQueenslandthatwishtocomparethemaximumpricethey

mayreceivefromtheLNGprojectswithgasoersfromlocaldomesticuserswouldneedto

subtractthecostoftransportinggasfromtheuser’slocationtoWallumbilla(seeboxfora

workedexample)



Inquiry into the east coast gas market—April 2016

Box Example—thegaspricerangeinSydneybasedontheLNGnetbackprice

ThisexampleillustrateshowtocalculatetheLNGnetbackpriceatWallumbillafromagiven

LNGspotpriceandthentranslatethisintothegaspricerangeatSydneyforahypothetical

gasbuyerandgasseller

PriceDescription BuyerSeller

SpotLNG(DES)pricequoted* USMMBtu

DESpriceconvertedtoAUGJ** AUGJ

FOBprice(subtractshippingcostsandlosses)† AUGJ

TheLNGnetbackpriceatWallumbilla(subtractliquefactioncosts)‡ AUGJ

ThegaspriceatSydneybasedontheLNGnetback

– Selleralternative(subtracttransportationcosts)˜ AUGJ

– Buyeralternative(addtransportationcosts)˜˜ AUGJ

Thesetwopricesrepresentthepriceceilingandﬂoorinnegotiationsbetweenbuyersandsellers(asdiscussedindetailin

sectionbelow)

* ArgusLNGDailyFridayFebruary(Argus)

** ConversionratesAUUSandMMBtuGJ

† ShippingcostfromGladstonetoTokyoUSMMBtuorAUGJ(Argus)shippinglossesareestimatedatAU

basedonpercentlossofvolumeloadedatGladstonepricedatDESprice

‡ MarginalliquefactioncostsareestimatedatatotalofAUbasedonapercentmark-upongassalespriceatWallumbilla

ThepercentconsistsoffuelgasforLNGplantestimatedtobeaboutpercentofgasinputtotheLNGplant



and

operatingexpenditureassumedtoequatetoanotherpercent

~ SellertransportationcostsareestimatedatAUGJconsistingofAUGJfortransmissionfromSydneytoMoomba

(ﬁgure)AUGJfortransmissionfromMoombatoWallumbilla(takenasamid-pointoftherangeinﬁgure)AU

GJforestimatedprocessingtollatMoomba



andAUGJforcostofgasusedintransmissionbasedonpercent

useestimate



pricedataveragedailypricefortheSydneyshort-termtradingmarkethubfor–uptoFebruary

(AERwebsite)

~~ BuyertransportationcostsareestimatedatAUGJconsistingofAUGJfortransmissionfromWallumbillatoMoomba

(takenasamid-pointoftherangeinﬁgure)AUGJfortransmissionfromMoombatoSydney(ﬁgure)andAUGJ

forcostofgasusedintransmissionbasedonpercentuseestimatepricedataveragedailypricefortheSydneyshort-term

tradingmarkethubfor–uptoFebruary(AERwebsite)

 Pricesinthesouthernstatesdependonthelevelanddiversity

ofsupply

 Gasfromo-shoreVictoriastillﬂowspredominantlytodomesticusersinthe

southernstates

TheattractivenessoftheLNGexportoptionforgasproducersdiminishesthefurtheraway

theirreservesarefromWallumbillaGasproducersinQueenslandareinthebestpositiontosell

gastotheLNGprojectsgiventheirproximitytoWallumbillaBycontrastgasproducersinthe

GippslandOtwayandBassbasinshavetotransporttheirgasacrossasigniﬁcantdistanceto

deliverittoWallumbillaThetotalcostofgastransportationfromthegasplantsatLongfordor

IonatoWallumbillaamountstoabout–GJ(Boxesand)



Thismakesiteasierfor

domesticusersinthesouthernstatestobidthegasproducedino-shoreVictoriaawayfrom

theLNGprojectsparticularlyatloweroilprices

Theabilityofsoutherngassupplierstoﬂowsigniﬁcantvolumesofgasnorthisalsoconstrained

bycontractualandphysicalpipelinelimitationsSomesuppliersalreadyhaveestablished

transportpositionsthatlinkthesouthtothenorthallowingthemtomovegastothehighest

valuemarketHoweverthisisnotthecaseformostparticipantsinthegasmarket

SomepartsofthetransmissionchainarecontractuallycongestedForinstancetheexisting

contractualcommitmentsenablinggasfromtheCooperBasintoﬂowtoWallumbillalimitthe

amountofsparecapacityavailableforeastwardﬂowontheSWQPFurtherwinterpeaking

demandinthesouthernstatesalsorestrictshowmuchgascanﬂownorthinthewintermonths

 LewisGreyAdvisoryProjectionsofGasandElectricityUsedinLNGpreparedforAEMOAprilp

 ProductivityCommissionExaminingBarrierstoMoreEcientGasMarketsMarchappendixBp

 ChrisHarveyConsultingEnergyEciencyOpportunitiesinGasTransmissionPipelinesandDistributionNetworksprepared

forDepartmentofResourcesEnergyandTourismJunep

 Thisindicativerangeisbasedontarisapplicabletoexistingholdingsofpipelinecapacity



Inquiry into the east coast gas market—April 2016

fromVictoriaThisisbecausethepipelinecapacityontheEGPandSEAGaspipelineswouldbe

largelyutilisedtosupplySydneyandAdelaideleavinglimitedcapacitytoﬂowgasfurthernorth

Thesepipelineconstraintscanbeovercomethroughsecondarycapacitytradingandor

additionalcapitalinvestmenttoenhancephysicalpipelinecapacityHoweverthiswould

likelyincreasethecostoftransportinggastoQueenslandevenfurtherandisonlylikelytobe

economicatsigniﬁcantlyhigherLNGexportprices

TheextenttowhichsoutherngassuppliershaveanopportunitytosellgastotheLNGprojects

isalsocurrentlycontingentontheirabilitytoprocessgastothespeciﬁcationrequiredbythe

LNGprojectsandthepricetheywouldhavetopaytoaccessorbuildsuchprocessingfacilities

(seechapterforfurtherdiscussion)

Inthecurrenteconomicenvironmentthedomesticusersinthesouthernstatesremainthe

primarydestinationforgasproducedino-shoreVictoria

Box Transportinggasfromo-shoreVictoriatoWallumbilla

Gasproducedino-shoreVictoriacanbetransportedtoWallumbillaviathreeseparate

routes



TransportRoute FromprocessingfacilityinVictoriatoMoomba FromMoombatoWallumbilla

(allthreeroutes)

EasternRoute(ex-Longford) TransportviaEGPtoSydneyandthenviaMSP

toMoomba

TransportviaQSNSWQPto

Wallumbilla

CentralRoute(ex-Longford) TransportviatheDeclaredTransmissionSystem

(DTS)toCulcairnandthenviaMSPtoMoomba

WesternRoute(ex-Iona) TransportviaSEAGastoAdelaideMAPSand

thenviaMAPStoMoomba

Thetotaldistanceforeachrouteisapproximately–kmsThetotalcostof

transportationforeachrouteisabout–GJwhichincludestherespective

pipelinetaris(ﬁgure)processingtollatMoombaandcostofgasusedintransmission

ParticipationintheDTSaspartofthecentralroutealsoincursamarketparticipationfee

 Domesticusersinthesouthernstatesareincreasinglyreliantongasproduced

intheGippslandBasin

Historicallydomesticusersandretailersinthesouthernstatescouldpurchasegasfromsuppliers

ino-shoreVictoriatheCooperBasinortheSuratBasinWhilemanygasbuyersparticularly

inVictoriareliedonsupplyfromtheGBJVthecompetitionfromotherproducersparticularly

intheCooperandOtwaybasinswascriticaltopricingoutcomesreachedbygasbuyersin

negotiationswiththeGBJV(forexampleseeproductionbreakdownforinchart)

 SEAGasistheSEAGaspipelineMAPSistheMoombatoAdelaideAdelaidePipelineSystemEGPistheEasternGas

PipelineMSPistheMoombatoSydneyPipelineMoombaistheMoombaProcessingFacilityintheCooperBasinQSNis

QueenslandtoSouthAustraliaNewSouthWaleslinkandSWQPisSouthWestQueenslandPipeline



Inquiry into the east coast gas market—April 2016

Chart GasproductionintheeastcoastgasmarketexcludingQueenslandmonthsending

December

252 83 15 100 6

20%

40%

60%

80%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

100%

Gippsland

Otway

Bass

Cooper

Other

NSW

Origin (46)

AWE (5)

GBJV (250)

Other Otway (24)

BHPB (20)

Beach (22)

Santos (77)

Other (14)

Production by basin (PJ)

Total = 456 PJ

Production by producer (PJ)

250

Source UnpublishedEnergyQuestdataACCCanalysis

ThecompetitivedynamicsinthesouthernstatesaredeterioratingconsiderablyTheproduction

intheSuratBasinispredominantlydedicatedtosupplyingtheLNGprojectsAsigniﬁcant

portionofmedium-termproductionfromtheCooperBasinhasalsobeencommittedtothe

LNGprojects(asdiscussedinsection)GasproductionintheOtwayandBassbasinsisin

declinewithfewnewprojectsidentiﬁedtomaintainproductionplateauintothefutureSince

productionintheOtwayBasinhasfallenbypercentperannum





OnFebruaryAGLannouncedthatitwouldnotproceedwiththeGloucesterGasProject

andwouldceaseproductionatitsCamdenGasProjectraisingquestionsaboutthefutureof

CSGinNewSouthWalesMoratoriaononshoregasexplorationanddevelopmentaswellas

otherregulatoryimpedimentsinNewSouthWalesandVictoriarestrictdevelopmentofonshore

conventionalandunconventionalreservesinthosestates

Inthisenvironmentdomesticusersandretailersinthesouthernstatesarebecominghighly

reliantono-shoregasproductionfromtheGippslandBasinTheGBJVholdsalargeportionof

theremaininguncontractedlowcostconventionalgasreservesintheeastcoastgasmarketand

isnowakeysourceofgasavailableintheshort-tomedium-termTheGBJVhasgivenevidence

thatforithassoldthehighestvolumeofgasinthehistoryoftheGippslandBasinUntil

thesecompetitivedynamicschangetheGBJVwillhavethebulkofmarketshareandwillhold

signiﬁcantmarketpowerinthesouthernstates

TheInquirynotesAGL’srecentagreementwithCooperEnergytobuyuptoPJofgasfrom

theSoleprojectovereightyearsandpotentiallyuptoPJperannumfromtheMantaproject





ThiscouldresultinnewalternativegassupplycomingoutoftheGippslandBasinalthoughthis

isarelativelysmallvolumeofgas

 PricingoutcomesinthedomesticGSAnegotiationsareshapedbythe

competitivedynamicsinthesouthernstates

Intheabsenceofawidelyacceptedexternalreferencepriceintheeastcoastgasmarket

thepricespaidbydomesticusersandretailersunderbespokeGSAswithgasproducersare

determinedbytheoutcomeofbilateralnegotiationsbetweenthepartiesAsdiscussedinthe

previoussectionstheLNGprojectshavechangedthealternativesavailableinthesenegotiations

tobothbuyersandsellersofgasinthesouthernstatesbycreatingopportunitiesforgas

 EnergyQuestEnergyQuarterlyMarchandEnergyQuestEnergyQuarterlyMarch

 CooperEnergy’sASXannouncement‘GassalesagreementwithAGLforSoleplusMantaoption’March



Inquiry into the east coast gas market—April 2016

producerstosellgasforexportandbiddingawayfromdomesticbuyerssigniﬁcantvolumesof

gasparticularlyfromtheCooperBasin

Theimpactofthesechangesonpricingoutcomesinthesouthernstatescanbeexplainedvia

thebargainingframeworkillustratedinchartThisframeworkisbasedontheprevailinggas

supply-demandbalanceintheeastcoastgasmarketwherepricesinQueenslandareshaped

byLNGexportprices(asdiscussedinsection)andgasproducersinthesouthernstatescan

meetthedomesticdemandfromtheirownproductionwithoutrequiringgasfromQueensland

Materialchangestothisunderlyingsupply-demandbalancearelikelytoalterthepricing

dynamics(box)

Asdiscussedinsectiongasproducersinthesouthernstatesnowhavetheoptionofselling

gastotheLNGprojectsalthoughtheattractivenessofthisoptionvarieswithﬂuctuationsin

LNGexportpricesWhiletheoptiontosouthernproducersofsellinggastotheLNGprojects

remainsthepricetheycanachievefromsellingtoexportersrepresentstheﬂoorpriceintheir

negotiationswithdomesticgasbuyersInchartthisisrepresentedbythe‘LNGnetback—

selleralternative’whichisderivedbycalculatingtheLNGnetbackpriceatWallumbillaand

subtractingthecostoftransportinggasfromthebuyer’so-taketoWallumbilla(asper

box)Theﬂoorpricevarieswiththepriceofoilgiventhecurrentlinkbetweenoilprices

andLNGexportpricesOncetheLNGoilpricefallssucientlylowtomakeituneconomic

forgasproducerstoselltoexportersthemarginalcostofsupplybecomesthepriceﬂoor

innegotiations

Asdiscussedinsectiongasbuyersinthesouthernstatesarenowheavilyreliantonsupply

fromtheGippslandBasinGiventhelackofalternativesouthernproducersthatareabletooer

signiﬁcantvolumesofuncontractedgasabuyer’salternativeinthenegotiationwiththeGBJV

islikelytobeuncontractedgasavailableinQueensland



GiventheQueenslandmarketisnow

beingdrivenbytheLNGfundamentalssouthernbuyerswouldhavetooertheLNGnetback

priceatWallumbillatonorthernproducerstobidthisgasawayfromtheLNGprojectsandthen

transportthisgastotheirlocationInchartthisisrepresentedby‘LNGnetback—buyer

alternative’(asperbox)Thispricegenerallyrepresentstheceilinginbuyer’snegotiations

withtheGBJVAtveryhighoilpricestheceilingbecomesthebuyer’smaximumwillingness

topay

 ThissituationislikelytoariseifthegasproducedfromexistingandplanneddevelopmentsintheOtwayBassandCooper

basinsisalreadycontractuallycommittedtotheLNGprojectsorotherbuyersandnonewinvestmentismadetoproduce

gasinexcessofthosecommitments



Inquiry into the east coast gas market—April 2016

Chart Bargainingframeworkforgassupplynegotiationsinthesouthernstates

Conceptual buyer’s maximum willingness to pay

Gas price

AU$/GJ

LNG netback—buyer alternative

Conceptual marginal cost of supply

LNG netback—seller alternative

Not to scale

Oil price

US$/barrel

Transport costs

Note ThischartpresentsastylisedbargainingframeworkThepricesachievedbypartiesinindividualnegotiationswillvaryPrices

underbilateralGSAsarealsoinﬂuencedbythespeciﬁcnon-pricetermsandconditionsagreedbytheparties

Thegapbetweenthebuyerandselleralternativesconsistsoftwocomponents—thecosttothebuyeroftransportinggas

fromWallumbillatotheirlocationplusthecosttotheselleroftransportinggasfromthebuyer’slocationtoWallumbilla

includingprocessingatMoombaandgaslossesThebuyer’smaximumwillingnesstopayandthemarginalcostofsupplyin

thischartarepurelyillustrative

Thegapbetweenthebuyerandselleralternatives(cappedatthebuyer’smaximumwillingness

topayandwithaﬂoorofthemarginalcostofsupply)representsthemaximumrangeof

possiblepricingoutcomesingassupplynegotiationsbetweentheGBJVandgasbuyersinthe

southernstatesatagivenpriceofLNGoilThesizeofthegapdependsonthecostoftransport

fromWallumbillatothebuyer’slocationandwillthereforebelargerthefurtherawaythegas

buyersarelocatedfromWallumbilla

Thepricesateachendofthisrangeareunlikelytoberealisedinpracticeforanumberof

reasonsincludingbecausethegasmarketisunlikelytobeperfectlycompetitiveorfully

monopolisticthenegotiatingpartiesdonothaveperfectinformationaboutthestateofthe

marketandmayhavedierentexpectationsaboutthecurrentandfuturemarketconditions

NeverthelessthereisstillaconsiderablerangeofpossiblepricingoutcomesWherethe

domesticgaspriceswillultimatelyendupislikelytodependonavailabilityanddiversityofgas

supplyinthesouthernstates

IntheabsenceofcompetitiveconstraintstheGBJVwillholdsigniﬁcantmarketpowerand

islikelytochargedomesticusersapriceapproachingthebuyeralternativeItisimportantto

notethatwhilethecostsofgasproductionandprocessingintheGippslandBasinarerising

thesecostincreasesarenotlikelytobetheprimarydriversofdomesticpriceoutcomesin

thisscenario

Thebargainingframeworkdemonstratesthattherearesigniﬁcantgainsthatcouldbe

achievedfrombringingonnewsupplyandincreasingthediversityofsuppliersinthesouthern

statesIfsigniﬁcantcompetitioninthesouthernmarketre-emergesthepricingoutcomesof

negotiationsarelikelytofallclosertotheselleralternativepriceIncreasedcompetitioncould

potentiallyresultinsoutherngasuserspayinguptoGJlessfortheirgaswhichcouldbe

asmuchasonethirdofthedeliveredgasprice(withmarginalcostofsupplyandthebuyer’s

maximumwillingnesstopayinﬂuencingthesizeofthegapatcertainoilprices)



 Thegainfromcompetitionispresentedasarangeinpartduetofactorsmentionedearlieraectingactualpricing

outcomesandinpartbecausetheextenttowhichdomesticusersinthesouthernstatesareaectedbytransportation

costsvariesForexamplebecausethecostoftransportinggasfromWallumbillatotheuser’slocationandviceversais

higherforuserslocatedinVictoriathanNewSouthWalesthereisagreaterrangeofpossiblepricingoutcomesinVictoria

comparedtoNewSouthWalesandhenceagreaterpotentialbeneﬁtfromincreasedcompetition(allelsebeingequal)



Inquiry into the east coast gas market—April 2016

Thesizeofanygainsthatcouldbeachievedfromincreasedcompetitioninthesouthernstates

dependsonthefactorsmentionedearlierandalsoonthecostandlocationofnewgassupply

Ifthedeliveredpriceofgasofamarginalproducerinthesouthishigheitherbecauseofhigh

costorproductionorbeinglocatedfarfromthedemandcentresinthesouththenthissetsa

highﬂoorinpricingnegotiationsforallsuppliersinthesouthernstatesInthiscontextmoratoria

andotherregulatoryimpedimentsinNewSouthWalesandVictoriamaybepreventinglower

costgasreservesfrombeingdevelopedthatcouldpotentiallyexertthelargestdownward

pressureonpricesinthesouthernstates(refertochapterforfurtherdiscussion)

Thebargainingframeworkalsohighlightstheeectofpipelinetarisacrosstheeastcoast

gasmarketonpricingoutcomesinthesouthernstatesAsthegapbetweenbuyerandseller

alternativesisdeterminedbythetransportcostsbetweenWallumbillaandthebuyer’slocation

anymonopolypricingbypipelineoperatorscouldbeexacerbatingthepricingoutcomesfor

domesticusersinthesouthernstatesintheenvironmentwheregaspricesareshapedbythe

buyeralternative(discussedfurtherinchapter)

Whilethebargainingframeworkisavaluabletoolforanalysingtheparametersinanegotiation

forsupplyofgasitisimportanttoemphasisethatitcannotaccuratelypredictthepricing

outcomesofindividualnegotiationsAsmentionedearlierthisisinpartbecausekeyinformation

aectingindividualnegotiationsparticularlyinrelationtouncontractedsupplyandmarket

pricescanbesubjecttoconsiderableuncertaintyinamarketdominatedbybilateralconﬁdential

agreementsBargainingpartiescanhavedierentperceptionsorexpectationsaboutthe

prevailingandfutureLNGfundamentalstheLNGnetbackpricestransportcostsmarginalcosts

andalternativesavailabletotheircounterpartiesThisgenerallyfavoursproducersorretailers

overendusersastheyaretypicallyexposedtoagreaternumberofnegotiationsandwill

thereforehaveabetterinsightintoprevailingmarketconditionsThereforeifareliableindicative

pricewaspubliclyavailableitcouldhelpdomesticusersinbargainingwithsuppliers(discussed

furtherinchapter)

Box Bargainingframeworkunderadierentsupply-demandbalance

Theparametersandpricingoutcomesofthebargainingframeworkmaybedierentifthe

supply-demandbalanceintheeastcoastgasmarketchanges

Gasshortageinthesouthernstates

Therecouldbecircumstanceswherethegasproducersinthesouthernstatesareunable

toeconomicallyproduceenoughgastomeetthesoutherndemandduetodepletionof

conventionalreservoirsGasfromQueenslandproducerswouldberequiredtobalance

themarketInthisscenariothegaspricesinthesouthernstatesarelikelytobeshaped

bythebuyeralternative(theLNGnetbackpriceplustransportcostfromWallumbilla

tobuyer’slocation)ratherthanthecompetitivedynamicsinthesouth(thatisakinto

import-paritypricing)

ChangingLNGdynamics

Asdiscussedinboxtheremaybesomecircumstanceswhendomesticpricesin

Queenslandtemporarilyde-linkfromtheLNGnetbackpricingThesameisevenmore

likelytooccurinthesouthernstatesgiventheirdistancefromWallumbillaIfthisoccurs

andthemaincompetitivealternativecomesfromsupplierslocatedinQueenslandthen

themarginalcostofCSGproductionwouldinﬂuencethepricingoutcomesinthesouth

FurtherifcircumstanceschangeinawaythatpositiontheCooperBasinproducersasa

genuinecompetitivealternativetotheGBJVthenthemarginalcostofconventionalor

unconventionalCooperBasinproductionwouldberelevant



Inquiry into the east coast gas market—April 2016

3 The supply outlook across the east coast gas

market remains uncertain

Akeyquestionfortheeastcoastgasmarketiswhethertherewillbesucientsupplyover

timetomeettherapidlyincreasingdemandforgasWhileitisclearthattherearesucient

Preservesandcontingentresourcesintheeastcoastgasmarkettomeetlikelydemandfor

theforeseeablefuturewhetherthesereservesandresourceswillbedevelopedintimetomeet

increasingdemandisuncertain

FromaboutproductionofPreservesfromprojectsthatarealreadyproducingisnot

likelytobesucienttomeettheexpecteddemandintheeastcoastgasmarketAnumberof

producersintheeastcoastgasmarkethaveidentiﬁedspeciﬁcadditionalprojectsthatcould

bedevelopedandhaveprogressedplanstoproducegasfromtheassociatedreservesIfthese

producerssanctiontheseprojectsandmeettheircurrentproductionforecaststhereislikely

tobesucientgasintheeastcoastgasmarkettomeetdomesticdemandandexistingLNG

exportcommitmentsuntilatleastFurtherdevelopmentsofadditionalreservesand

resourcesmayberequiredtoproduceenoughgastofullyutilisetheproductioncapacityofthe

LNGtrains

Thereareanumberoffactorsthatcouldaectthetimingandvolumeofgasproductionfrom

theidentiﬁedundevelopedprojectsLowoilpricesareimpactingontheabilityandincentives

ofgassupplierstomaketheinvestmentnecessarytobringtheundevelopedprojectsinto

productionLowLNGspotpricesarereducingthepricestheLNGprojectsarewillingtopay

forthirdpartygaswhichmayalsoresultinsomesuppliersdelayingsanctioningtheseprojects

Furthermajorsourcesofsupplythathistoricallyhavesuppliedtheeastcoastmarketarefacing

increasingproductioncostsanduncertainties

Therearealsoanumberofadditionalfactorslimitingnewgasdevelopmentsandtherateat

whichgasresourcesarematuredintoreservesMoratoriaandotherregulatoryimpedimentsin

NewSouthWalesandVictoriaarepreventingorrestrictingnewdevelopmentsinthosestates

Lackofbipartisansupportforon-shoredrillingintheNorthernTerritoryiscreatinguncertainty

aboutthedevelopmentofresourcesinthatterritoryEntryintoupstreamproductionby

juniorexplorersandproducersisdicultduetothehighcostsandrisksassociatedwithgas

productionDierencesingasspeciﬁcationrequirementsbetweentheLNGprojectsandother

userscouldcausebifurcationinthemarketandpotentiallyaectdevelopmentofresources

Inthisenvironmentitisimportantforpolicymakerstotaketheseissuesintoaccountwhen

consideringpoliciesthatmayimpactongassupplyandonpricespaidbydomesticgasusers

TheInquiryencouragesgovernmentstoconsideradoptingregulatoryregimestomanagethe

riskstocommunitiesposedbyindividualgasdevelopmentsonacasebycasebasisratherthan

usingblanketmoratoriaTheInquirydoesnotsupportintroductionofgasreservationpoliciesas

theyarelikelytoadverselyimpactonfuturegassupply

 Alargevolumeofgasreservesandresourcescouldbedeveloped

tomeetexpectedmarketdemand

Chartinchapterpresentedtheprojectedmedium-termsupplyanddemandforecastinthe

eastcoastgasmarketTheproductionforecastwaslargelybasedondataobtaineddirectlyfrom

producersandwascharacterisedaseitherrelatingtodevelopedsupplyorundevelopedsupply

Thedevelopedsupplyincludedforecastproductionfromcurrentlyproducingorsanctioned

projectsProductionfromtheseprojectsishighlylikelytooccurasthecapitalinvestment

toundertakethatproductionhasalreadybeenmadeorcommittedTheexacttimingofgas

developmentfromtheassociatedreservesissubjecttosomeﬂuctuationsforcommercialor

technicalreasonsbuttheforecastvolumeofproductionisalsomadewithareasonabledegree

ofcertaintyastheseprojectsarealreadyproducingorhaveundergoneextensivetesting



Inquiry into the east coast gas market—April 2016

TheundevelopedsupplyincludedforecastproductionofPreservesinprojectsthathavenot

yetbeensanctionedProductionforecastsinrelationtotheseprojectsaremoreuncertain

Theseprojectsrequireadditionalinvestmentstobeapprovedbeforeproductioncancommence

Theseinvestmentswillneedtomeettheﬁnancialtargetsoftherelevantcompaniesatthetime

theyaremadewhichwilldependonexpectationsaboutfuturemarketconditionsatthetimeof

investmentInadditionmostundevelopedprojectshavelesstestingandothertechnicalwork

associatedwiththemsothevolumeexpectationsarelesscertain

Despitethistheundevelopedsupplyforecastsinchartrelatetoidentiﬁedprojectswhich

therelevantproducersexpectedtoproceedatthetimetheyprovidedthedataManyproducers

haveidentiﬁedadditionalgasreservesorresourceswhichmaypotentiallybedevelopedat

somepointinthefuturebutwhichtheyhavenotincludedintheirownproductionforecasts

duetocommercialortechnicaluncertaintiesMoreuncertaindevelopmentsofthistypearenot

includedintheforecastinthisreport

Chartassumesthatdevelopedsupplyinchartwillbeproducedandpresentsonlythe

projectedundevelopedsupplyagainsttheremainingunfulﬁlleddemandThatisthetopline

inchartrepresentsthemaximumlevelofunfulﬁlleddemandthatwouldbeexpectedtobe

inthemarketifnoneoftheforecastundevelopedreservesweredeveloped(thatisthegap

between‘DomesticdemandandmaximumLNGcapacity’and‘developedsupply’inchart)

Thelowerlineinchartrepresentsthelevelofunfulﬁlleddemandthatwouldbeexpectedif

theLNGprojectssoughtonlytomeettheirexistingcontractualcommitmentsandnotattempt

tofullyusetheirplantsTheundevelopedsupplyfortheLNGprojectsandotherproducers

inchartisthesameasinchartAhypotheticalArrowforecasthasalsobeenadded

forcompleteness

Chart Unfulﬁlleddemandandforecastofproductionfromidentiﬁedundevelopedprojects–

Forecast supply and demand (PJ)

Unfulﬁlled demand (domestic demand and LNG export GSAs)

Unfulﬁlled demand (domestic demand and maximum LNG capacity)

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

200

400

600

800

1000

1200

1400

1600

Undeveloped supply—Arrow (hypothetical)

Undeveloped supply—other producersUndeveloped supply—LNG projects

Source DataobtainedbytheACCCduringtheInquiryEnergyQuestEnergyQuarterlyMarchandAEMO’sNationalGas

ForecastingReport

Chartshowsthatgasfromundevelopedprojectswillneedtobebroughtintoproductionin

ordertomeetexpecteddomesticdemandandLNGexportcontractualcommitmentsbeyond

HoweverasnotedaboveatthetimeofprovidinginformationtotheInquirytherelevant

producersplannedtodevelopthereservesinthe‘undevelopedsupply—LNGprojects’and

‘undevelopedsupply—otherproducers’categoriesinlinewiththisforecastIftheseexpectations

aremetthenthereislikelytobesucientgasinthemarkettomeetdomesticandLNGexport

contractdemanduntilatleast



Inquiry into the east coast gas market—April 2016

ChartalsoshowsthatthereisverylikelytobesparecapacityintheLNGtrainsuntilat

least(thegapbetweenthetoplineandundevelopedsupply)Thereisalsolikelytobe

somesparecapacityintheLNGtrainsbeyondthatunlessArrow’sreservesaredeveloped

(andprovidedsuchdevelopmentdoesn’tsigniﬁcantlydisplacedevelopmentofotherreserves)

Theundevelopedprojectsinchartareexpectedtoproducegasfromthreecategories

ofreserves

• LNGreservesTheseareCSGreservesheldbytheLNGprojectsDevelopmentofthese

reservesovertimewassanctionedintheinitialdecisiontoproceedwiththerelevantLNG

projectHoweverduetothenatureofCSGreservesonlyaproportionoftheinfrastructure

(includingwellspipelinesandprocessingfacilities)neededtoextractthisgaswasbuiltat

thestartoftheprojectandcontinualadditionalinvestmentisrequiredovertimetomeetthe

initially-proposeddevelopmentpathTheLNGprojectshaveastrongincentivetodevelop

theirreservesparticularlyinordertomeettheirexportcontractcommitmentsbutonlyifthe

incrementalinvestmentiscommerciallyattractiveatthetimeitactuallyneedstobemade

• Arrowgasreserves(hypothetical)TheInquiryisnotawareofanyﬁrmcommercialplan

todeveloptheArrowgasreservesinQueenslandAsdiscussedinmoredetailbelow

thehypotheticalestimateprovidedinchartisbasedonpublicinformationregarding

thepotentialsizeandearliestpossibletimingofdevelopmentofthosereservesThis

estimateisprovidedtodemonstratethepotentialsizeoftheArrowdevelopmentrelative

tootherundevelopedreservesinthemarketandshouldnotberegardedasaforecastof

likelyproduction

• OtherreservesTheprojectsinthe‘otherproducers’categoryrelatetoundevelopedreserves

ontheeastcoastthatdonotfallintotheabovetwocategoriesThesereservesincludeboth

conventionalandunconventionalreservesacrosseachofthemajorbasinsontheeastcoast

Beyondtheprojectsincludedinthisforecastthereareanumberofotherpotentialgasresource

developmentsandnewexplorationprojectsandopportunitiesacrosstheeastcoastgasmarket

TheseincludespeculativeunconventionalprojectsinQueenslandSouthAustraliaandthe

NorthernTerritoryandpotentialnewgasﬁeldsindeeperwaterfurtheroshorefromVictoriaIn

additiontherecentplannedconnectionoftheNorthernTerritorytotheeastcoastgasmarket

representsamajornewpotentialsourceofsupplyinthelongerterm(discussedfurtherbelow)

TheInquiryhasnotattemptedtoforecastthevolumeofgasthatcouldbeproducedfromsuch

projectsalthoughifsuccessfullyexploredandeconomictodeveloptheywillbeimportantfor

newsupplyintothefuture

 Therearesigniﬁcantcommercialuncertaintiesassociatedwith

developmentofreservesandresources

 Lowoilpricesreducetheinvestmentfundsavailableforgasexplorationand

development

Amajorfactoraectingthesupplyoutlookfortheeastcoastgasmarketisthecurrentoilprice

AsdiscussedinchaptertheLNGprojectshaveresultedintheintroductionofoil-linkedpricing

intheeastcoastgasmarketThismeansthatthecommercialincentivestodevelopgasonthe

eastcoastarelinkedtotheglobalpriceofoilTheoilindustryhashistoricallybeencharacterised

bycyclicalpriceswherenewinvestmentincreaseswithpriceupswingsandexplorationand

developmentlevelscontractaspricesfallBecauseoilprojectscantakeuptoyearsfrom

initialexplorationtoresultinproductionthemarketresponsetoshort-termpricesignalscan

leadtounderinvestmentinfutureproductionwhenoilpricesarelowandoverinvestmentwhen

oilpricesarehigh

TherealaveragepriceofoilinthepostOPECperiodisaboutUSbarrel(-in

dollarschart)ThenominalpriceofoilaveragedaboveUSbarrelformostof-

SincethenoilpriceshavefallensigniﬁcantlytoaslowasUSbarrelinJanuaryAs

atApriloilpriceswereaboutbarrelwhichrepresentsareturntoapricelevelcloser

tothelong-runrealaverageprice



Inquiry into the east coast gas market—April 2016

Chart ReallongtermoilpricesUSbarrel

US$ 2014 Average (1861–2014) Average (1970–2014)

$20

$40

$60

$80

$100

$120

$140

1861

1866

1871

1876

1881

1886

1891

1896

1901

1906

1911

1916

1921

1926

1931

1936

1941

1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

2016

2014 US$/barrel

Source BPStatisticalReviewofWorldEnergy

Lowoilpricesreducetheinvestmentfundsavailableforoilandgasexplorationandproject

developmentintheeastcoastgasmarketinanumberofwaysSomeproducersincluding

theLNGprojectsandeachofthelargedomesticsuppliers(SantosOriginandtheGBJV)are

businesseswithsigniﬁcantoilexposurearisingfrombeingapartytoorhavingasigniﬁcant

ﬁnancialinterestinoil-linkedGSAsorbybeinginvolveddirectlyintheproductionandsaleof

oilThelowoilpriceaectsthecashﬂowandbalancesheetofthesecompaniesandthelenders

andshareholdersofthesecompaniesarelesswillingtoprovideadditionalfundstoﬁnance

explorationwhenoilpricesarelowAnexampleoftheimpactofoilpricesonbusinesseswith

directexposuretotheoilpriceisthebillionimpairmentofCooperBasinassetsannounced

bySantosinFebruaryduetoanupdatetotheiroilpriceestimate



Asdiscussedfurther

inchaptertheeectofchangesinoilpriceforecastsonreservesiscurrentlyreportedto

thepubliconanadhocbasisbytherelevantcompaniesOthercompanieswithoutdirectoil

exposuremayfacedicultiesinobtainingﬁnancetofundprojectsbecauseinvestorswillseelow

oilpricesasasignaloflowfuturegaspricesintheeastcoastgasmarket

BothAPLNGandGLNGhavestatedthattheyarecashﬂowpositiveataverageoilpricesof

aroundUS–perbarrel



Atoilpricesbelowthisleveltheseprojectswillfacedicult

decisionsaroundtheinvestmentsrequiredtomaintainsteadystateproductionwhichwill

haveatotalvalueofbillionsofdollarsAsaresulttheseprojectsmayconsideroptionssuch

aspurchasingadditionalthirdpartygasifitisavailableinacontractuallypermissiblelocation

andoncommerciallyattractivetermsorrenegotiatingthetermsoftheirexportGSAswith

theircustomers

Thereforeifthecurrentlowoilpricescontinueforanumberofyearsmajordomesticproducers

mayﬁnditmorediculttoinvestintheircurrentlyproposeddevelopmentopportunitiesand

signiﬁcantvolumesofcurrentlyundevelopedforecastfutureproductionintheeastcoastgas

marketmayfacedelays

 SantosASXannouncement‘ImpairmentofAssetsnon-cashchargeofbillionaftertax’February

 OriginEnergyinvestorpresentation‘UpdateonAmendedLoanFacilitiesandAPLNG’DecemberandSantos

GLNGfactsheetOctober



Inquiry into the east coast gas market—April 2016

 ThevolumetimingandmarketeectofArrow’sreservedevelopmentis

uncertain

TheArrowJointVentureholdsthemostsigniﬁcantuncommittedgasreservesintheeast

coastgasmarket(table)ThesereservesconsistofCSGintheBowenandSuratbasins

ArrowinitiallyproposedtousethegasinthesereservestounderpinafourthLNGprojectin

QueenslandbutShellformallyannouncedthecancellationofthisprojectinearly

Table ArrowoperatedreservesatFebruary

Surat

(PJ)

Bowen

(PJ)

Total

(PJ)

ArrowPreserveestimates   

Source EnergyQuestEnergyQuarterlyMarch

Note TheestimatespresentedinthistablearebasedonreservesinArrowoperatedareasThisincludesPJofArrow-owned

reservesandPJofreservesownedbyotherparties

ThemajorityofArrow’sreservesareintheSuratbasinArrowhasanapprovedenvironmental

impactstatementinrelationtoitsSuratGasProjectunderwhichitproposedtodevelopreserves

uptoproductionofoneLNGtrainperyear(~PJ)usingapproximatelywellsMuch

ofArrow’sSuratacreageislocatedinareaswherethereissomeexistingCSGinfrastructure

particularlybelongingtoQGCasubsidiaryoftheBGgroupShellhasstatedthatthemerger

betweenShellandBGwhichwascompletedonFebruaryisthebestwaytobring

ArrowgastomarketasitwillenablebothArrowandQGCtoaccessexistingpipelinesand

processingfacilitiesintheSuratBasin



TheArrowreservesintheBowenBasinarecurrentlynotconnectedtoGladstoneortheeast

coastgasmarketBringingthisgastomarketwouldrequiretheconstructionofapipelineof

approximatelykmArrowhasanapprovedenvironmentalimpactstatementinrelationtothe

BowenGasProjectwhichdescribesaprojectscaleinvolvinguptowellsoverthe-year

lifeoftheprojectInSeptemberArrowannouncedthattheprojectwasenteringintoa

front-endengineeringanddesignphaseArrowexpectedthatthiswouldtakeaboutmonths

howeverithasnotyetannouncedtheresultofthisphase

IfeitheroftheproposedmajorArrowgasprojectsweredevelopeditwouldbeasigniﬁcant

sourceofgasproductionintheeastcoastgasmarketArrowstatesthatphaseoneconstruction

ofitsSuratGasProjectwouldtakeapproximately–years



Thistimeframeandthestated

potentialtoproduceuptooneLNGtrainofgasperyearisthebasisforthehypothetical

estimateofArrow’sproductioninchart

AsshowninchartitispossiblethatdevelopmentoftheArrowgasreservescouldincrease

supplyabovemarketdemandAsdescribedinboxthisisoneofthescenariosthatcould

causedomesticpricestobecomedelinkedfrominternationalLNGpricesatleastforaperiod

oftime

HoweverthereareanumberoffactorsthatreducethelikelihoodofthisscenariodevelopingIn

particularifamajortrancheofArrow’sgaswasdevelopeditisprobablethatthisdevelopment

woulddisplacethedevelopmentofsomehighercostgasinthemarketThisisparticularlylikely

tobethecaseiftheeectofbothdevelopmentsgoingaheadwouldbetocausethemarketto

beoversuppliedrelativetothecapacityoftheLNGfacilitiescausinggaspricesintheeastcoast

gasmarkettopotentiallyfallbelowtheLNGnetbackpriceSuchasituationcouldunderminethe

economicsoftheinvestmentswhichcouldgeneratesuchoversupply

TheInquiryexpectsthatdevelopmentofArrow’sgaswouldbeunderpinnedbyalarge

foundationGSAfromanLNGprojectastheprojectrequiresafoundationGSAofagreatersize

andlengththananydomesticcustomerwouldbeabletooerWhiletheInquiryisnotaware

ofanyspeciﬁcbusinessplantodevelopArrow’sgasatthisstagethemergerbetweenBGand

Shellmayoerthisgasaclearerpathtomarketthanhaspreviouslyexisted

 ShellAustraliaChairmanAndrewSmithsaysLNGneededtodevelopArrowgasSydneyMorningHeraldNovember



 ArrowSuratGasOverviewNovember



Inquiry into the east coast gas market—April 2016

 TheNorthernGasPipelineopensupanewpotentiallong-termsourceofsupply

buttheextentoffuturedevelopmentiscurrentlyuncertainduetolackof

bipartisansupportforonshoredrilling

InNovembertheNorthernTerritorygovernmentannouncedthatithadselectedJemena

toconstructapipelinetoconnecttheNorthernTerritorywiththeeastcoastgasmarketforthe

ﬁrsttimeThepipelinenamedtheNorthernGasPipeline(NGP)byJemenawillrunbetween

TennantCreekandMtIsaandisexpectedtostartoperatingin





JemenarecentlyannouncedthatthesizeoftheplannedNGPwillallowfortransportationof

approximately–PJofgasperannum



Whilesuchvolumeswouldberelativelymodest

inthecontextoftheoveralleastcoastgasmarkettheywouldstilladdimportantincremental

volumestodomesticsupplyinQueenslandInadditiontheNGPisdesignedtobescalableif

furthergasreservesintheNorthernTerritoryaredeveloped



Providedaccessonreasonable

termstoallrelevantpipelinesisavailabletoprospectivesuppliersintheNorthernTerritorythis

connectioncouldstimulatenewgasexplorationandpotentialnewgasdevelopmentinthe

NorthernTerritory

ThereisalargepotentialgasresourceintheNorthernTerritoryTheNorthernTerritory

Government’sestimateisthattheremaybeinexcessofPJofshalegasintheTerritory





AnumberofcompaniesincludingOriginSantosPangeaResourcesandINPEXareactively

exploringorﬁnalisingvariousapprovalsandagreementsinadvanceofexploringforonshoregas

intheNorthernTerritoryHoweveritisemphasisedthatagreatdealofworktimeandcapitalis

requiredtoproveupthesepotentialresourcesandrecenthistoryacrossanumberofbasinsboth

inAustraliaandinternationallyshowsthatactualproductionmaynotmeettheinitialprojections

AlthoughthisgaswouldentertheeastcoastgasmarketatMtIsainQueenslandithasthe

potentialtoassistusersacrosstheeastcoasttosourcegasoncompetitivetermsovertime

TheintroductionofgasfromtheNorthernTerritorytoMtIsawouldenablegaswhichwould

otherwisehavebeenneededtosupplyusersinMtIsatobesuppliedtootherlocationsOver

timeifthevolumessuppliedviathepipelineincreaseadditionalgascouldbemadeavailable

tousersacrosstheeastcoastgasmarketHoweverthefurtherthoseusersarelocatedfrom

theNorthernTerritorythemoreexpensiveitwouldbetotransportthegasfromtheNorthern

Territorytothoseusers

OveralltheNGPisapositivedevelopmentfortheeastcoastgasmarketasitenablesthe

NorthernTerritorytobepotentiallyamajornewsourceofgastomeeteastcoastdemandin

thelongtermHoweveritiscurrentlyuncertaintowhatextentoroverwhattimeperiodthese

shalegasresourceswillbecommerciallyextractedWhilethechancethattheywillbeextracted

soonerhasincreasedduetotheNorthernTerritorybeingconnectedtoamajornewmarket

manyresourcedevelopersarecurrentlydeferringinvestingingasdevelopmentduetothelack

ofbipartisansupportforonshoredrillingThishasresultedinJemenareducingthesizeofthe

plannedNGPbyaboutaquarterfromthesizeitinitiallyplannedwhenitwonthecontractfrom

theNorthernTerritorygovernment



 Therecouldbesigniﬁcantreductioninproductionfromtraditionalsourcesof

domesticsupplyinthesouthernstates

TheLNG-drivenincreaseingasdemandintheeastcoastgasmarkethascreatednewsupply

opportunitiesfortraditionaldomesticgassuppliersThesenewsupplyopportunitieshave

resultedininvestmentinnewsupplybeingmadeearlierthanitotherwisewouldhavebeen

Howeverthisincreaseinsupplymeansthattheeasiertoextractresourcesatmajorﬁeldswill

bedepletedmorequicklythantheyotherwisewouldhavebeenIntheabsenceoffurther

explorationandinvestmentwhichisuncertainandcostlythereisapotentialfordeclinein

supplyfromthesesources

 ThisplannedpipelinewaspreviouslyreferredtoastheNorthEastGasInterconnector

 ‘JemenaforcedtoreduceNTgaspipelinesizeamiddrillingopposition’TheSydneyMorningHeraldApril

 Mediarelease‘NTannouncesJemenatobuildgaspipelinetoeastcoast’November

 SeehttpwwwcorentgovauContentFileInvestmentAlertShaleGasPotentialpdf

 ‘JemenaforcedtoreduceNTgaspipelinesizeamiddrillingopposition’TheSydneyMorningHeraldApril



Inquiry into the east coast gas market—April 2016

TheCooperBasinisanexampleofaconventionalgasproductionﬁeldthathasexperienced

accelerateddevelopmentasaresultofincreasedLNGdemandInSantosenteredintoan

agreementwithGLNGtosupplyPJofgasoveraperiodofyears(theHorizonGSA)





AtthetimeSantosindicatedthatthisGSAwouldbeusedtounderwritethelong-termfutureof

theCooperBasinSantos’jointventurepartnersintheCooperBasinOriginandBeachelected

nottosupplytheirvolumesintotheHorizonGSAmeaningthatSantoshasacceleratedreserve

developmenttomeetitscontractualcommitments



Partiallyasaresultofthisincreasedpace

ofdevelopmentmanycostsofdevelopmentintheCooperBasinhavebeenandwillcontinue

toincreaseAdditionallytheconventionalgasreservesinthebasinwillbedepletedsoonerthan

theyotherwisewouldhavebeen

Tablecontainsanestimateoftheremainingreservesandcontingentresourcesinthe

CooperBasinSantosdescribesapproximatelyhalfofitsPreservesintheCooperBasinas

undeveloped



Thesereservesareassociatedwithexistingdevelopedreservesbutarenotable

tobeproducedwithoutadditionalinvestmentSantosconsidersthatthereisanexpectation

thatthesevolumesofgaswillbedevelopedandatsuchtimetheywouldbereclassiﬁed

asdeveloped

Table CooperBasingasreservesandresourcesasatFebruary

Preserves

(PJ)

Cresources

(conventional)(PJ)

Cresources

(unconventional)(PJ)

CooperBasin   

Source EnergyQuestEnergyQuarterlyMarch

AlmostpercentofremainingcontingentresourcesintheCooperBasinarefrom

unconventionalsourcesTherearesigniﬁcanttechnologicalchallengesassociatedwithextracting

theseresourceswhichprimarilyconsistofshalegasMajorcostsavingsorverysigniﬁcant

increasesintheexpectedsalepricewillberequiredforthesetobeextractedonacommercial

basisAccordingtoSantosthetechnologytoextracttheseresourcesmaybemorethanﬁveto

yearsaway



InordertopreventasigniﬁcantdropoinproductionfromtheCooperBasintheCooperBasin

JointVenturewillneedtomakefurtherinvestmenttoenableproductionofreservesthatare

currentlyclassiﬁedasundevelopedThecostoftheseinvestmentscouldberelativelyhighdue

totheacceleratedscheduleofdevelopmentintheCooperBasininrecentyearsWhileSantos

currentlyexpectsthattheseundevelopedreserveswillbedevelopedwhenrequiredthejoint

venturemaybesomewhatconstrainedinitsabilitytomakeadditionalinvestmentsinalowoil

priceenvironment

ProductionfromanothertraditionalsourceofdomesticsupplytheOtwayBasinisexpectedto

signiﬁcantlydeclineinthecomingyearsProductionatthelargeMinervaﬁeldwhichaccounted

forpercentofproductioninthebasinin



isexpectedtoceaseinapproximately

Declinesatmanyotherﬁeldsinthebasinareexpectedtobeginintheearlys



Oneofthe

largestprospectivedevelopmentsinthebasinisintheHalladaleandSpeculantﬁeldswhichare

underdevelopmentbyOriginThisprojectiscurrentlynotexpectedtoproduceavolumeofgas

thatwouldpreventasigniﬁcantdeclineinoverallproductionintheOtwayBasin

FutureproductionfromtheGippslandBasinalsofacessigniﬁcantchallengesThemostrecent

majorprojectinthebasinKipperTurrumTuna(KTT)commencedconstructioninandwas

intendedtomaintainexistinggasproductionlevelsbeyondInthetotalcostofthis

projectwasapproximatelybillionwhichincludedtheinstallationofexpensiveadditional

processinginfrastructure



 Santos’mediarelease‘SantostosupplyPJofportfoliogastoGLNG’October

 Santos’presentation‘CooperandGLNGInvestorVisit’–Aprilp

 Santos’AnnualReportpp–

 ‘ShalegassuccessstilladecadeawayforAustraliasaysSantos’TheAustralianSeptember

 EnergyQuestEnergyQuarterlyMarchtable

 AEMOGasStatementofOpportunitiesp

 ExxonMobilFactSheetKipperTurrumTunaOctober



Inquiry into the east coast gas market—April 2016

ThenewinfrastructurebuiltaspartoftheKTTprojectincludesthebilliongasconditioning

plant(GCP)facilityThisfacilitywasrequiredasgasfromtheKTTﬁeldscontainedhigher

levelsofmercuryandcarbondioxidethanhistoricproductionﬁeldsinthebasinWhiletheexact

compositionofgasfromfutureproductionﬁeldsinthebasinisuncertainitislikelythattheywill

alsocontainlevelsofcarbondioxidesucienttorequireprocessingbyagasconditioningplant

TheprocessingcapacityofGCPismillioncubicfeetperday



(approximatelyPJper

annum)whichonlycoversabouttwothirdsofapproximatelyPJproducedbytheGBJVin





ThereforeasproductionfromlegacyﬁeldswithlowimpuritiesintheGippslandBasin

declinestheGBJVwillneedtoinvestinanadditionalexpensivegasconditioningplantto

preventasigniﬁcantfallinproductionprovidingthereisfurtherundevelopedgasavailable

Thereisthepotentialforsomesmallerundevelopedgasresourcestobeprogressedorfurther

discoveriestobemadeintheoshoreVictoriangasbasinsForexampleCooperEnergyis

partneringwithSantostodeveloptheoshoreSolegasﬁeld(originallydiscoveredin)and

islookingatgasdevelopmentoptionsfortheBaskerMantaGummyprojectOnMarch

CooperEnergyannouncedabindingheadsofagreementwithAGLforsupplyofuptoPJof

gasfromtheSoleprojectovereightyearsandpotentiallyuptoPJperannumfromtheManta

projectsubjecttoﬁnalinvestmentdecision(expectedlaterin)



Giventheabovefactorsitisunlikelythattherewillbeanyoverallincreaseinproductionfrom

conventionalsourcesofgassupplyItismorelikelythatgassupplyfromthesesourceswill

declineinthenearfutureplacingpressureonthedomesticmarketdueinparttoLNGdemand

andinparttoﬁelddeclineWhilethereispotentialaroundunconventionalgassourcesmanyof

theseremaintobeproven

 Newentryintoupstreamproductionisdicult

Developmentofgasresourcesinnewareascanpotentiallyincreasetheavailabilityofgasand

diversityofsupplyintheeastcoastgasmarketHowevergasexplorersandsmallnewproducers

inparticularfacemajorchallengestoachievethescalenecessarytoenterthemarketforthe

wholesalesupplyofgasduetothecostandrisksassociatedwithgasproduction

Gasexplorationandproductionhavehighcapitalcostsarehighriskandhavelongproject

executiontimeframesPetroleumexplorationandproductionpermitswhetheroshoreor

onshoretypicallyrequireworkcommitmentssuchasseismicsurveysandordrillingwellsThese

investmentstendtobesunkcostswheretheinvestmentshavefewalternativeusesintheevent

thatnogasisdiscoveredExplorationisalsocharacterisedasanactivitywithalowanduncertain

probabilityofsuccess

ThecostofexplorationissubstantialEnergyQuesthasestimatedanaveragecostofalmost

millionperonshorewellinSouthAustraliaandmillionperwellinQueenslandfor

wheretheCSGrequiresshallowerandsimplerwells



Oshorewellscancostovermillion

dependingonwaterdepthtargetdepthandthecomplexityofgeologyanddrillingoperations

Thesehighcostsmeanthatsmallerindividualcompaniesaretypicallyconﬁnedtoonshore

explorationoronlyinitialoshoreexplorationactivitiessuchasdatareviewswithmorecostly

activitiessuchasseismicshootingordrillingwellsrequiringfarm-inarrangementstobringin

otherpartiestosharecostsandrisksAsaresultfrontieroshoreexplorationisnowalmost

exclusivelythedomainoflargerplayerswithaccesstosubstantialcapital

ThecharacteristicsofCSGaecttherelativeimportanceofsunkcostsforCSGdevelopment

CSGwellsinQueenslandareshallowerhavelowerpressureandproducegaswithfewer

impuritiesthanmostconventionalgasreservoirsWellsrequireaperiodofdewateringtocome

intoproductionwithongoingwaterproductionoverthelifeofthewellGasproductionper

wellislowerandoverashorterlifespanwhichmeanscontinuouswelldrillingoverthelifeofa

projectisrequiredtomaintainproductionTheinitialcapitaloutlayforCSGﬁelddevelopment

 BHPBmediarelease‘LongfordGasConditioningPlantProjectApproval’December

 EnergyQuestunpublisheddataMarch

 CooperEnergyASXannouncement‘GassalesagreementwithAGLforSoleplusMantaoption’March

 EnergyQuestOilandgasindustrycosttrendsanindependentreportpreparedbyEnergyQuestforAPPEA

Novemberp



Inquiry into the east coast gas market—April 2016

istypicallylowerthanforoshoregasdevelopmentsHowevermaintainingCSGproduction

requireshigheroperatingcostandongoingcapitalexpendituretosupportacontinuous

programofdrillingandnewinfrastructuredevelopmentSodespitethesomewhatlowerupfront

sunkcoststhehigherongoingcostsmeanthatCSGﬁelddevelopmentstillrequiresaccessto

substantialcapital

Thecombinationoflargeupfrontcostssigniﬁcanttimetorecoverthosecostsandtheriskiness

ofgasﬁelddevelopmentcontributestochallengesinﬁnancinggasproductionBecausethey

arecapital-intensivetheyhavetraditionallybeendebt-ﬁnancedandlendershavecommonly

requiredlong-termcontractstoensuredebtserviceFinancierstypicallyseekconﬁrmation

oftheexistenceofuserandtransportcontractswhichcreatescoordinationchallengesfor

newproducers

 Gasspeciﬁcationisanemergingissue

NaturalgasfromdierentsourceswillhavedierentcompositionsThemajorcomponentin

mostcasesismethanebutgasmayalsocontainvarioushigherendhydrocarbons(ethane

butanepropanepentanecondensatesetc)arangeofinertgases(forexamplenitrogenand

carbondioxide)andvariouspotentialcontaminants(forexamplewatersulphurdioxide)Gas

whichcomprisespredominantlymethaneisclassiﬁedasa‘dry’or‘lean’gaswhilegaswithhigh

endhydrocarbonsandcondensatesmaybeclassiﬁedasa‘wet’gas

CSGinQueenslandisclassiﬁedasadrygasItcanbeusedinplaceofconventionalgasfromthe

CooperBasinortheoshoregasbasinsasaninputtothegassupplychainandcanbeusedin

thesamemanufacturingorheatingprocessesacrosstheeastcoastgasmarket

Naturalgastransportedviapipelinesintheeastcoastgasmarketisrequiredtomeetthe

AustraliannaturalgasstandardAS-BothCSGandconventionalgasmeetthe

AustralianstandardrequirementsHowevertheLNGprojectsusetechnologythatiswell

suitedtoCSGasthefeedstockIfitwouldbenecessaryforallgasenteringQueenslandtobe

processedtothespeciﬁcationoftheLNGplantsthismaybifurcatetheeastcoastgasmarket

andcouldaectliquidityinthemarketinthefuture

LNGplantsrequireadrygasspeciﬁcation

Theprocessofliquefyingnaturalgasﬁrstrequirestheremovalofcontaminants(suchas

watercarbondioxidenitrogenandsulphur)beforegasisfedintotheplantforcoolingto

atemperatureof–degreescelsiusandeventualliquefactionThetransformationfrom

agaseoustoliquidstatereducesthevolumebyaroundtimesmakingitpossibleto

economicallytransportofgasasLNG

TheLNGplantscangenerallybeoptimisedtosuitthegascompositionofthesourcegasand

areabletohandledierentlevelsofhigherendhydrocarbonsTheLNGplantsinQueensland

areoptimisedtorunonadrygasspeciﬁcationwhichreﬂectstheuseofCSGasthemajorgas

source



BothAPLNGandGLNGintheirEnvironmentalImpactStatements(EIS)fortheprojects

expectedfeedgascompositionsofaround–percentmethane–percentnitrogenand

–percentcarbondioxidewithvirtuallynohigherendhydrocarbonspresent





GiventhisgascompositiontheLNGprojectsappearnottohaverequiredadditionaltechnology

orprocessingwithintheLNGplantstocopewithhigher-endhydrocarbonsintheirgassupply

streamsThisincludedGLNGatthetimeoftheirEIS()whereonlyonetrainwasexpected

initiallytobeconstructedbeforewithallgascomingfromCSGtenementsSincethe

EISGLNGbroughtforwardtheconstructionofTrainwhichalsorequiredpurchasingthird

partygasincludingnon-CSGgasGLNGisrelyingontheMoombaProcessingHub(MPH)to

ensurethatitsthirdpartygasmeetsthegasspeciﬁcationforitsLNGplantTheMPHincludes

processingtoremovethehighendhydrocarbonandarangeofinertgasesandimpurities

 AlltheQueenslandprojectsuseConocoPhillips’OptimisedCascade®Processtechnologywhichwasdevelopedfor

theworld’sﬁrstleangasLNGdevelopmentatKenaiinAlaskain—seehttpwwwstatedevelopmentqldgovau

resourcesprojectaustralia-paciﬁc-lngaplng-ias--mar-pdfaccessedonMarch

 Seehttpwwwaplngcomauenvironmentour-environmental-impact-statementandhttpwwwsantosglngcom

resource-libraryglng-eissection--project-descriptionaspxfortherelevantEISforeachproject



Inquiry into the east coast gas market—April 2016

GLNGconsidersthatitsLNGplantscouldbeatriskifgasfromothersourcesisintroducedinto

theQueenslandgastransmissionnetworkbecausethisgasmaynotmeetthedrygasstandard

requiredforitsLNGplantsandcouldpotentiallydamageliquefactionequipmentThiscould

includeanygasfromtheCooperBasinthesouthernoshorebasinsortheNorthernTerritory

thatissuppliedbyproducerswhodonotutilisetheMPH

GLNGhasinstalledmonitoringinstrumentsonpipelinestoensurethatgasﬂowingtowardsthe

GLNGPipelineanditsLNGplantmeetstherequiredspeciﬁcationIfnon-LNGspeciﬁcationgasis

detectedheadingtowardstheGLNGPipelinethecompanywouldworkwithpipelineoperators

toreducethelikelihoodofthatgasreachingtheLNGplant

GLNGhasinvestigatedthepotentialinstallationofadditionaltreatmentfacilitiesatWallumbilla

totreatgaspriortoitsinjectionintotheGLNGpipelineGLNGgaveevidencetotheInquirythat

thiswouldnotbeeconomiccostingbetweenmilliontobilliontoinstallsuitablegas

treatmentfacilitiesThesefacilitiesmayonlyberequiredtoremovesmallamountsofhigherend

hydrocarbonsorinertgasesfromthepipelinegasstreamtoensuretheecientoperationofthe

LNGplantInadditionsuchaplantwouldduplicatethecapabilityalreadyinstalledattheMPH

HoweverinitspubliclyavailablesubmissiontotheNationalCompetitionCouncilapplying

fora-yearno-coveragedeterminationofitspipelineGLNGOperationsPtyLtdonbehalfof

theGLNGprojectpartnersnotedthepossibilityofwhattheyclaimedasunsuitableAustralian

standardgasbeinginthepipelinesystemandthatGLNG

“…willconstructtheTreatmentFacilityifnecessarytoensurethatallgaspurchasedfrom

thirdpartiesbyGLNGorstoredintheRomaUndergroundGasStorageFacilitymeetsthe

speciﬁcationandcontaminantdesignlimitsbeforeitisinjectedintoandtransportedthrough

thePipelinetotheLNGFacility”



Thesubmissionwentontonotethatifotherthirdpartygassupplierswantedtotransportgas

viatheGLNGpipelinetheytoowouldhavetoconstructsuitablegastreatmentfacilitiesto

ensurethatthegaswouldmeettheLNGspeciﬁcationItisclearthatatleastinGLNG

envisagedtreatinggasitselfpriortoitenteringtheGLNGpipelineandnotrequiringallgasin

theQueenslandgastransmissionsystemtocomplywithitsLNGspeciﬁcationratherthanthe

Australianstandardfornaturalgas

Implicationsofabifurcatedmarket

GLNG’sgreaterrelianceonthirdpartygasoutsideQueenslandandtheneedforitsplantsto

runongasthatmeetsitsLNGspeciﬁcationcanpotentiallycreatedicultiesforothermarket

participantsSpeciﬁcallyitispossiblethatotherusersinQueenslandmayfaceadditionalcosts

forprocessingtheirgastotheLNGspeciﬁcationratherthanjusttheAustralianstandardThis

morecostlyadditionalprocessingrequirementmayalsoreducetheincentivefornewgas

producerstoexploreforanddevelopnewgasprojectsinsomeareasoutsideofQueensland

TheevidencegiventotheInquirysupportsthisForexampleonemarketparticipantstatedthat

gasfromtheothersourcesmayrequireadditionalprocessingattheMPHpriortobeingsent

intoQueenslandviatheSWQPwhichwouldimposeadditionalcostsonusersintheQueensland

marketThisisdespitethecurrentgastransportationagreementsrequiringshipperstosupply

gasattheAustralianstandardandpipelineoperatorstotransportgasattheAustralianstandard

AsimilarissuemayariseoncetheplannedNGPisconstructedconnectinggasproduced

intheNorthernTerritorytotheeastcoastgasmarketIfconstructionoftheNGPfacilitates

additionalgasdevelopmentintheNorthernTerritoryornorthernQueenslandanygasmoving

southofMountIsamayalsorequireadditionalprocessingandadditionalcoststomeetthe

LNGspeciﬁcation

 SantosGLNGproject‘Applicationfor-yearno-coveragedeterminationundersectionoftheNationalGasLaw’

Marchp



Inquiry into the east coast gas market—April 2016

Accesstogasprocessingfacilitiescouldbecomemorecriticalinabifurcatedmarket

WhiletheInquirydidnotreceiveanyclearevidencethataccesstoprocessingfacilitiesis

currentlyanissueofconcernintheeastcoastgasmarketthereisapotentialforaccessto

processingfacilitiestobecomeanissueasaresultofthebifurcationdiscussedabove

ItispossiblethatsomemarketparticipantsmayneedtoaccesstheMPHtoprocessgasto

theLNGspeciﬁcationTheMPHisownedbyajointventurebetweenSantosOriginEnergy

andBeachEnergyItisalargeandcomplexpieceofinfrastructurewhichhasseensubstantial

investmentinadditionalprocessinginfrastructureoverthepastfewyearsSantoshaspublicly

statedanumberoftimesrecentlythattheMPHis‘openforbusiness’andisseekingadditional

thirdpartygastoprocess





GiventheinfrastructureavailableattheMPHitisinastrongpositiontocompetitivelyprocess

newthirdpartygasfromtheCooperBasinHowevertheInquiryreceivedevidencethatthe

processforagreeingtollingarrangementsandpricesattheMPHhasbeenlongandcomplex

(partlydrivenbytheneedforagreementwithintheJointVenture)

Newentrantsandexistingproducershaveanoptionofestablishingtheirownprocessing

infrastructureinsteadofrelyingontheMPHbutthisispartlydependantongascomposition

(includinganyliquids)andthepresenceofcontaminantsintheirgasreserves

AbifurcatedmarketbetweenQueenslandandtherestoftheeastcoastgasmarketcould

potentiallyplacetheMPHinanincreasinglyimportantpositionAnygasﬂowingnorthtowards

WallumbillafromtheCooperBasinoshoreVictoriaandtheNorthernTerritorycouldeectively

berequiredtobetreatedattheMPHtomeettheLNGspeciﬁcation

WhiletheMPHownersmayhaveincentivestoallowaccesstotheMPHtomaximisethe

utilisationoftheprocessingcapacitytheycouldbeinastrongpositioninabifurcatedmarketto

imposeahighprocessingcostonanyparticipantattemptingtoshipgasintoQueensland

 Policydecisionsaectingthelevelanddiversityofgassupplyhave

thepotentialtocausesigniﬁcantpriceeects

Asdiscussedinchapterdomesticgasusersinthesouthernstatesarenowlikelytohavefewer

optionsforsupplyThisislikelytoreducethecompetitivenessofsupplyoersinthisregion

Pricingoutcomesforgasusersinthesouthernstateswillthereforebecriticallyinﬂuencedbythe

volumeanddiversityofsupplyinthosestates

Thereiscurrentlylittleprospectofasigniﬁcantincreaseinsupplyfromtheexistingproduction

basinsinthesouthernstatesMoratoriaandotherregulatoryrestrictionsinvariousstatesare

preventingorimpedingdevelopmentofnewgassupply(seebox)Unlessmeasuresare

takentochangethesupplyoutlookinthesestatesgasusersarelikelytofaceuncompetitive

pricingoutcomes

 SantosInvestorSeminarNovember



Inquiry into the east coast gas market—April 2016

Box Moratoriaandotherregulatoryrestrictionsontheeastcoast

Therearesigniﬁcantcommunityconcernsrelatedtovariousaspectsofthegasindustry

acrossAustraliaInparticularthesehavefocusedonCSGdevelopmenttheuseofhydraulic

fracturestimulationtechnologies(fracking)andpotentialimpactsonwaterresourcesand

theenvironmentTherearealsowiderdebatesaroundconﬂictinglanduseintheresources

sectormoregenerallyincludingaccesstoleaseholdfarmlandandthefutureofthefossil

fuelsector

ThesecommunityconcernshaveledtoCommonwealthstateandterritorygovernments

implementingvariousregulatorymeasureswithsomelocalgovernmentsalsosupporting

thelimitationorbanningofgasdevelopmentsinlocalgovernmentareasInMarch

theNewSouthWalesGovernmentfrozetheissuanceofnewgasexplorationlicences

andundertooktocarryoutacomprehensivereviewofexistinglicencesNewregulatory

requirementshavebeenputinplaceforexistinglicenceholdersandnumerouslicenceshave

sincebeenhandedbackorre-acquiredbythegovernment

TheVictorianGovernmenthasputinplaceamoratoriumonthegrantingofnewexploration

licencesforalltypesofonshoregas(tightshaleCSGandconventionalgas)onapprovals

forallexplorationdrillingactivitiesandonhydraulicfracturingThemoratoriumaects

mineralexplorationlicencesthatcoverCSGpetroleumexplorationpermitsthat

covertightandshalegasandthreeretentionleasesthatcovertightandshalegas



The

TasmanianGovernmenthasalsoputinplaceamoratoriumontheuseoffrackinguntil

OnFebruarytheoppositionleaderoftheAustralianLabourPartyintheNorthern

Territoryannouncedthatamoratoriumontheuseoffracturestimulationwouldbeput

inplaceifhispartywereelectedintogovernmentwhilehisgovernmentdeterminedthe

implicationsoffracking



 Onshoreregulatoryrestrictionsareimpedingpotentialnewsourcesofsupply

Giventhechallengesfacingtraditionalsourcesofsupplyandtheeectthatalackof

competitioncanhaveonpriceallowingnewsourcesofgassupplytobedevelopedislikelyto

putdownwardpressureondomesticgaspricesGovernmentsshouldtakeintoaccountthat

moratoriaandotherregulatoryimpedimentshavetheeectofpreventingordiscouragingsuch

developmentsandonpricingoutcomesexperiencedbydomesticgasusers

TheimpactofrisingdomesticpricesonindustrialuserswasdiscussedinchapterMargin

reductionsforindustrialuserscantypicallyrangefromtopercentagepointsdepending

ontheindustryandthelevelofgaspriceincreases



Furtherwholesalegascostsmakeup

percenttopercentoftotalresidentialgasbills



dependingonthestateForexample

householdbillscouldincreasebypercentinNewSouthWalesandpercentinVictoriaif

wholesalegaspricesrosebyGJ



Asnotedinchapterthegainstousersfromincreased

competitionifalternatelow-costcompetitivesourcesofsupplyweredevelopedinthesouthern

statescouldbeashighasperGJoruptoonethirdofthedeliveredpriceofgas

InformationprovidedtotheInquiryindicatesthattherearesomeprojectsinonshoreNewSouth

WalesandVictoriathathavebeenpreventedfrombeingdevelopedbygovernmentrestrictions

onsupplyTheInquiryhasreceivedevidenceofexplorationplansthathavebeenputonhold

orabandonedasaresultofonshoremoratoriaorotherregulatoryimpedimentsinthesestates

ForexampleSantos’NarrabriprojectinNewSouthWaleshasfacedrepeateddelaysasaresult

ofregulatorydicultiesAprojectbyLakesOiltoextracttightgasonshoreintheGippsland

BasininVictoriathroughconventionaldrillingtechniquesiscurrentlyonholdduetotheVictorian

moratoriumTheDecemberVictorianinquiryintoonshoreunconventionalgasinVictoria

 Seehttponshoregasvicgovauregulationcurrent-status-and-allowable-activities

 ‘ALPwouldstopfrackinginNT’NTNewsFebruary

 AssumingastartingwholesalepriceofGJanda-GJgaspriceincrease

 OakleyGreenwoodGasPriceTrendsReviewDecember

 AssumingbaselinewholesalegaspricesofGJinVictoriaandGJinNSWestimatedbyOakleyGreenwood(Gas

PriceTrendsReviewDecember)



Inquiry into the east coast gas market—April 2016

notedthat‘Industrialgasusershavesignedcontracts’withsuppliersthatareaectedbythe

moratorium



TheInquiryhasalsoreceivedevidenceofindustrialcustomerssigningagreements

forsupplywithpotentialunconventionalsuppliersinVictoria

Itisdiculttodeterminethevolumeofgassupplythatisbeingaectedbymoratoriaandother

regulatoryrestrictionsinNewSouthWalesandVictoriaInpartthisisbecausetheserestrictions

preventexplorationanddevelopmentactivityoccurringthatcouldhelptounderstandthe

volumeandcommercialityofgasresourcesinthosestatesSomeproducersorpotential

producershaveprovidedevidencetotheInquirythattheyconsiderthatthereissomefurther

explorationpotentialinthesestatesthathasnotoccurredduetoregulatoryrestrictionsOne

estimateofthepotentialvolumeofunconventionalgasinVictoriaandNewSouthWalesis

shownintableCommercialdevelopmentofmostofthisgasisbeingpreventedorrestricted

bymoratoriaorotherregulatoryrestrictionsinthesestatesThisisamaterialvolumeofgasin

thecontextofdemandinthisregion

Table ProspectivereservesandresourcesinNewSouthWalesandVictoriaasat

State Reserves

(PJ)

Resources

(PJ)

Prospectiveresources

(bestestimate)

(PJ)

NewSouthWales   

Victoria  

Source COAGEnergyCouncilUpstreamPetroleumResourcesWorkingGroupReportCoalSeamShaleandTightGasinAustralia

ResourcesAssessmentandOperationOverviewNovember

WiththedevelopmentoftheNGPtheNorthernTerritoryrepresentsapotentiallylargesource

oflong-termsupplyfortheeastcoastgasmarketAsdiscussedearliertheNorthernTerritory

GovernmentestimatesthattheremaybeinexcessofPJofunconventionalshalegas

intheNorthernTerritoryWhiletheNorthernTerritorydoesnotcurrentlyhaveamoratoriumon

unconventionalgasexplorationordevelopmentsomecompaniesarecurrentlyscalingback

explorationprojectsblamingtheuncertaintycausedbythepotentialintroductionofa

banontheuseofhydraulicfracturingannouncedbytheleaderoftheopposition



Thiswill

slowdowntheappraisalanddevelopmentofsigniﬁcantpotentialgasresourceswhichcould

contributetofuturegassuppliesfortheNorthernTerritoryandtheeastcoastgasmarket

TheInquiryacknowledgesthatthereareseriousconcernsinthecommunityregardingthe

potentialenvironmentaleectsofunconventionalgasexplorationWhilerecognisingthe

strengthsofconcernstheInquiryencouragestherelevantgovernmentstotakeintoaccount

theimpactthatmoratoriaandotherregulatoryrestrictionsmayhaveondomesticgasusers

whenconductingthecost-beneﬁtassessmentoftheenvironmentalregulatoryregimesThe

Inquiryalsoencouragesgovernmentstoconsideradoptingregulatoryregimesthatallow

themtomanagetherisksofindividualgasdevelopmentsonacasebycasebasisratherthan

regimesthatimposeablanketmoratoriumorotherregulatoryrestrictionsongasexploration

andproduction

 MarketdevelopmentscompeltheACCCtorevisitGBJVjointmarketing

arrangements

BHPBillitonandEssoAustraliahavebeenjointlyproducingandsellinggasfromtheGippsland

BasinfornearlyyearsTheseproducerscontendthatuntiltheeastcoastgasmarketis

sucientlymaturejointmarketingisnecessarytoensurethatthejointventurepartners

continuetomaketheinvestmentsrequiredtosustainthedevelopmentofGippslandBasin

reserves



Theproducerscontendthatintheabsenceofmorematuremarketssigniﬁcant

investmentinnewproductionwhichisofhigherriskandlowerresourcequalitymaybe

deterredifgasfromthosenewinvestmentsisseparatelymarketed

 ParliamentofVictoriaInquiryintoonshoreunconventionalgasinVictoriaDecember

 ABCRural‘JobsleakingfromoilandgasexplorationsectorasNorthernTerritorydebatesfrackingmoratorium’March



 EssoAustraliaSubmissiontoEastCoastGasInquiryIssuesPaperJulyandBHPBillitonSubmissiontoEastCoast

GasInquiryIssuesPaperJuly



Inquiry into the east coast gas market—April 2016

TheACCCconductedapreliminaryreviewoftheGBJVjointmarketinginprimarilyto

determinewhetherthejointmarketingarrangementhadorwaslikelytohavetheeectof

substantiallylesseningcompetitioninanymarketincontraventionofsoftheCompetition

andConsumerAct(Cth)TheACCCdecidedtotakenofurtheractionatthattimebut

advisedthejointventurepartnersthatitmightrevisitthematteriffuturemarketdevelopments

warranteddoingso

TheACCChasnotconductedaninvestigationofjointmarketingbytheGBJVforthepurposes

ofsoftheCCAaspartoftheInquiryHoweverduetosigniﬁcantmarketchangessincethe

ACCClastconsideredarrangementsintheGBJVnowholdssigniﬁcantmarketpowerin

thesouthernstates(asdiscussedinchapter)TheInquiryconsidersthatjointmarketingbythe

GBJVmaynowhaveamoredetrimentalimpactoncompetitionthaninthepastandwarrants

reconsiderationattheconclusionoftheInquiry

InconsideringwhetherthejointmarketingarrangementsoftheGBJVsubstantiallylessen

competitiontheACCCwillconsiderwhetherseparatemarketingwouldgiveasubstantially

bettercompetitiveoutcometothemarketTheACCCwillreviewthejointmarketing

arrangementsinthecontextofgaswhichiscurrentlycommittedforproductionaswellas

productionfromfutureinvestment

TheACCC’sassessmentwillincludeconsiderationofthelikelyeectofseparatemarketing

onfutureinvestmenttoensurethatanypotentialgainsfromcompetitionarenotosetby

thereductionofgassupplyfromunder-developmentoftheGippslandBasinresourcesIn

thisregardtheACCCwillconsiderwhetherarrangementscouldbeputinplacetoenable

anindividualjointventurepartnerpotentiallyinconjunctionwithotherpartiestoinvestin

newprojectsintheGippslandBasinwhenthejointventurepartnersarenotalignedonfuture

investmentdecisions

TheACCCwillalsoconsiderwhetherthegasmarketisnowsucientlymaturetosupport

separatemarketinginlightofthechangesthathavetakenplacesinceTherehasbeen

asigniﬁcantshiftinmarketingarrangementsamongstthegasproducingjointventuresin

AustraliaTheNorthWestShelfGasProjectandGorgonGasProjectinWesternAustraliaaswell

asCooperBasinjointventureincentralAustraliahavecommencedseparatelymarketingtheir

shareofuncontractedgas

WhilethespeciﬁccircumstancesoftheGBJVwillneedtobeconsideredseparatemarketing

bytheCooperBasinjointventureproducersinparticularprovidesapositivesignthatitis

possibletoimplementbalancingagreementsbetweenjointventurepartiesintheeastcoast

gasmarketandthatseparatemarketingdoesnotnecessarilyleadtoreducedinvestmentin

resourcedevelopment

 Gasreservationpolicieswouldreducethelikelihoodofnewgassupplysources

beingdeveloped

Somestakeholdershavesuggestedthatgovernmentsshouldimplementpoliciestoreservegas

fordomesticuseThesepoliciescouldbeavariationonthreebasicoptions

• apercentageshareofgasreservesorproductionthatmustbeplacedintothe

domesticmarket

• areservationofspeciﬁcacreagethatcanonlybebroughtintoproductionforthe

domesticmarket

• exportcontrolswhichrequirealicenceforexportinggasthatisgrantedsubjecttothe

applicationsatisfyingconditionssuchasanationalinteresttestwhichcouldinclude

considerationoftheimpactondomesticsupply

InitsGasMarketReporttheformerBureauofResourcesandEnergyEconomics

conductedadetailedanalysisofstudiesthathadbeenconductedintheAustralianmarket

relatingtoreservationpoliciesThisreportconcludedthatintheshorttermsuchpoliciesmay

reducegaspricesfordomesticusersasadditionalgasisforcedontothedomesticmarket

aboveecientmarketdemandHoweverinthemedium-tolonger-termanumberofissues

arisewhicheectivelyreversethoseshort-termbeneﬁtsInparticulartheeconomicincentives



Inquiry into the east coast gas market—April 2016

forfurtherexplorationandappraisalactivityarenecessarilyremovedwithlowpricesandthe

eectiveoversupplyofgasInadditionnewgasprojectswhicharescaledtothedomestic

marketmaybeforcedoutofthemarketduetopooreconomicreturns

WesternAustraliahasadomesticgasreservationpolicywhichseekstoreservegasequivalentto

percentofgasfromnewoshoredevelopmentstobeavailablefordomesticuseThispolicy

wasanalysedbytheWesternAustralianEconomicRegulatoryAuthority(ERA)inits

InquiryintoMicroeconomicReforminWesternAustraliaFinalReportTheERArecommended

thatthis‘policyshouldberescindedassoonaspracticable’asithasresultedinthefollowing

negativeconsequences

• ithasincreasedrelianceonsubsidisedgaspricesleadingtooverconsumptionof

theresource

• ithasinhibiteddynamiceciencyandtechnologicalinnovation

• ithasperpetuatedtheexistenceofindustriesthatmaynothaveacomparativeadvantagein

WesternAustraliaattheexpenseofinvestmentinotherindustries

• ithasreducedtheincentiveforinvestorstoinvestinthegasindustryinthelongerterm

leadingtopotentialfuturegasshortages

Whileallofthesefactorsareofconcerntheﬁnalpointisparticularlyrelevantforgasuserswho

willneedsecuregassuppliesnotjustintheshorttermbutalsointothefuture

TheInquiryhasnotidentiﬁedanymarketfailureintheeastcoastgasmarketthatwouldjustify

theintroductionofagasreservationpolicyThegassupplyissuesthathavebeenidentiﬁed

relatetoastructurallackofcompetitioninthesouthernstatesTheseissueswouldnotbeﬁxed

byareservationpolicyinfacttheycouldbeworsenedifareservationpolicywasenactedwhich

artiﬁciallydepressedpricesintheshorttermanddiscouragedinvestmentinnewgassupply

thusreducingthelikelihoodofrequiredsupplydiversity



Inquiry into the east coast gas market—April 2016

4 Risk management mechanisms have become

more important and new mechanisms should be

supported

 Tighteninggassupplyhascreatedconsiderableuncertaintyforall

gasmarketparticipants

TheevolvinggasmarkethascreatednewchallengesProducersretailersandgasusersare

respondingbychangingtheirapproachtogassupplycontractingTheInquiryhasfoundthat

somerisksarebeingshiftedfromproducerstobuyers(retailersandotherusers)andthat

buyersarehavingtoadoptalternativeapproachestomanagetheirexposure

Mostoftheincreasedrisksarisefromthedicultiesinvolvedinpredictingfuturegaspricesinan

uncertainsupplyenvironmentGivenrapidlychangingmarketconditionsitisnowmoredicult

todeterminewhetheraparticulargaspriceinaproposedGSAwillcontinuetobeinlinewith

themarketpriceforgasoverthecourseoftheGSAThisisexacerbatedforGSAswithalonger

supplylengthAlsoinanenvironmentofrisinggaspricesusersarenowundergreaterpressure

tomanagetheirgascostsandhaveagreaterdesireforvolumeﬂexibilitywhichisbecoming

hardertoobtainInthefaceofthisuncertaintyusersﬁndithardertomakedecisionsaboutthe

futureviabilityoftheirbusinessandaboutfutureinvestmentdecisions

Someofthisincreaseduncertaintyistransitoryinnaturearisingfromtheveryrapidincreasein

marketsupplyanddemandinrecentyearsHowevergiventheneedforsigniﬁcantcontinued

investmentinsupplyandtherisksassociatedwiththis(seechapter)increaseduncertainty

aboutfutureconditionsincludingfuturepriceswillcontinuetobeakeyfeatureofthemarket

Userswillbeincreasinglyreliantdirectlyorindirectly(througharetailer)onmechanismsto

copewithrisksuchasstorageandshort-termtradingtomanagethisuncertaintySomelarge

gasbuyersmaybeinapositiontohedgeoil-linkedpricingintheirGSAsbyparticipatingin

internationaloiltradingmarketsandcurrencytradingmarketsbutthisstrategyitselfinvolves

aleveloffuturepriceriskandotherparticipationcoststhatmaynotbeattractiveformany

gasusers

Retailersaretypicallyinabetterpositiontomanagetheserisksthanusersastheyareable

todiversifytheirgasportfolioacrossanumberofproducersandusersInamarketwithfew

supplierstheyarealsoabletopasstheimpactoftheserisks(suchastheincreasingcostof

ﬂexibility)thoughtousersandareabletomakedecisionsaboutwhichcustomerstosupply

basedonanassessmentofthoserisksAccordinglymostoftheburdenoftheserisksfallson

usersratherthanonretailers

 GSAsarebecominglessﬂexibleformanagingdemandrisks

 ThetypicaldurationofaGSAhasbecomeshorter

OverthelastfewyearsthetypicaldurationofanewlysettledGSAbetweenaproduceranda

buyerfordomesticsupplyhasbeennomorethanthreetofouryearsThisisincontrasttolarge

historicalGSAswhichfrequentlyhadadurationofsupplyofﬁveormoreyearsInpartthis

reﬂectsthelackofnewsourcesofdomesticallyorientedsupplybeingbroughtintothemarket

HoweveranotherkeydriverofthisreductioninthelengthofGSAshasbeentheincreased

uncertaintyoverfuturemarketconditionsincludingpricearisingfromtherapidlychanging

marketdynamicsInadditionsomeproducershavefaceduncertaintiesoverfutureproduction

fromtheirﬁeldswhichhavereducedtheirwillingnesstoenterintolong-termGSAs

Theseuncertaintieshaveaectedthewillingnessofbothsuppliersandbuyerstoenterintolong-

termGSAsatﬁxedpricinglevelsparticularlymanyyearspriortothecommencementofsupply

Givenrapidlyrisingpricessomeindustrialusershavebeenconcernedaboutthecontinued



Inquiry into the east coast gas market—April 2016

viabilityoftheirbusinessesathigherpricelevelsThishasreducedtheirwillingnesstoenterinto

signiﬁcantlong-termgascommitments

Somesuppliershavebeenmorereluctanttooerlong-termﬁxedpriceGSAsatalevelthatmay

notbereﬂectiveoffuturemarketconditionsInparttomitigatetheriskofmarketpricechanges

somesuppliershavesoldgastotheLNGprojectsatpricesthatarelinkedtothepriceofoilFor

exampleAGL’srecentGSAtosellasigniﬁcantquantityofgastoGLNGatoillinkedpriceshas

thebeneﬁtforAGLofsubstantiallyosettingitsoilpriceexposureunderitsGSAwiththeGBJV

 VolumeﬂexibilityinGSAshasbeendecreasing

Forproducersthecostofbuildingandoperatingexcessproductioncapacityinordertomeet

variationsintheircustomers’demandcanbesubstantial

Wheretheproducer’soverallgasproductioncostsarerisingtheproducerhasagreater

incentivetoreduceuncertaintyaboutcostrecoverybyoeringaﬂatterloadproﬁleAtthe

sametimeproducersandbuyerseachhaveaninterestinobtainingcontractualcertaintyabout

thepeakcapacitythattheproducerwillberequiredtomakeavailableataparticulartimeof

theyear

• Aretailerneedstoknowthatitwillhaveenoughgasavailabletomeetitsexpectedpeak

demandrequirements(suchasforwinter)

• Aproducerhasaninterestinhavinggreatercertaintyaboutwhenthepeakcapacitywill

actuallyberequiredbytheretailersothattheproducerknowswhenitislikelytobein

apositiontoeitheruseitsproductioncapacitytosupplyotherbuyersortocarryout

maintenanceactivities

Thecostforretailersinensuringthattheyhaveaccesstoenoughgasinordertomeetvariations

inuserdemandcanalsobesubstantialasillustratedincasestudy

CasestudyThecostsofﬂexibility

Alargebuyerofgasforindustrialusesuchasglassproductionexperiencesasigniﬁcant

reductioninitsannualdemandforgasbutanincreaseinitsdailypeakdemandrequirement

andentersintoanewGSAwitharetailerthatreﬂectsthisrequirementThenewGSAhasa

lowerAnnualContractQuantity(ACQ)andahigherMaximumDailyQuantity(MDQ)which

resultsinasubstantialincreaseinthebuyer’sloadfactor

Toensurethatitisinapositiontomeettheglassplant’speakdemandtheretailermay

needtoreserveadditionalpeakcapacityatagasstoragefacilityAsaresultthecharge(per

gigajouleofACQ)payableforthatcapacitywillincreaseEveniftheperGJcapacitycharge

payablebytheretailertothestoragefacilityremainsthesamethevolumeofcapacity

thatmustbereservedtomeetthepeakwillbehigherTheretailermustthenrecoverthe

increasedcapacitychargeacrossasubstantiallyreducedACQundertheGSAwhichwill

resultinahigherperGJofACQchargepayablebytheglassmanufacturer

HistoricallymanyGSAsgavecustomersasigniﬁcantdegreeofﬂexibilityinthevolumesthat

theywerecommittedtotakeunderthatGSAThisﬂexibilitywasprovidedinanumberofways

mostcommonlythroughtake-or-payprovisionsloadfactorandbankingrights(seebox)

TheInquiryhasfoundthattheamountofﬂexibilitybeingprovidedtousersinnewGSAshas

beendecreasinginrecentyearsasthemarketrespondstochangingconditionsWhilesome

ﬂexibilitymaystillbeavailableitisatahigherpricethanitwashistoricallyThishashadthe

eectofshiftingtherisksandcostsofprovidingsuchﬂexibilityfromproducerstoretailersand

usersandhaspromptedsomeretailerstoseekoutothersourcesofﬂexibility(suchasstorage)



Inquiry into the east coast gas market—April 2016

Box GSAﬂexibilityterms

Take-or-paymultiplierThisistheminimumproportionoftheGSA’sACQthatthebuyeris

requiredtotakeinaparticularyearThebuyerisrequiredtopayforthisminimumvolume

ofgasregardlessofwhethertheyuseitThetake-or-paymultiplierisexpressedasa

percentageForexampleforathreeyearGSAwithanACQofPJsandatake-or-pay

multiplierofpercentthebuyerwouldberequiredtotakeatleastPJsofgasineachof

thethreecontractyears

LoadfactorTheloadfactor(sometimesreferredtoasswingfactor)measurestheextentto

whichabuyercantakemorethantheaveragedailycontractquantity(theMDQ)throughout

theyearsubjecttothecapimposedbytheACQbeingmetForexampleunderaGSAwith

anACQofPJ(equivalenttoTJperday)andaloadfactorofthebuyerwould

beabletotakeuptoTJofgaseachdayHavingahigherloadfactordoesnotincrease

thequantityofgasthatthebuyercanpurchaseinayearInsteaditprovidesthebuyerwith

greaterﬂexibilitytomanagedemandvariationsthroughouttheyear

BankingrightsSomeGSAsforsupplyoveranumberofyearspermitbuyersthatpurchase

lessthantheminimumtake-or-payquantityinaparticularcontractyearto‘bank’thatgas

andtakethatquantityatalatertimeThereareanumberofdierentwaysthatbanking

arrangementscanoperateincludinginrelationtothepriceofthebankedgasandhowor

whenbankedgascanbetaken

Inasituationwherecustomershaveacontractualrighttosigniﬁcantlyvarytheirdailyvolumes

withinayearproducersneedtomaintainexcessproductioncapacitytobeinaposition

tosupplyuptotheirmaximumexposureThereforereducingcontractualﬂexibilityallows

producerstomaximisetheiroverallproductionofgasacrossayearwithoutinvestingin

additionalprocessingequipment

Moregenerallythereducedﬂexibilityisaresponsebysupplierstochangingmarketconditions

Asgaspriceshaveincreasedtheopportunitycostofprovidingﬂexibilityhasalsoincreased

RetailersarealsopassingontheincreasingcostofﬂexibilitytotheircustomersHoweverbuyers

arelesswillingtopayapricethatreﬂectsthatopportunitycostThereducedﬂexibilitymayalso

beduetothechangesincompetitivedynamicsdiscussedinchaptersandInthesouthern

statesforexamplebuyershavefeweralternativestoGBJVgasthantheydidinthepastThis

hasallowedtheGBJVtotightenitsconditionsofsupply

TheInquiryhasobservedthatoverallﬂexibilityundernewGSAsislowerthanhasbeen

previouslyoeredandthatﬂexibilityismoreexpensiveThereducedﬂexibilityhasoccurredina

numberofwaysincludinganincreaseinthetake-or-paymultiplierareductionintheloadfactor

GSAsbeingoeredwithadeﬁnedloadproﬁlethroughouttheyearandtheremovalorlimiting

ofbankingprovisionsinnewGSAsInsomecircumstancessuppliershavesigniﬁcantlyincreased

thecostofprovidingcontractualﬂexibilitytobuyersincludingbyseekinghigherperGJgas

pricesinreturnforlowertake-or-paycommitmentsandhigherloadfactors

ForexampleoftheﬁvedomesticGSAsenteredintooverthelastthreeyearsthatreplaced

existingGSAsbetweenthesamebuyerandproducercombinations

• ﬁvehadalowerloadfactorthantheGSAstheyreplaced(percentvspercent–

percent)thoughseveraloftheseGSAshaveadeﬁnedloadproﬁleforeachmonth

whichprovidessomeintra-yearﬂexibility

• threehadahighertake-or-paymultiplier(–percentvspercent)andmore

restrictivebankingrightsthantheGSAstheyreplaced

ThereareseveralnewGSAsthathavealoadfactorofpercentandatake-or-paymultiplier

ofpercentIneectthebuyersundertheseGSAsdonothaveanyﬂexibilitytovary

theiractualgasusagefromdaytodaywithouthavingtopayforunusedgasunderthe

take-or-payprovisionsTheythereforeincurcostsforunusedgasintheeventofaplannedor

unplannedoutage



Inquiry into the east coast gas market—April 2016

Forbuyersdecreasedcontractualﬂexibilityincreasestheﬁnancialimpactofunexpected

demandﬂuctuationsforexampleanindustrialgasuserlosingalargecustomerIfabuyeris

unabletomeettheirminimumtake-or-paycommitmentandisrequiredtopayforgasthatthey

donotusetheoveralleectistoincreasetheiraveragepriceofgasAnincreaseinthetake-or-

paymultiplierfrompercenttopercentdeprivesabuyerofpercentoftheﬂexibility

thatwaspreviouslyavailabletothem

SomeGSAswithretailersalsoincludeexclusivityprovisionswhichlimitthebuyer’sabilityto

obtaincheapergasfromelsewhereifmarketpricesdeclineSomeexclusivityprovisionsonly

relatetoparticularpremiseswiththeaimofensuringreliablemeteringofthegassuppliedat

eachdeliverypoint



Otherexclusivityprovisionsareanalternativewayofreducingtheriskthat

abuyerwillnottakesomeorallofthegasavailabletoitunderaGSAAgainthereisatrade-

obetweentake-or-payprovisionsandtheseexclusivityprovisions—thelowerthetake-or-pay

provisionthegreaterthelikelihoodthatthesupplierwillrequireanexclusivityprovisionaswell

inordertoreducethatrisk

AnotherwayinwhichGSAsaddresssupplyrisksisthroughprovisionsthatsetouttheliability

ofthesupplierforfailingtofulﬁlitsobligationstosupplygasTheseprovisionstypicallyrequire

thesuppliertocompensatethebuyerforanyshortfalluptoanagreedliabilitycapTheInquiry

observedthatonemajorsupplierhadreducedthemaximumamountthatitwouldbeliablefor

intheeventoffailuretosupplyinGSAsoeredinrecentyearsThissupplierstatedthatthis

trendwasaresponsetochangesincompetitiveconditionsWhilenotallsuppliershavedone

sothiscontractualclauseappearstobeanotherwayinwhichsupplyriskscanbeshiftedfrom

supplierstobuyersintightmarketconditionswithfewsuppliersInsomecasesthelevelof

compensationmaybesolowastoprovideaninsucientdeterrenttoabreachoftheGSAby

thesupplier

 Theabilitytosellgastothirdpartiesisvaluablebothforsuppliersandfor

buyers

ThestandardGSAsofsomeretailerscontainaprovisionthatprohibitstheuserfromresellinggas

obtainedunderthatGSAIftheGSAdoesnotincludeatake-orpayprovisiontherestrictionon

resaledeprivestheuseroftheﬂexibilitytodealwiththatgasasitseesﬁtbutdoesnotcreate

signiﬁcantadditionalrisksfortheuserInthatcasetheuserisonlyrequiredtopayforgasthat

itconsumes

Howeverthecombinationofatake-or-payprovisionandaresalerestrictioncreatessigniﬁcant

additionalrisksfortheuserbecauseiftheusercannotmeetitstake-or-paycommitmentdueto

anunexpecteddemandﬂuctuationtheuserwillneedtopayforgasthatitisdoesnotneedand

ispreventedfromsellingthatgastoathirdpartyTheseresalerestrictionspreventusersfrom

takingadvantageoftheSTTMstheDWGMandtheWallumbillaGSHtosellexcessgasApart

fromlimitingtheoptionsavailabletotheseuserstomanagetheirriskstheserestrictionsalso

inhibitcompetitionandthedevelopmentofliquidityinthosemarketsbyreducingthenumber

ofpartiesusingthemarketandpotentiallythetradedvolumeofgas

NotallGSAshaveresalerestrictionsSomeendusershavebeentakingadvantageoftheir

ﬂexibilityundersuchGSAstoengageinshort-termtradingstrategiestohelpthemminimise

theirtotalcostofgas(seecasestudy)

 Inpracticehowevertheseclauseshaveabroadereectasitispossibletohavemorethanonedeliverypointataparticular

premises



Inquiry into the east coast gas market—April 2016

CasestudyShort-termtradingstrategy

AuserinaSTTMregionhasbeenfacedwithrisinggaspricesandexperiencessigniﬁcant

ﬂuctuationsinitsdailygasvolumerequirementsthatarenoteasytopredict

TheuserhasenteredintoaGSAwitharetaileratapriceofperGJTheGSAhasanACQ

andtake-or-payobligationshowevertheuserhassomeﬂexibilitytoadjustthevolumesthat

theytakeundertheGSAonadailybasis

OndayswheretheuserexpectsthemarketclearingpricetoexceedperGJtheuser

oerstoinjectgasintotheSTTMinexcessofitsownrequirementsOndayswheretheuser

expectsthemarketclearingpricetobelessthanperGJtheuserbidstowithdrawgas

inexcessofthevolumeofgas(obtainedundertheGSA)thattheuseroerstoinjecton

thatday

Subjecttotheusermeetingitsobligationsinrelationtoitscontractualvolumespeciﬁcations

thismethodofparticipatingintheSTTMallowstheusertoobtaincheapergaswhenthe

STTMpriceislowerthanperGJandtosellsurplusgaswhentheSTTMpriceishigher

thanperGJTheuser’sexperienceisthatthisstrategyhaslowereditsoverallgascosts

WhilethisstrategyhasbeneﬁtsforthebuyeritcreatessomecostsforthesupplierPricing

oerstomajorusersareoftenbasedinpartonaforecastoftheuser’sexpecteddemandproﬁle

Iftheuservariesfromthisdemandproﬁlethenitcouldcreateadditionalcostsforthesupplierto

theextentthatthosecostsarenotreﬂectedintake-or-payrequirementsorincapacitycharges

eitherbecausethecustomer’susageishigherthanexpected(requiringtheretailertoprovision

additionalgasandtransportationvolume)orlowerthanforecast(meaningtheretailermayhave

excessgasortransportationcapacity)

Inadditiontheoptionofbeingabletoengageinshort-termtradingstrategiesorofotherwise

beingabletosellgastoanothercustomerwithaﬂatterloadproﬁleisvaluabletosuppliers

Allowingcustomerstoengageinthetradingstrategyasdescribedabovepreventsthesupplier

frombeingabletotradethosevolumesofgasintheSTTMsitselfortootherwisesellthatgasto

athirdparty

Thesereasonsprovidesomeexplanationforwhysuppliersmaywishtoincluderesalerestriction

clausesinretailerGSAsTheInquirywasprovidedwithevidencethatsomesupplierswouldallow

customerstorequestremovalofastandardresalerestrictionclausebutthatthiswouldresultin

ahigherpriceforthesupplyofgasunderthatGSA

ThecostsdescribedaboveonlyariseinGSAsthatallowthecustomersomevolumeﬂexibilityIn

GSAswithapercenttake-or-paymultiplierandwhichpermitnodailyvariationinvolume

andintheabsenceofabroadercommercialrelationshipbetweensupplierandbuyeritishard

toseeabilateralcommercialrationaleforinclusionofaresalerestrictionifthecustomerwishes

tohavetheabilitytoresellgassuppliedunderitTheeectofsuchprovisionsistoreducethe

potentialforthetradingofgastooccur

TheInquiryencouragesgassuppliersandbuyerstoconsiderwaysinwhichGSAscould

allowgreaterﬂexibilityforgastradingTherewouldalsobemeritintheAEMCgivingfurther

considerationtowhethertheremightbewaysofmonitoringchangesintheleveloftrading

ﬂexibilityavailabletogasbuyersovertimeForexampleonepossiblealternativetoresale

restrictionsandexclusivityprovisionswouldbetoincludeproﬁtsharingmechanismsinthose

GSAsthatdoallowforvolumeﬂexibilityAsupplierandabuyercouldagreethatifthebuyer

(atthebuyer’schoice)resellsgassuppliedundertheGSAitwouldshareaproportionofits

proﬁtonthatsalewiththesupplierInadditionitcouldbeagreedthatifthebuyer(atthe

buyer’schoice)obtainsothergasitwouldshareaproportionofitsproﬁt(thatisthedierence

betweenthecostofobtaininggasfromthesupplierandthecostofobtainingthattradedgas)

withthesupplier

Acontractualmechanismofthiskindwouldgivesuppliersagreaterincentivetoallowtrading

bybuyersasthesupplierandthebuyerwouldsharethebeneﬁtsofsubsequentﬂuctuationsin



Inquiry into the east coast gas market—April 2016

themarketpriceofgasTheInquiryhasobservedthattherearesomeGSAsinvolvingAustralian

supplierswhichhaveproﬁtsharingarrangementswheregassuppliedundertheGSAisresold

bythebuyerAsanalternativetoresalerestrictionscontractualimplementationofcommercial

proﬁtsharingarrangementsofthisnaturecouldpotentiallyassistinthedevelopmentofliquidity

inSTTMsbyfacilitatingtheparticipationofadditionalbuyersinthosemarketsandincreasing

thevolumeofgastradedonthem

 Storagefacilitieshaveanincreasinglyimportantroletoplayin

managingdemandrisks

Anotheroptionthatgasmarketparticipantshavefordealingwithvariabledemandisstorageso

thatgasdoesnothavetobeconsumedassoonasitisproducedAmapofstorageoptionsin

theeastcoastgasmarketareshowninﬁgureandexistingstoragefacilitiesaredescribedin

moredetailintable

Therearethreetypesofstorageavailableintheeastcoastgasmarket

• largelonger-termstoragefacilitieslocatedclosetogasﬁeldsinQueenslandVictoriaand

SouthAustraliausingdepletedgasﬁelds

• smallerseasonalorpeakingstoragefacilities(includingtheDandenongLNGstoragefacility)

locatedclosetogasdemandcentresinVictoriaandNewSouthWales

• short-termpeakingstorageservicesongaspipelines

Table Existingstoragefacilities(excludingpipelines)

StorageFacility Operator WithdrawalCapacity(TJday) StorageCapacity(PJ)

Moomba(SouthAustralia) Santos  

Ballera(Queensland) Santos  

Roma(Queensland) GLNG  

SilverSprings(Queensland) AGL  

Newstead(Queensland) ArmourEnergy  

Iona(Victoria) QIC  

DandenongLNG(Victoria) APA  

NewcastleLNG(NewSouthWales) AGL  

Sources CoreEnergyGroupGasStorageFacilitiesEasternandSouthEasternAustraliaFebruarypandAustralianEnergy

MarketOperatorGasProcessingTransmissionandStorageFacilitiesApril

StoragecapacityinQueenslandorSouthAustraliacanbeusedasastrategyformanaging

varioustypesofﬂuctuationsingasproductionandgasdemandThereislessgasstorage

capacityavailableinVictoriaandNewSouthWalesTheVictorianandNewSouthWales

facilitiesbythemselvesarenotcapableofmeetingtheentirewinterseasonalpeakinthose

locationsasthatpeaklastsforseveralmonthsThusretailersinthesouthernstateshaveto

relyonacombinationofincreasedseasonalproductionbyproducersandonthatgasstorage

capacityinordertomeethighwinterdemandRetailersinthesouthernstatesalsousestorage

capacityongaspipelinestomanagethehighestdaysofpeakwinterdemand



Inquiry into the east coast gas market—April 2016

Figure Storageintheeastcoastgasmarket



Major Pipelines

Key

Capital Cities and Towns

Supply Hubs

Under Development Gas

Storage Facility

Moomba Underground

Gas Storage

LNG Injection

Iona

Gas Storage

Existing Gas Storage Facility

Ballera

Gas Storage

Roma Undergound

Storage System

Proposed Gas Storage Facility

Newstead

Undergound Storage

Silver Springs

Torrens Island Gas

Storage and LNG

Gas Storage

Origin Energy

Otway

Beach Energy

Otway Basin*

Boree Gas

Storage*

APLNG

Surat Basin*

QCLNG

APLNG

GLNG

Liquefaction Plants (Proposed)

Liquefaction Plants (Under Construction)

Ballera

Moomba

Wallumbilla

Moranbah

Mt Isa

Newcastle

Camden

Orbost

Longford

Pt Campbell

Lang Lang

Ascontractualﬂexibilityisdecliningorbecomingmoreexpensivestorageisbecomingmore

importantasariskmanagementmechanismforgasbuyersthathavevariableloadsparticularly

inVictoriaNewSouthWalesandSouthAustraliaThisisbeingreﬂectedinmovesbysomelarge

buyersparticularlyretailerstosecurestoragecapacityForexampleAGLhasrecentlybuiltthe

NewcastleLNGstoragefacilityinNewSouthWalesandhasalsoenteredintoacontractwith

QICwhichentitlesAGLtouseapproximatelyhalfofthecurrentcapacityoftheIonafacilityin

VictoriafromJanuaryInenteringintothiscontractAGLnotedthatitwillresultina





 CoreEnergyGroupGasStorageFacilitiesEasternandSouthEasternAustraliaFebruarypTheNewcastle

LiqueﬁedGasStorageFacilityisnowoperational

 AGLmediarelease‘AGLsecureslong-termgasstoragerights’December



Inquiry into the east coast gas market—April 2016

“…percentreductioninAGL’scoststomanageseasonaldemandwhencomparedto

AGL’sequivalentcontractedcostspriortothecommencementofthisincreasedcontracted

capacity…”

ThehighpricethatQICpaidtoacquiretheIonaundergroundstoragefacility



isanother

indicatorthatthedemandforstorageservicesisexpectedtoincreaseinthefutureThereare

severaloptionsfordevelopingadditionalgasstoragecapacityinVictoriaincludingusinggas

ﬁeldsthatmightbecomefullydepletedinthemediumterm

Mostnon-pipelinestoragecapacityinthesouthernstatesisheldbymajorretailersalthough

somecapacityinVictoriaisalsoheldbysmallerretailersVarioussmallerretailershaveobtained

storagecapacityongaspipelineseitherviatheconstructionofadditional‘branch’capacityor

asparkservicesontheprimarypipelineMostmajorretailersalsohavesomeparkserviceson

thesepipelines

Pipelineoperatorscanalsobuildadditionalstoragecapacityasanoshootfromapipeline

toprovidededicatedstorageservicestooneormoreretailersAsthis‘branch’capacityisnot

usedtotransportgasfromareceiptpointtoadeliverypointinanotherlocationusingthis

capacityforstoragedoesnotinvolveanylossoftransportationcapacityforpipelineoperators

Incontrastprovidingparkservicesonthecorepipelineitselfhastheeectofreducingthe

transportationcapacityofthepipelineThiscontributestohigherpricesforthoseparkservices

Accesstostoragemaybecomeamoresigniﬁcantissueinthefutureifthevolumeofgas

availableforsupplyintothedomesticeastcoastgasmarketincreasesAlackofaccessto

longer-termformsofstoragemayconstraintheabilityofsomesmallerretailerstoexpandin

thefutureAccesstostoragemaywellalsobecomeanimportantfactorinthedevelopmentof

gastradingItwouldprovideanalternativemechanismforpartiestogasfuturescontractsto

ensurethatthereissucientgasavailabletothemtophysicallydelivergasifneededunder

thosecontractsAtpresenthoweverthereisnoevidencethataccesstostoragecapacityon

reasonabletermsisasigniﬁcantbarriertoentrybysmallerretailersintheeastcoastgasmarket

 Liquidityintradingmarketsiscurrentlylimited

Thereareanumberofwaysinwhichparticipantsintheeastcoastgasmarketcantradegason

ashort-termbasisThesemechanismsincludetheDWGMoperatedbyAEMOinVictoriathe

STTMsoperatedbyAEMOinAdelaideBrisbaneandSydneytheWallumbillaGSHandbilateral

contractingTheAEMCisalsoproposingaWallumbilla-stylegassupplyhubforVictoriaaspart

oftheAEMCEastCoastGasMarketReviewandAEMOisplanningtoestablishatradinghub

atMoombaAllofthesemechanismscanassistmarketparticipantstomanageﬂuctuationsin

gassupplyanddemandwithintheirownportfoliosTheeectivenessofthesemechanismsas

tradingplatformsdependstoasigniﬁcantextentontheirlevelofliquidity

Manymarketparticipantshaveraisedconcernsaboutthelevelofpricetransparencyintheeast

coastgasmarketThisisbecausemostgasisconsumedunderlong-termbilateralconﬁdential

GSAsIfmoregastradingoccurredthroughtheSTTMstheDWGMandtheWallumbillaGSH

thenthiswouldimprovepricetransparencyIfliquidityinthesemarketswassucienttheprices

establishedviathesetradingmechanismswouldpotentiallybeadoptedaspartofapricing

formulaunderlong-termGSAs

Evidencepresentedtotheinquiryisthattheseexistingtradingmechanismsdonotcurrently

havesucienttradedvolumestoenableasigniﬁcantnumberofuserstorelyonthemfor

obtainingallorasubstantialportionoftheirgasrequirementsviatradingInadditionthese

mechanismsdonotcurrentlyprovideanadequatepricesignaltobeusedaspartofapricing

formulaunderlong-termGSAsWhilechangestomarketdesignmayhelpimprovetheoperation

ofthesemarketswithoutincreasedvolumeanddiversityofgassuppliersinthemarketthese

mechanismswillhaveonlylimitedsuccessinprovidingﬂexibilityandpricediscovery

 ‘CLPHoldingssellsIonagasplanttoQICLtdforbn’TheAustralianOctober



Inquiry into the east coast gas market—April 2016

TheInquirysupportstheAEMC’swideconsiderationofmarketparticipantviewsonthe

appropriatenumberandtypeoftradingmarkets(thatisvoluntaryormandatory)TheAEMC

shouldtestwhetherotherarrangementswouldbelikelytogeneratemoreliquiditycomparedto

theexistingDWGMandSTTMarrangements

 Theshort-termmarketsestablishpricesthatreﬂectshort-termﬂuctuationsonly

AtpresentallgassuppliedintheDeclaredTransmissionSysteminVictoriahastobecleared

throughtheDWGMwhileallgassuppliedinthegreaterSydneyBrisbaneorAdelaideregions

hastobeclearedthroughaSTTMTheDWGMandtheSTTMsaremandatoryschedulingand

balancingmechanismsAlthoughthereisscopeforgastobetradedviatheDWGMandthe

STTMsmostretailersanduserschoosetolimitexposuretothemarket-clearingpricebymaking

oersandbidsatvolumesandpricesto‘target’anetsellorbuypositionofbetweenﬁveto

percentorinsomecaseszero

AccordinglytradingontheDWGMorontheSTTMscurrentlyonlyinvolvesarelativelysmall

proportion(–percent)ofthegasthatisboughtandsoldinthegeographicregionsserved

bythosemechanisms

• TheVictorianDWGMhasseenormoreactivesuppliersandbuyersoveranextended

periodNetofmatchedsupplyanddemandabout–percentoftotalmarketdemand

(uptoTJperday)istradeddailyNoASXderivativesmarkethasdevelopeddespitea

productbeingoeredsinceapproximately

• ThenumberofsuppliersandbuyersinSydney(totalvolumeTJperday)hasincreased

recentlytoormoreandnettradevolumesaresimilartoVictoria(–percent)The

AdelaideandBrisbaneSTTMsaresmaller(totalvolumesuptoaboutTJperday)with

lessnettradetypicallythanotherSTTMsparticularlyinBrisbaneThereisnoASXproduct

fortheSTTMs

TheInquiryisawareofacoupleofexamplesofparticipantsintheeastcoastgasmarketusing

theexistingDWGMandortheSTTMstosupporttheirgasvolumerequirementseitherinpart

(seecasestudy)orinwhole(seecasestudy)Thesestrategiesaremostattractiveto

buyerswhohavesigniﬁcantﬂexibilityintheirdaytodaygasdemandrequirementsMany

gasusershavelimitedshort-termﬂexibilityintheirgasdemandwhichlimitstheappealof

thesestrategies

CasestudySmallretailers

SomesmallgasretailershavebeenobtaininggasbybiddingtowithdrawgasfromanSTTM

withoutalsooeringtoinjectgasintotheSTTMThatistheseretailersobtainallthegas

thattheyneedintherelevantSTTMregionatpricesdeterminedontheSTTMratherthanvia

aGSA

Thisenablestheretailertoenterorexpanditsmarketsharewithoutneedingtocommitto

alonger-termgassupplyarrangementwithaproduceroraretailerAlthoughtheretailer

isexposedtoﬂuctuationsintheSTTMpricetheretailercantrytomanagethisriskeither

byoeringretailGSAswhich‘passthrough’theSTTMpriceorbyenteringintodemand

managementarrangementswiththeircustomerswherebycustomerusageisreducedat

therequestoftheretailerwhenSTTMpricesarehighThesetypesofretailoersmaybe

attractivetoindustrialcustomersthathaveasigniﬁcantdegreeofﬂexibilityintheirgas

usage

InadditionmanypartiesindicatedtotheInquirythatthepriceoftradedgasisconsideredtobe

volatileThereisariskoflargeﬂuctuationsinthepriceandvolumeofgasavailablefromdayto

dayThislackofcommercialcertaintyactsasastrongdisincentiveagainstincreasedrelianceon

gastradingbothbyproducersandbyusers

Akeywayofmeasuringliquidityintradingmarketsistoassesswhethermarketparticipants

havetheabilitytoexecutetradeswithouthavingamaterialimpactonpriceAsnotedabove

basedonevidenceavailabletotheInquirythevolumesofgascurrentlytradedontheDWGM



Inquiry into the east coast gas market—April 2016

andontheSTTMswouldonlysupportalimitednumberofbuyersusingthosemechanismsas

theirprimarysourceofgasAsigniﬁcantincreaseinthenumberofbuyersengaginginthese

typesofstrategieswouldleadtoasigniﬁcantincreaseinthepriceofgastradedviathose

mechanismsThisindicatesthatthesemarketsarenotdeepwhichdiscouragesmoreextensive

relianceonthesemarketsasasourceofsupplyAlthoughasigniﬁcantincreaseinaDWGMor

STTMpricemightpotentiallyleadtoadditionalsupplybyproducersandorretailersviathat

mechanismitisalsolikelytoleadtoreduceddemandbyexistingbuyerswhoalsohavethe

optionofobtaininggasunderaGSAThustheoveralleectonliquidityislikelytobemuted

unlesstheincreaseinthevolumessoughtbynon-GSAbuyersisverylarge

NoproducercurrentlyusestheDWGMortheSTTMsasamajoroutletforsupplyThevast

majorityofgasproducedintheeastcoastgasmarketissoldbytheproducerunderbilateral

GSAsSuchGSAshavehistoricallybeenanimportanttooltounderpinnewinvestmentingas

ﬁeldsastheygivepriceanddemandcertaintytotheproducerProducersprovidedevidence

totheInquirythattheydidnothavesucientconﬁdenceinthematurityofSTTMstoprovide

themwithalevelofpriceandvolumecertaintythatwouldenablethemtosupplysigniﬁcant

volumesofgasonthesemarketsSimilarlymanybuyersareconcernedthattradinggaswill

increasenotdecreasetheiroverallaveragegaspriceifdemandontheDWGMorSTTMs

increasessigniﬁcantly

AlmostallmarketparticipantswhoprovidedevidencetotheinquiryontheSTTMsindicated

thattheyconsideredthesemarketstobeprimarily‘balancing’marketsratherthanfulltrading

marketsMostofthetradedvolumesweretoadjustimbalancesbetweenexpectedandactual

supplyordemandandthepricesonlyreﬂectshort-termdayto-day-conditionsratherthanthe

underlyingsupplyanddemandconditionsforgassupplyTheshort-termpricesinthesemarkets

werenotregardedasprovidingaguidetoactualmarketpriceswhichcouldbereﬂectedin

bilateralsupplynegotiations

 TheWallumbillaGSHiscurrentlyattractingalimitedrangeofparticipants

TheWallumbillaGSHisavoluntaryexchangethatenablessuppliersandbuyerstotradegas

uptoseveralmonthsinadvanceofphysicalsupplySpeciﬁcoersandbidsareanonymously

matchedagainsteachotheronabilateralbasistoformatradeTheexchangedoesnot

determineamarket-clearingpriceapplicabletoallparticipants

TradeatWallumbillahasbeenincreasingbutisstillintermittent—therehavestillbeensomedays

onwhichnogashasbeentradedAnASXderivativeproductwaslaunchedinthemiddleof

buttherehavebeenveryfewtradesofthisproductasyetRegisteredparticipantsonthe

WallumbillaGSHincludeproducerslargeretailersGPGsandthreelargeindustrialusers

TheQueenslandLNGprojectsprovidedevidencethattheyhaveasigniﬁcantinterestinbeing

abletoengageinshort-termtradestomanageunexpectedvariationinproductionandLNG

plantperformanceAPLNGforexamplehasbeenactiveontheWallumbillaGSHinthepast

monthsHowevertheLNGprojectsindicatedthattodatethevastmajorityoftheirshort-

termtradinghasbeenundertakenbywayofﬂexiblebilateralgassupplyarrangementsThese

participantsindicatedthatthiswasbecausetherewereonlylimitedvolumestradedonthe

WallumbillaGSH

ComparedtocurrentlevelsthevolumeoftradesontheWallumbillaGSHshouldincreaseover

timeastheLNGprojectsmoveintofullproductionandbecomemorefocusedondeveloping

andoptimisingtheirsupplyoperationsandtradingstrategiesInadditioniftheLNGprojects

engagedinfewerbilateraltradestomanagetheirvolumeﬂuctuationsinfavourofusingthe

WallumbillaGSHthiswouldovertimeincreasethevolumestradedonthehub

Howeverproducersmightbereluctanttodothisduetotheurgentnatureofmanyvolume

ﬂuctuations(forexampleunexpectedinfrastructurefailure)whichmeanstheconsequences

ofbeingunsuccessfulinclearingatradeinashorttimehorizonareverysevereTheLNG

projectparticipantsoftenalsohaveotherphysicalmechanismsavailabletothemformanaging

ﬂuctuationsincludingturningdowntheﬂowofgasfromtheirwellsandaccesstonearby

storagefacilitiesInadditioneventhoughtradesontheWallumbillaGSHareanonymousother



Inquiry into the east coast gas market—April 2016

marketparticipantsmaybeabletoinfertheidentityofparticularbidsgiventhelowfrequency

oftradeMarketparticipantsmaybereluctanttoprovideotherpartieswithsuchmarket

intelligencebytradingonapublichub

 Greaterliquidityintradingmarketsisdesirablebutisdependentonincreased

participationinmarkets

Thereismeritinencouraginggreaterparticipationinwholesalegasmarketsasawayof

increasingliquiditywhichwillimprovepricediscoveryandbetterallowmarketparticipantsto

managevolumeﬂuctuationsTheInquirysupportsthedevelopmentoftradingmechanismsthat

aretargetedatfacilitatinggreaterparticipationintradingmarketsBeingabletomanagevolume

ﬂuctuationsontradingmarketscouldhelpuserscompensateforareducedlevelofcontractual

ﬂexibilityinrecentyearsEstablishingareliabletradingpricewouldprovidegreaterclarityfor

producersinmakingproductionandpricingdecisionspotentialnewentrantretailersinmaking

theirentrydecisionandusersincludingcommercialandindustrialusersinmakinglong-term

businessplanningandinvestmentdecisions

Toincreaseparticipationintradingmarketsstepscanandshouldbetakentoreducethe

costsassociatedwithtradinginthosemarketsincludingthecostsoftransportinggastothem

(seechaptersto)Inthelong-runhoweversigniﬁcantimprovementinparticipationand

liquiditywillbebestsupportedbyanincreaseinthediversityofgasmarketparticipantsandthe

volumeofgassupplyinthemarket

 Reducingtransactioncostswillincreaseparticipation

Thegreaterthecostsanddicultiesofparticipatingintradingmarketsthemoreuserswillbe

reluctanttoengageintradingactivityThefollowingstepscouldbetakentoreducetransaction

costsintradingmarkets

• alignthegasstartofdayineachtradingmarket

• aligngassupplynominationtimesacrossproducersandaligngastransportationtimes

acrosspipelines

• improvetheabilityofmarketparticipantstoaccessshort-termpipelinecapacityby

standardisingcontracttermsandconditionsandotherpotentialmeasuressuchasauctioning

ofcapacity

• ensurethatalignmentandriskissues(includingtheriskofincurringancillarycharges

associatedwithparticularmarketmechanisms)aretakenintoaccountwhendesigningor

re-designingderivativetradingproductssuchasthoseoeredbytheASXinrelationtothe

VictorianDWGM

TheInquiryunderstandsthattheAEMCisconsideringeachofthesemattersaspartofthe

AEMCEastCoastGasMarketReviewandtheGasDayHarmonisationproposedrulechangebut

thatmatterssuchasaligningnominationtimesacrossproducersandpipelinesmayneedtobe

anindustryledinitiativeTheInquirysupportstheAEMC’seortsinthisareaandencourages

industrytodoitsparttoreduceanypotentialbarrierstotradeandtransactioncostsThere

wouldalsobemeritintheAEMCconsideringhowthetradingandotherrisksofpurchasinggas

andtransportationservicesonaday-aheadbasiscanbestbemanagedgiventhepotentialin

somecasesfor

• thebuyertohavetopurchasegasfromthetradingmarketwithoutknowingifitcansecure

transportationservices

• thebuyertohavetomakenominationstoproducersorpipelineoperatorsforthefollowing

daywithoutknowingtheex-anteSTTMpriceforthatday

• apeakingGPGtohavetopurchasegasforthefollowingdaywithoutknowingthatthe

electricityitintendstoproduceusingthatgaswillbedispatched

 Increasedvolumesanddiversityofsupply

TablesummarisesthefactorsidentiﬁedbytheInquirythatarerelevantforassessingwhether

tradingmarketsarewellfunctioningAnimprovementintheseindicatorswillincreasethe

conﬁdenceofparticipantsintradingmarketsandimproveliquidity



Inquiry into the east coast gas market—April 2016

Table indicatorsofconﬁdenceingastradingmarkets

Indicator Currentstatus Futureoutlook

Minimalpricechangein

responsetotrade(market

depth)

Smallincreasesinvolumeleadtolarge

changesinprice

Ifsupplyoutlookimprovesandconﬁdencein

marketincreasestheproportionofgassupply

tradedasspotmayincrease

Nodominanttradingparty Smallnumberofpartiesaccountfor

vastmajorityoftradedvolumes

MoreparticipationfromtheLNGprojectsor

newsmallusersandretailersmayincrease

diversityofparticipation

Newsourcesofsupplyintheeastcoastgas

marketmayincreasediversityofparticipation

Largenumberofproducers

andbuyers

Smallnumberofproducersparticularly

inthesouthernstatesthethreelargest

retailersaccountforasigniﬁcant

proportionofretailgasmarkets

Availablecommodity Marketsupplyistightduringrampup

tofullLNGproduction

Possibleimprovementinsupplyconditions

asLNGprojectsreachsteadystateandifgas

fromArrow‘sﬁeldsandorNorthernTerritory

gasaresuppliedintothemarket

Availabletransport Markethasbeenadjustingtonew

LNG-ledsupplydynamicscontractual

congestiononsomeroutesdiculties

inshort-termtradingduetohigh

transactioncosts

Marketadjuststonewdynamicspossible

introductionofauctionmechanismtofacilitate

short-termpipelinecapacitytrading

Whilethestatusofmanyoftheseindicatorsissuchthatmanyusersdonothaveahighdegree

ofconﬁdenceintradingmarketsthereissomehopethatthesituationwillimproveinthefuture

InparticularincreasedparticipationbyLNGprojectsintradingmarketsovertimehasthe

potentialtoleadtomaterialincreasesinliquidityparticularlyoncetheyreachfullproductionand

starttooptimisetheirsupplyoperationsandtradingstrategies

TradingontheWallumbillaGSHmayprovideamechanismforadditionalgastoenterthe

domesticmarketiftheLNGprojectsbecomenetsuppliersintotheWallumbillaGSHoncethey

enterfullproductionHoweverthiseectmaybemutedbythefactthatadditionalsupplyinto

theWallumbillaGSHmayreducethepriceofgasontheWallumbillaGSHintheabsenceofa

correspondingincreaseindemandLNGprojectsmightalsodecidetosellgasdirectlyintothe

southernstatesincludinganyfuturetradinghubinthesouthernstatesiftheyareabletoaccess

transportationcapacityonreasonableterms

Asdiscussedinchapterthelikelihoodofadditionalgasenteringdomesticmarketsatany

particularpointintimewilldependonthecurrentandexpectedfuturedynamicsofLNG

exportpricesandtheextenttowhichtheLNGfacilitiesareoperatingatfullcapacityAccessto

LNGexportpricesandthedistancefromdemandcentresinthesouthernstatesreducesthe

attractivenessfortheLNGprojectsoftransportingandsellingtheirowngasintothesouthern

statesHoweverthereissomeevidence(seechapter)thatﬂowsofgasfromQueensland

intothesouthernstatesincludingviaswapsmayincreasetosomeextentinthefuture

oncetheLNGprojectsreachsteadystateproductionTheavailabilityofadditionalgasfor

domesticconsumptioninQueenslandmayalsofreeupothergasforretailerstosupplyintothe

southernstates

Inadditionasdiscussedinchapterimprovingthesupplyoutlookinthesouthernstates

throughtheremovalofrestrictionsononshoregasdevelopmenthasthepotentialtoincrease

diversityofsupplyandleadtogreaterliquidityRegulatorystepstoimproveaccesstoshort-

termpipelinecapacityincludingasproposedbytheAEMCwillalsoassistparticipationin

thesemarkets

 Establishingapriceserieswouldbemoreeectivethanmandatorytrading

Onewaywhichcouldbeseenasimprovingliquiditywouldbetorequiremandatorytradingof

gas—thatistorequirethatproducerssellgasthroughtradingmarketsatpricesdetermined

bythosemarketsratherthanunderGSAsortorestrictinsomewaysupplyunderGSAsThe

Inquirydoesnotsupportsuchmeasures

GSAsplayanimportantroleinthemarketandwillcontinuetodosoTheyprovideproducers

withadegreeofpriceandvolumecertaintywhichisnecessarytosupportinvestmentbysome



Inquiry into the east coast gas market—April 2016

producersForexamplesmallproducersmaybeabletorelyonacommittedcustomer’scredit

ratingwhenseekingﬁnanceOtherproducersmaybeabletoacceptmoreriskbutmayalso

beunwillingtofullycommittoaverylargeinvestmentdecisionwithoutasigniﬁcantdegreeof

certaintythattheywillbeabletosellthevolumesthattheyproduceGSAsalsoprovideusers

withagreaterdegreeofcertaintyabouttheirfuturegassupplyincludingaboutthepricethat

theywillpayforgaswhichallowsthemtomakeinvestmentdecisionswithbetterinformation

GiventheimportanceofGSAsrestrictingthesupplyofgasunderGSAswouldcausemajor

disruptiontobusinessplanningandinvestmentbyproducersandusersuntilanewsupply

anddemandbalanceisestablishedandtheeventualpricingoutcomesareverydicultto

predictThoseoutcomesmaythemselvesbyaectedbyreductionsindemandarisingfrom

thatdisruption

Establishmentofano-marketindicativepriceseriesorpriceindex(seechapter)isamore

appropriatemechanismforimprovinggaspricetransparencyAnindicativepriceseriesor

priceindexbasedonLNGnetbackorGSApriceswouldprovideamechanismforcomparing

tradingpriceswiththoseotherpricesItwouldthereforeassistproducersandusersindeciding

whethertocommencetradingandtodosoatatimethatwouldminimiseanydisruptionto

theirbusinessesIfsuchamechanismbecomessucientlywellacceptedmarketparticipants

mightdecidetomakeuseofthatpriceseriesasanelementofthepricingprovisionsinaGSA

SupportingthistheInquiryhasseenGSAsthatcontemplatethepossibilityofsubstitutingthe

agreedcontractpriceforanexternalpriceifsuchapriceissucientlywellestablished



Inquiry into the east coast gas market—April 2016

5 The gas market is opaque and is not signalling

expected supply problems eﬀectively

Thereareanumberofgeneralattributesthatassistincreatingacompetitivemarketthat

operatesecientlyandsendsappropriateinvestmentsignalstomarketparticipantsForagas

markettheseattributesincludebuyersandsellersbeingabletoaccessconsistentinformation

ongasreservesandresourcestoenableinformeddecisionsrelatedtothesupplyoruseofgas

andanindicativepricetoprovideaguidetothevalueofgas

TheeastcoastgasmarketislackinginboththeseattributesInformationongasreservesand

resourcesisinconsistentunreliableorunavailablehinderingthemarket’sabilitytorespondto

supplytightnessandcurrentandpredictedhigherpricesAnindicativegaspriceisunableto

becalculatedbythemajorityofparticipantsgiventheconﬁdentialbi-lateralcontractswhich

dominatethemarket

Informeddecisionsprovideamorecertainregulatoryenvironmentandassistinencouraging

competitioncreatingmoreecientmarketstructuresandensuringthatregulatoryburdens

onindustryarenon-duplicativeandeectiveTheInternationalEnergyAgencynotedinits

reviewofAustralianEnergyPolicies



that‘highqualityenergydataandstatisticsarethe

cornerstoneofenergypolicyandanessentialelementofinformeddecisionmaking’andthat

AustraliashouldimproveitsdatagatheringItalsoassistsinprovidingassurancestothewider

communitythatpetroleumresourcesandreservesarebeingmanagedinthenationalinterest

Whenrelevantinformationanddataiscombinedwithanindicativepricereﬂectiveofrealmarket

pricesitimprovestheabilityofmarketparticipantstorespondtopotentialsupplyshortfalls

infrastructureinvestmentopportunitiesandpricemovements

 Additionalgasmarketinformationwillimprovemarket

competitiveness

AnumberofusershavestatedpubliclyandtotheInquirythatsucientinformationis

notavailabletofullyinforminvestmentdecisionsortoprovideanequalbasisincontract

negotiationsThisincludedsuchinformationastheavailabilityofreservesandresources

informationproductionproﬁlesforCSGwellsandproductionandshippingschedulesforthe

LNGprojects

Itisimportanttonotethatallgasreservesandresources(andpetroleumreservesandresources

moregenerally)arenotabsoluteandcannotbemeasureddirectlyEstimatesofreserves

combineinformationandassumptionsabouteconomicsfeasibletechnologyandgeology

Upstreamcompanieswillusethisinformationindierentwayswhenassessingtheeconomic

potentialofagivenresourceorreservewithdieringassessmentsofthepotentialtodeploy

technologiesindevelopinggasresourcesdieringecienciescompaniescanbringtobearon

theproductionprocessanddieringviewsonfuturedemandandpricelevels

Notallparticipantsinthegasmarketwillhavethesamelevelofinformationorunderstanding

ofthevariousassessmentsandjudgementsusedtobringaprojectintoproductionHowever

tousereservesestimatesinthemakingofinformedjudgementsitisnecessarytohavesome

understandingofhowtheyaregeneratedandtohaveconﬁdenceintheintegrityofthe

estimatingprocess



Currentlyreserveresourceandproductioninformationiscollectedthrougharangeof

disconnectedmechanismsandbodiesTheAustralianStockExchange(ASX)hasareporting

obligationforlistedcompaniestoreportlimitedinformationongasreservesannuallyalong

withquarterlyproductionactivitiesCompaniesmayprovideadditionaldetailsthroughinvestor

presentationswhicharealsoprovidedthroughtheASXStateandterritorygovernmentsallhave

 InternationalEnergyAgencyEnergyPoliciesofIEACountriesAustraliaReviewp

 OxfordEnergyInstitutePaperathttpswwwoxfordenergyorgwpcmswp-contentuploadsSP-

PetroleumReservesinQuestion-JMitchell-pdf



Inquiry into the east coast gas market—April 2016

somereportingrequirementsandtheCommonwealthcollectssomeinformationparticularly

relatedtoitsresponsibilityforoshoreresourcesalthoughmuchiscommercialinconﬁdence

Unfortunatelythewayinformationanddataiscollectedaggregatedanddisseminatedlimits

theusefulnessofmuchofthereserveandresourceinformationthatisavailabletomarket

participantsandregulatorsThereislittleconsistencyindatastandardsandaggregation

betweenjurisdictionsandtheASXMostoftheassumptionsthatliebehindthedataarenot

reportedandlargelyinvisibletoparticipants

 Betterinformationanddatawillbeneﬁtallmarketparticipants

Consistentreliableandaccurateinformationparticularlyaroundreserveandresourcedata

providesanumberofadvantagesandbeneﬁtstogasmarketparticipantsacrossthevalue

chainThisincludesreducingtransactioncostsinactivitiessuchascontractnegotiationsby

providingallpartieswithahigherlevelofconﬁdenceinnegotiatedoutcomesItalsoallowsfor

theimplementationofappropriatemanagementstrategiesproportionatetoknownriskstobe

incorporatedintheseoutcomes

Therearealsomorespeciﬁcbeneﬁtsthatshouldassistthedownstreammidstreamand

upstreammarketparticipantsalongwithgovernmentsandregulators

• Gasusers—Dataonreservesandresourcesassistsininformingthedecisionsofgasusers

abouttheirfutureuseofgasforwardplanningandinvestmentdecisionsAdditionaldataand

informationwouldalsohavetheeectoflevellingtheplayingﬁeldwherelargeincumbents

(bothproducersandpotentiallyaggregatorsretailers)haveadditionalknowledgeand

informationnotavailabletomostothermarketparticipantsThisputsgasusersatadistinct

disadvantageincontractnegotiationandbargaining

Wheregasusersdependongasasafeedstock(petrochemicalsfertilisermanufacture)or

asamajorfuelsource(glasspaperco-generationetc)ahigherelementofcertaintyis

requiredaroundfuturegassuppliestounderpinlargeinvestmentdecisionsonperiodicplant

refurbishmentsormajorinvestmentsinupgradesexpansionsornewplantandequipment

• Pipelineownersoperatorsstorageownersprocessingfacilityowners—Changesingas

reservebookingsovertimewouldsignalfutureinvestmentopportunitiesandsupplyrelated

riskstothemidstreamtransportationandfacilityownersoperatorsThiscouldinclude

maximisingtheﬂexibilityofexistinginvestmentsthroughtimelyupgradesasnewordierent

typesofreservesarebroughtintoproductionorfacilitatingnewproductionthroughtimely

investmentsinconnectinginfrastructure

• Suppliersandproducers(includingnewentrants)—Additionalreserveandresource

informationcoupledwiththedemandforecastsprovideanimportantinvestmentsignal

totheupstreamsectorinpursuingnewexplorationanddevelopmentactivitiesItcould

alsoprovideincreasedconﬁdencetotheinvestmentcommunityinprovidingthecapitalto

undertaketheseactivities

• Governmentandregulators—Aconsistentandfullerinformationsuitewillprovide

governmentsandregulatorswithamoreaccuratebenchmarkonwhichtoformulate

policyandregulationsfortheindustryItwouldalsoprovideafullerandmoreaccurate

pictureoftheresourceendowmentofvariousjurisdictionsandtoprovidemoreaccurate

advicetogovernmentsonmattersrelevanttomanagingthatresourceintheinterestsof

thecommunity

Itshouldalsohelpinformgovernmentaboutthepotentialcostsandbeneﬁtsof

implementingpolicydecisionslikemoratoriaorchangesinregulatorycomplianceburdens

Concernsaboutthesecurityoflong-termgassupplyforindustriesandhouseholdscouldbe

weighedmoreaccuratelywiththeconcernsofandinterestsofsectorialinterestgroupsIt

wouldalsoinformdecisionsaroundthenecessityofroyaltyholidaysincreaseddepreciation

andtaxconcessionstostimulateexplorationanddevelopmentifgovernmentswere

concernedabouttheadequacyofgassuppliesinthefuture



Inquiry into the east coast gas market—April 2016

 ImprovingInformationanddatacollectionanddissemination

Amorecompletesetofinformationanddataespeciallyaroundgasreservesandresourcesﬁts

withintheNationalGasObjectiveTheNationalGasObjectiveassetoutintheNationalGasLaw

isto

“…promoteecientinvestmentinandecientoperationanduseofnaturalgasservices

forthelongterminterestofconsumersofnaturalgaswithrespecttopricequalitysafety

reliabilityandsecurityofsupplyofnaturalgas”

TheNationalGasLawalreadyprovidesforcertaininformationtobereportedtoAEMOfor

publicationontheGasMarketBulletinBoardandtheAEMCiscurrentlyconsideringusingthis

powertorequirethepublicationofmoreinformationonprovenandprobablereserves

 ASXreservereportingrequirements

EssentiallythereportingrulesandguidelinesforASXreportingarebasedontheSocietyof

PetroleumEngineers-PetroleumResourcesManagementSystem(SPE-PRMS)Reportingon

reservesandresourcesisundertakenonaprobabilitybasiswithacompanyrequiredtohave

aneconomicprojecttobookreservesandresourcesHowevertheSPE-PRMSisaprinciples-

basedprojectmanagementsystemforpetroleumresourcesandisnotinitselfasetof

reportingguidelines

UndertheSPE-PRMSthefollowingcategoriesforclassifyingreservesandresourcesareused

• ProspectiveResourcesarethosequantitiesofpetroleumestimatedasofagivendatetobe

potentiallyrecoverablefromundiscoveredaccumulationsbyapplicationoffutureprojects

• ContingentResourcesarethosequantitiesofpetroleumestimatedasofagivendateto

bepotentiallyrecoverablefromknownaccumulationsbuttheappliedproject(s)arenotyet

consideredmatureenoughforcommercialdevelopmentduetooneormorecontingencies

forexamplecosttechnologymarketdemand

• Reservesarethosequantitiesofpetroleumanticipatedtobecommerciallyrecoverableby

applicationofdevelopmentprojectstoknownaccumulationsfromagivendateforward

underdeﬁnedconditions

– Proved(P—percentprobabilityofbeingproduced)

– ProvedandProbable(P—percentprobabilityofbeingproduced)

– ProvedProbableandPossible(P—percentprobabilityofbeingproduced)arethe

measuresofprobabilityused

TheGuidelinesforApplicationofthePetroleumResourcesManagementSystemnotethat‘Itis

importanttorestatethefollowingPRMSguidanceWhileeachorganisationmaydeﬁnespeciﬁc

investmentcriteriaaprojectisgenerallyconsideredtobeeconomicifitsbestestimate(orP)

casehasapositivenetpresentvalueundertheorganisation’sstandarddiscountrate’



This

thenisthebasisforaproject(andforcompaniesinassessingtheviabilityofaproject)TheP

reserveclassiﬁcationbecomesthestandardreportingmeasurementinbothexternalreporting

obligationsandininternalprojectinvestmentdecisionsUnderstandingsomeoftheunderlying

assumptionsonhowPreservecalculationsarereached(suchasapriceassumption)provides

additionalassurancetomarketparticipantsonthecertaintyofprojectsbeingabletodelivergas

 Otherdatasources

TheGasStatementofOpportunities(GSOO)anditsrelateddataandinformationsetsare

publishedeveryyearforboththeeastcoastgasmarketandtheWesternAustraliangasmarket

byAEMOItprovidesarangeofinformationongasreservesandresourcescoupledwith

informationonprocessingandtransportationinfrastructureanddemandTheGSOOanalyses

transmissionproductionandreservesadequacytohighlightlocationswhereforecastgrowing

demandmayrequireinvestmentinnewgasproductionortransmissioninfrastructureor

ﬁelddevelopments

 SeehttpwwwspeorgindustrydocsPRMSGuidelinesNovpdfpage



Inquiry into the east coast gas market—April 2016

TheGSOOdoesnotclaimtoprovidealltheinformationinvestorsandmarketparticipants

requiretomakeaparticularinvestmentormarketingdecisionMuchofthedataintheGSOO

isalsobasedonarangeofassumptionsandinformationutilisedbyconsultantspreparingthe

reportwhichwhileitmaybeclosetoactualcompanyinformationisbasedonassumptions

andprocessesthatarenottransparenttothemarketandarelikelytodierfromactual

companyinformation

StatesterritoriesandtheAustraliangovernmentsallhaveaccesstodierentdatasetswhich

coveraspectsofreservesandresourcebookingsbytheindustryTherearealsosigniﬁcant

dierencesinthepublicreleaseofthatinformationbetweenjurisdictions

• Queenslandappearstohavethemostencompassingdatacollectionregimeandmakesmost

ofthecollecteddatapublicthroughadownloadablespreadsheetSpreadsheetscoverboth

productionandreservesforCSGconventionalgascondensateandoilproduction

– BookedPreservesforallpermitsalongwiththepermitdesignationandnumberthe

operatorbasinandﬁeldareallavailableasisatimeseriesofreservebookingsback

toThereservebookingsarebasedonSPE-PRMSguidelinesbutassumptions

underpinningreservesarenotavailable

– Overtimeandcombinedwithwelldatainquarterlyreportsthisinformationcouldbe

combinedtogiveanindicationofproductiondeclineratesandwellproductivityforspeciﬁc

licenceareaswhichmaybeusefulforthemarket(andregulators)

• SouthAustraliaVictoriaNewSouthWalesandtheNorthernTerritoryallappeartohavelittle

informationavailablepubliclyonreservesorresourcesPartlythisistheresultofevolving

onshoreregulationwhereuntilcomparativelyrecentlytherewaslimitedonshoreexploration

anddevelopment(especiallyinNewSouthWalesandVictoria)

• TheCommonwealththroughtheNationalOshorePetroleumTitlesAdministrator

(NOPTA)mandatestheprovisionofreserveandproductioninformation(alongwitha

widerangeofotherinformation)inannualtitleassessmentreportsundertheOshore

PetroleumandGreenhouseGasStorageActHowevertheinformationisregardedas

commercialinconﬁdenceundertheregulationsandisnotavailablepubliclyortoother

governmentagencies

• TheCOAGEnergyCouncilhasalsodirectedtheUpstreamPetroleumResourcesWorking

Grouptoprovideareportonunconventionalgasreservesresourcesandproductionfor

CouncilMinistersHowevertodatethereporthascontainedsigniﬁcantinformationgaps

wherestatesandterritorieshavebeenunabletoprovideinformationtoGeoscienceAustralia

(whocompiledthereport)

 TheUnitedStates(US)reportingrequirementsaremorecomprehensiveand

consistent

TheUSreportingregimeisusefultoexaminegivensomesimilaritieswiththegasindustryin

Australia(bothindustriesoperateoshoreandonshorehaveconventionalandunconventional

resourcesandhaveprivatecompaniesoperatingacrossstateboundariesinafederalsystem)

TheUSSecuritiesandExchangeCommission(SEC)

TheSEChasmandatedincreasedstandardisationparticularlyaroundastandardoilprice

assumptionCompaniesnowreportusinga-monthaverageoilpriceattheendofSeptember

eachyearwhenreportingonprovedreservesTheSEChasoptionalreportingofprovedand

probablereserves(P)



Inquiry into the east coast gas market—April 2016

IntheSECsoughtcommentontheuseofoilpriceassumptionsaspartofthe

ModernisationofOilandGasReportingprojectwithaparticularlyforcefulcommentator

notingthat

“Undernocircumstancesshouldindividualcompaniesbeallowedtogeneratetheirownprice

forecastsforthebasicprovenSECreservesreportThiswillleadtoinconsistencyandnoone

willbeabletocomparecompanies …UseofanaveragepriceorSECgeneratedpricedeck

wouldleadtoconsistencybetweencompanies”





TheSECrulesrequirecompaniestousetheunweightedaverageofthepriceontheﬁrstdayof

eachmonthforthemonthsprecedingtheendofthecompany’sﬁscalyear

TheSEChasnotedthattherulesreducetheeectsofshort-termvolatilityandseasonalityinthe

marketwhileenhancingcomparabilitybetweencompaniesandthattheyenableinvestorsto

comparethebusinessprospectsofvariouscompaniesonamoreobjectivelevel

TheUSEnergyInformationAgency(EIA)

TheEIAalsomaintainsamandatedandencompassinginformationgatheringandrelease

regimeThisincludesinformationonoilandgasreservesandresourcesproductionstorageand

gasprices

Theinformationonreservesisgatheredthroughamandatedsurveyform(FormEAI–L)which

requiresdetailedinformationonreservesdowntospeciﬁcﬁeldsineachtenementforindividual

companiesacrossallstatesintheUSWhilenotallcompaniesreporteveryyearitappearsthat

alllargercompaniesaresurveyedandsmallcompanieswhosereservesarelessmaterialforEIA

purposesaresurveyedlessoften

Informationisavailablepubliclyalthoughreserveinformationisaggregatedtoageographicarea

levelinthepubliclyavailablereports

TheEIAreleasesalargerangeofinformationandreportsbasedonthisandotherdataMostof

thesupportingdataisavailablefordownloadandpublicuse

 ReportingrequirementsinAustraliaareinconsistentandincomplete

Whilereportingreservesandresourceshasthepotentialtoprovideusefulinformationandto

meetthestatedobjectiveofprovidinginvestmentsignalsthereareanumberofinconsistencies

inthewaythisinformationiscurrentlyreportedthatlimitsitsutilityForexample

• ReportingdatesCompaniesreportreservestotheASXatdierenttimesthroughoutthe

yearwithnocleardatefromwhichareserveﬁgureistakenForexampleSantosreportsits

reservesinFebruaryOrigininJulyandBHPBillitoninSeptemberaspartofitsannualreport

• AggregationTheASXprovidesﬂexibilityinhowcompaniesreportreservesaccordingto

geographicregionTheinstructiontouse‘arithmeticsummation’accordingtocompany-

deﬁnedgeographicareasmeansthatBHPBillitonreportsasingleﬁgureforallitsreservesin

AustraliawhileSantosandOriginEnergybreakﬁguresdownintobasinsSmallercompanies

thathavefewerprojectsmayhavemorespeciﬁcreservereports

– Companiesdoreportfurtherinformationinavarietyofcompanypresentationstoinvestors

orotherpresentationswhichareusuallyalsoavailableontheASX

– Whilethesepresentationsareusefuldiligenceincollectingthisinformationisrequiredforit

tobeusedtoputtogetherareservespictureforaspeciﬁccompanyorgasﬁeld

– QuarterlyreportswhicharealsolodgedwiththeASXprovidedetailsonwelldrilling

activityandproductionAgainthereisagreatdealofvariabilityinthisinformationbetween

companiesTheproductionﬁgurescanbesubtractedfromreserveﬁgures(ifavailable)to

provideanongoingpictureofreservesandﬁelddepletion

• ASXlimitationsOnlycompanieslistedontheASXhaveanobligationtoreportreserve

ﬁguresAsanexamplethehalfownerandoperatoroftheGBJV-ExxonMobilonlyreports

itsreserveﬁgurestotheUSSECHowevertheseﬁguresarealsohighlyaggregatedinto

 Seehttpwwwsecgovrulesﬁnal-pdf



Inquiry into the east coast gas market—April 2016

geographicregionsandprovidelittledetailspeciﬁcﬁeldsbasinsorremainingreservesinthe

GippslandBasin

• AssumptionsThereislittledetailgivenintheASXreportingastotheﬁnancialandother

assumptionsthatarebehindthecalculationofareserveﬁgureWhencompaniesﬁrstreport

onreservesorresourcestheyarerequiredtoprovidematerialeconomicassumptionsthat

underpinthenumbersandwhentherearematerialchangesinreserveorresourcenumbers

thesemustalsobeexplained

– HoweverinpracticetheguidelinesfromtheASXprovideagreatdealofﬂexibilityasto

assumptionsthatareusedincalculatingreservesbya‘qualiﬁedperson’whichmaythenbe

passedthroughareservescommitteeinthecompanyforaﬁnalassessmentbeforebeing

reportedThelevelofdetailwhichcompaniesprovideinreserveandresourcereportsalso

variesconsiderably

– Consistentandaccurateinformationincludingpriceassumptionswouldassistthe

investmentsectortobetterassessprojecteconomicscompanybalancesheetsandshare

priceassumptionsThiswouldenableahigherlevelofconﬁdencebytheinvestmentsector

inprovidingﬁnancefortheupstreamindustrywithappropriatetermsandconditions

attachedtothatﬁnance

– TheASXrevieweditsreportingrulesandobligationsinbutatthattimeelectednot

tostandardisethepriceassumptionreportingItwasreportedthatsmallercompanies

objectedtothestandardisationwhichtheybelievedwoulddisadvantagethem—althoughit

isnotclearhowthatdisadvantagewouldoccur

 Commercialityconcernsunreasonablylimittheavailabilityofmarket

information

TheupstreamindustrythroughitspeakbodyAPPEAraisedtheissueofduplicationindata

collectionandconcernsoverthecommercialityofinformationTheInquirydoesnotdisagree

withthispointandconsidersthatstreamliningdatacollectionandensuringthatitisconsistent

accurateandavailabletoallmarketparticipantsisimportantThisshouldassistinlimiting

theduplicationofinformationandreducethelikelihoodthatparticipantsareworkingwith

potentiallyconﬂictinginformationanddatawhichhasthepotentialtoaddconsiderablyto

transactioncostsintheindustryandresultininecientdecisionmaking

Therehavealsobeenconcernsexpressedthatthemoredetailedreserveandresource

informationmaydisadvantagecompanieswhoarebeingforcedtodivulgecommercial

informationtothemarketplaceThiswasamajorconcernofAustraliancompaniesinproviding

moredetailedinformationtotheASXonreservesandresourcescomparedtosomeofthe

largeinternationalcompanieswhoarenotlistedontheASXandwouldnothavethesame

reportingobligations

Howeverthecatch-allof‘commerciallysensitiveinformation’appearstohavebeenovercome

insomejurisdictions(forexampleQueensland)thatdopublishreserveinformationregularly

andwheretheupstreamsectoroperatesverysuccessfullyInadditionthecollectionand

publicationofmoredetailedinformationonreservesoutsideoftheASXobligationswould

requireallcompaniesandentitieswhichoperateinAustraliatoreportnotjustlistedor

Australiancompanies

 Therearereformsunderway

TheACCCisawarethatotherbodiesarelookingatmakingimprovementsinthisarea

ForexampletheCOAGEnergyCouncilisundertakingthedevelopmentofaGasSupply

StrategyaspartofitsGasAgendaAkeyaimoftheStrategyis‘Improvinginformationon

gasreservesandproductionpotential’TheCommonwealthisalsoconductingtheOshore

PetroleumResourcesManagementReviewWhilethereviewisnotaimedprimarilyat

increasingdataavailabilitythereisafocusonimprovingthetransparencyofdecision-making

whichincludestheassessmentbyregulatorsofgastenementinformationincludingreserves

andresources



Inquiry into the east coast gas market—April 2016

Inadditiontothesedistinctworkstreamsanumberofstateandterritoryagenciesand

departmentsareworkingatstreamliningandstandardisingreportingregimesinindividual

jurisdictionsTherearealsoanumberofnationalandinternationalgroupingswhichperiodically

examinereserveandresourcereportingrequirements

 Thelackofpricinginformationimpedescompetitivebargaining

Itisverydicultforanymarketparticipantstodeterminewhata‘fairgasprice’meansinthe

eastcoastgasmarketThereislittleinformationavailablethatcouldassistincalculatingan

accurateindicativepriceThislackofreadilyavailablepricinginformationalsofavourslarge

incumbents(whohavemultipleinteractionsacrossthesector)inpricenegotiations

ConﬁdentialbilateralcontractscontinuetodominatethemarketTheWallumbillaGSHallows

participantstotradegasoverlongertermsthanjustadailyimbalanceincludingweeklymonthly

andthreemonthlyusingstandardisedcontractsWhiletherehasbeenasmallincreaseintrades

astheLNGprojectshavecommencedproductionitremainsrelativelythinlytradedandthe

pricesattheWallumbillaGSHarenotanaccuratereﬂectionofatrueindicativeprice

TheSTTMsandtheDWGMarewholesalegasbalancingmechanismsratherthantruetrading

hubsWhileanumberofparticipantshaveindicatedtotheInquirythattheSTTMsinparticular

areausefuladjuncttotheirgasbuyingactivitiestheyhavelimitedutilityinprovidingan

accurateindicativepriceforothermarketparticipantsorthewidercontractingmarket

PricingontheDWGMandtheSTTMsislimitedinpracticebythefactthatmostgasusers

willnotbewillingtopayDWGMorSTTMpricesthatarehigherthanthepricespayableunder

existingGSAsConsequentlydailyﬂuctuationsinDWGMandSTTMpricesonlyreﬂectshort-

termdayto-day-conditionsratherthanbroaderpricetrendsTheDWGMandSTTMpricesare

inﬂuencedbyGSApricesbuttheydonotprovideaclearguidetoactualGSApricesBytheir

verynatureasday-aheadtradingmechanismstheyplayanimportantroleinrevealingactual

seasonalandothermarketvariationsingasdemandandpriceHowevertheydonotprovide

amechanismfordetermininganoverallstableandcertaingaspricetoapplybetweenaseller

andabuyeroveralongerperiodoftimetakingvariousﬂexibilityconsiderations(includingthe

particulardemandproﬁleoftheindividualbuyer)intoaccountthroughoutthatperiod

AlackofpricinginformationcomplicatesandslowsbargainingMuchpricinginformationis

privateandparticulartospeciﬁccontractsandnegotiationsBecauseofthisthereisalarge

disparitybetweenthelevelandaccuracyofinformationavailabletoplayerssuchasproducers

andretailersthatparticipateinmoretradesarelargeroraremoreverticallyintegratedversus

playerssuchasindustrialgasuserswhotypicallyarelessfrequentlypartiestonegotiationsand

agreementsWhilesomedisparityofthissorthasalwaysexistedthedisparityisworsened

duringtimeswhenthenumberofoersmadebysuppliersisreducedInthesituationwhere

fewoersarebeingmadeindustrialusersarelessabletousetheinformationthatwouldbe

embodiedinavarietyofoersasasubstituteforknowledgeofrecentagreedcontracts

Therehasbeensomeworktoencouragethedevelopmentofarangeoftradingproductsand

agasfuturesmarketHowevertheyareyettobewidelyadoptedorutilisedandarewithouta

usefulindicativepriceandsoareoflimiteduseforthemarkettodate

TheAEMCisworkingonwaystodevelopamoreliquidhub-basedindicativepricebutthisis

likelytotakesometimetoemergeTheAustralianBureauofStatistics(ABS)isinvestigatinga

gaspriceindexwhichwilltrackmovementsinwholesalegaspricesratherthantheactualprice

Thenumberofcontractstradedinatimeframeandoveragivengeographicareawilldictate

themarketsthatcanberepresentedintheindexgiventheneedoftheABStoadheretoits

conﬁdentialityguidelines(thatisAustralia-wideindexvswesterneasternmarketvsmarketsby

state)Thismaylimititsutilitygiventhesigniﬁcantdierencesbetweengasmarkets

TheInquiryhasthereforeconsideredwhethertherewouldbemeritindevelopingandpublishing

anotherformofindicativepricetoenhancepricetransparencyforallparticipantsIndicative

priceswouldprovidegreatervisibilityofproducergaspricesandprovideamorelevelplaying

ﬁeldforthenegotiationofactualcommercialarrangementsResponsibilityfordeveloping



Inquiry into the east coast gas market—April 2016

andimplementinganyindicativepriceshouldbegiventoabodytrustedbyindustryandwith

experienceinhandlingmanipulatingandguardingtheconﬁdentialnatureofinformation

AbodysuchasAEMOortheAERwithpotentialassistancefromtheABSwouldensurethatan

indicativepriceseriesismorereadilyacceptedbyallparticipantsinthegasmarket

TheInquiryhasconsideredanumberofpossibilitiesfordevelopingandimplementingan

indicativepriceseriesincludinganLNGnetbackpriceseriesandapriceseriesbasedonthegas

pricesactuallyinvoicedbysellerstobuyers

 PublishinganLNGnetbackpriceserieswillassistpricetransparency

WiththeexportofLNGtointernationalgasmarketstheeastcoastgasmarketisnowalsolinked

tointernationalgaspricesHowevertherealsoappearstobelittlecommonunderstandingof

whatanetbackpricemeansfordomesticgasmarketparticipantshowitiscalculatedandhow

itshouldbereﬂectedinthedomesticmarket

Domesticgasbuyerswithnewcontractsarenoweectivelypayingapriceinﬂuencedbythe

netbackpriceforLNGinQueenslandTheamountthatLNGprojectsarepreparedtopayfor

thisgasrepresentstheopportunitycostforothergasproducersofsupplyinggastodomestic

usersinQueenslandandthisisthepriceusersarelikelygoingtopayAfullexplanationofthe

calculationandimplicationsofthenetbackpricewaspresentedinchapterofthisreportThe

InquiryrecommendsthatAEMOusethismethodologytopublishamonthlyLNGnetbackprice

toWallumbillaalongwithaclearexplanationofframeworkandofrelevantinputs

 Thebeneﬁtsofpublishinganinvoice-basedpriceseries

DuringtheInquiryanumberofgasusersexpressedfrustrationthattherewaslittleorno

informationwithwhichtobenchmarktheoerstheyreceivedandnoabilitytocompare

contracttermsandconditions

Whiletherewouldbesomeuncertaintiesandcoststhatwouldneedtobeaddressedin

developinganindicativepricefortheeastcoastgasmarkettherewouldbeanumberof

potentialbeneﬁtsformarketparticipantsinhavingaccesstoavolume-weightedindicativeprice

seriesbasedonthepricesandvolumesactuallyinvoicedbyproducers

• Itwouldprovidegreatervisibilityofproducergaspricesincludingthemostimportant

commercialtermsthataectthoseprices—namelytakeorpaypercentagesandload

factors—whichareimportantpricingelementsinactualcommercialnegotiationsbutwould

notseteitheraceilingoraﬂooronthoseprices

• ItwouldprovideamarketreferencepointtogasuserswhennegotiatingGSAswith

producersandretailersThiswouldimposeaclearercompetitiveconstraintongasproducers

andgasretailersintheirsupplynegotiationswithusersandmayprovideamoreevenplaying

ﬁeldduringthebargainingprocess

• ItwouldprovideamechanismtocomparetheindicativepricebasedonGSAswithshort-

termtradingmarketpricesovertimeIfgreaterliquiditydevelopsinthetradingmarketsand

hubstheneedforanindicativepricewouldreduceovertime

• Itwouldprovideamarketreferencepointforsmallerandnewentrantgasproducerson

whichtobenchmarkthepotentialpricestheymayreceiveindevelopingnewgassupplies

Thiswouldalsoapplytotheﬁnancialsectorwhichhasaninterestinassessingtheongoing

viabilityofnewandexistinggasprojects

• ItwouldenablethemonitoringofGSApricesandchangesinGSAtermsandconditionsover

timeTheDepartmentofIndustryInnovationandSciencerecentlyengagedaconsultant

toprovideapricetrendsreviewwhichcommencedthisprocessAmoretransparent

indicativepricewouldallowamoreaccuratecontinuationofthisworkalongwitharange

ofassessmentsbygovernmentsandregulatorybodieswithaninterestinmaintaininga

competitivemarket

• Anindicativepricebasedonallproducerpricesratherthanonselecteduserpricesand

compiledonacommoditybasisratherthanonadeliveredbasiswouldbelessaected

byvariablessuchastransportcostsorbydecisionsbyretailerstofavoursupplyingsome



Inquiry into the east coast gas market—April 2016

classesofcustomersoverothersThewidespreadpresenceofoil-linkageinproducer

contractsmeansthatchangesintheoilpricewouldbereﬂectedinaninvoice-based

indicativepriceovertime

 Dicultiesincalculatinganinvoice-basedindicativepriceseries

Thereisarangeofviewsabouthowlongthecurrentmarketconditionsofsupplyandprice

uncertaintywillcontinueTherewasaviewthatoncetheLNGprojectsreachedasteadystateof

productionthemarketwouldreturntoastateofequilibriumalbeitwithhighergasprices

Givencurrenteventsintheoilandgasindustryinternationallyandtheramiﬁcationsthatare

playingoutinAustraliathisappearslesslikelyThedisequilibriuminthedomesticgasmarket

willcontinuefortheforeseeablefutureInthiscircumstanceprovidingmarketsignalssuchas

anindicativepricetomarketparticipants(especiallynewentrantsandgasusers)becomes

moreimportant

Theprocessforcalculatingtheindicativepricebasedonactualinvoiceswouldneedtoinclude

thecollectionofdataaboutthekeycommercialfeaturesofeachproducerGSAaswellasinvoice

dataTheremaybeaneedtoconferastatutorypowertoobtainthisinformationandtogovern

thedisclosureoftheinformationTherelevantdetailsofeachGSAwouldincludecontract

datecontractdurationnameofbuyerandlocationofgasusetakeorpaypercentageload

factor(orthedatausedtocalculateloadfactor)supplybasinandthecontractpriceprice

reviewmechanism

Therewouldalsohavetobeanassessmentoftheageorrelevanceofthecontracttothecurrent

marketThepricesandkeytermsandconditionsinlegacycontractsmayskewthecalculation

ofacurrentindicativepriceatleastwhereapricereviewhasnotbeenundertakeninthepast

severalyears

TheInquiryconsidersthatatpresentafeasiblemodelforanindicativepricewouldbeto

publishaneastcoastvolume-weightedaveragepriceoraseparatepriceforgasproducedin

eachofVictoriaandQueensland



for

• agreementsforthesupplyofgasbyproducerswhichhaveatakeorpaypercentageof

–percentandaloadfactorof–percent

• agreementsforthesupplyofgasbyproducerswhichhaveatakeorpaypercentageof

–percentandaloadfactorof–percent

Theremayalsobemeritinpublishinganaveragetakeorpaymultiplier(weightedbyvolume)

andanaverageloadfactor(weightedbyvolume)foreachpublishedvolume-weightedaverage

priceasthismaybeofadditionalassistancetobuyersinevaluatingparticularoersagainst

thoseindicativeprices

AtpresenttherearearoundGSAsineachofthesecategoriesthathaveadurationofthree

monthsormoreWhilesomeoftheseagreementspre-datethechangesinmarketconditions

thathaveoccurredinthelastfewyearsitislikelythatmostofthemhavebeenthesubjectof

pricereviewswithinthatperiodInanyeventsomeoftheolderagreementswillexpirewithin

thenext–months

TheInquiryconsidersthattherearelikelytobeasucientnumberofgassupplyagreements

toenablethecalculationoftheseindicativepricesforQueenslandandforanindicativeprice

foratakeorpaypercentageof–percentandloadfactorof–percentforVictoria

withoutgivingrisetoconﬁdentialityconcernsalthoughthisisanissuethatmayrequirefurther

evaluationbyAEMOorbytheAER

AEMOortheAERwouldneedtobeabletorevisethetakeorpayandloadfactorparameters

outlinedaboveinresponsetochangingmarketconditionssothattheoutputsoftheindicative

priceseriescontinuetobeameaningfulreﬂectionofkeyobservedmarketoutcomesThere

wouldalsobemeritinensuringthatpublicationoftheinvoice-basedindicativepriceis

 GasproducedatMoombacouldbeincludedineitherofthesecalculationsdependingontheactualorlikelydestinationfor

thatgas



Inquiry into the east coast gas market—April 2016

accompaniedbyqualitativecommentaryonchangesinthemarketovertimetoprovide

additionalguidancetomarketparticipants

ForexampleifmostGSAsmovetoapercentormoretakeorpaypercentageovertime

orifthereareanyolderpricesthatarehavingasigniﬁcantimpactonaparticularindicative

pricethiswouldbeusefulinformationforthemarketQualitativecommentarywouldalso

betheappropriatewayofoutliningandcommentingontherangeofactualpricesthathave

contributedtotheweightedaveragewithoutdisclosingthosepricesthemselvesItwouldalso

assistinaddressingsomeofthefundamentalissuesaroundasymmetricalinformationinthe

marketthathaveledtothisInquiry

 Limitationsandcostsofpublishinganinvoice-basedindicativepriceseries

WhilethereareconsiderablepotentialbeneﬁtsinAEMOortheAERpublishinganindicative

pricebasedonactualinvoicesandthemostimportantcommercialterms(takeorpay

percentageandloadfactor)therearesomerelevantfactorsthatmightlimittheextentofthose

beneﬁtsTherewouldalsobesomecostsassociatedwiththisworkAssuchbeforeadecision

toproceedwithanindicativepriceisﬁnaliseditwouldbeappropriatefortheAEMCtoconsult

furtherwithgasbuyersaboutwhetherthemodeloutlinedabovewilldeliversucientbeneﬁts

includinginlightofthepublicationoftheWallumbillaLNGnetbackpriceasdiscussedaboveto

makepublishinganindicativepricebasedonactualinvoicesworthwhile

• Thereisariskthatinpublishingquantitativeinformationparticularlyonabasin-by-basin

basisitwouldincreasethepotentialfortacitpricecollusionorpricesignallingbyproducers

Thismayinturnincreasethecompliancecostsforregulatorswhomayhavetomonitorany

signsofsuchbehaviourclosely

• Thereisariskthatproducersmightseektoinﬂuencetheoutputsoftheindicativeprice

seriesbychangingtheirpricingoerstobuyersHowevertheseriskscanbemitigated

byincludingallrelevantGSAsinthecalculationofthepriceseriesratherthanrelyingona

sampleandbybasingthepriceseriesonactualinvoicesratherthanontheoersthatare

beingmadeatanyonepointintimeTheInquiryalsonotesthatatpresentthereisscope

forproducerstoinﬂuencemarketexpectationsviatheselectivereleaseofpricingorother

commercialinformation

• Therewouldbeaninitialset-upcostforthesystemsandpersonnelundertakingthework

andanongoingcosttomarketparticipantsinsupplyingthedataandinformationnecessary

tocompileanindicativepriceItwouldbeexpectedthatmanyaspectsoftheprocesswould

notneedtoberepeatedorcouldberepeatedveryecientlyaftertheinitialset-up

• Inconsideringbeneﬁtsandcostsadecisionwillalsohavetobemadeontheregularityof

reportinganindicativepriceGiventhelimitednumberofcontractsbeingnegotiatedat

anyonetimeitwouldseemlikelythatpublishingapriceeverysixmonthswouldprovidea

sucientpriceindicatorformostmarketparticipantsHoweverAEMOortheAERshould

alsobeabletodecideonthetimeframesforitsreleasegiventheaccessthattheywould

havetotherelevantcontractandinvoiceinformation



Inquiry into the east coast gas market—April 2016

6 Pipelines are responding to market changes but

there is evidence of monopoly pricing

Whilegassupplyiscrucialforthemarkettheeciencyofthegasmarketisalsocritically

dependentontheeciencyofthetransmissionsectorthepricespipelineoperatorschargefor

transportationservicesandtheabilityofthissectortorespondtochange

ThematerialgatheredthroughtheInquiryindicatesthatmosttransmission



pipelineoperators

haverespondedinadynamicwaytothechangescurrentlyunderwayinthemarketInthemain

pipelineoperatorshaveundertakennecessaryinvestmentsinatimelymannerandoeredmore

ﬂexibleservicestomeetthechangingneedsofsomeusersandproducers

Concernshaveneverthelessbeenraisedbyanumberofmarketparticipantsaboutthemarket

powerwieldedbysomepipelineoperatorsthewaysinwhichthismarketpowerisbeing

exercisedandthedetrimentaleectitishavingoneconomiceciencyandconsumers

moregenerally

TheInquiryhasinvestigatedtheseconcernsandfoundthatthemajorityofexistingtransmission

pipelinesontheeastcoasthavemarketpowerandfacelimitedconstraintswhennegotiating

withshippersThereisalsoevidencethatalargenumberofthemajorarterialpipelinesonthe

eastcoastandpipelinesservicingregionalareasareusingtheirmarketpowertoengagein

monopolypricingwhichisnotsurprising

Thetermmonopolypricingisdeﬁnedinthiscontextaspricesthatsigniﬁcantlyexceedthelong-

runaveragecostofsupplyforasustainedperiodormoresimplypricesinexcessofwhatwould

prevailinaworkablycompetitivemarket



Itisimportanttonotethatmonopolypricingdoes

notamounttoacontraventionoftheCCAFurtheritislegitimateandexpectedcommercial

behaviourInamarketeconomywheretheproﬁtmotivedrivesprivateenterpriseitisexpected

thatﬁrmsthatdonotfaceeectivecompetitionorthethreatofsuchcompetitionwillengage

inmonopolypricingMonopolypricingcanneverthelessoperatetothedetrimentofconsumers

becauseitgivesrisetohigherconsumerpricesdistortsmarketoutcomesandadverselyaects

theeconomiceciencyofmarkets

AnecdotalandotherevidencegatheredthroughthisInquiryindicatesthatmonopolypricingby

transmissionpipelinesisgivingrisetohigherdeliveredgaspricesforusersandinsomecases

lowerex-plantpricesforproducersThisisinturnhavinganadverseeectontheeconomic

eciencyoftheeastcoastgasmarketandupstreamanddownstreammarketswithsomeof

themoresigniﬁcanteconomicineciencieslikelytoﬂowfromthisbehaviourincluding

• lowerthanecientlevelsofgasproductionandinvestmentinexplorationandreserves

developmentatatimewhenthemarketrequiresnewsourcesofsupplytobebroughtonline

andgreaterdiversityofsupply

• lowerthanecientlevelsofgasuseandinvestmentinfacilitiesthatusegas

• inecientpipelineutilisationdistortionsingasﬂowsacrossthemarketandgasfailingto

ﬂowtowhereitisvaluedmosthighly

Theseinecienciescanbeexpectedtoresultinconsumersfacinghigherdomesticgasprices

andhigherpricesforproductsandservicesproducedusinggas

 TheInquiryonlyfocusedontransmissionpipelinesnotdistributionpipelinesReferencesinthischapterandthefollowing

chapterstopipelineoperatorsshouldthereforebeinterpretedasreferencestotheoperatorsoftransmissionpipelines

 ThisdeﬁnitionisconsistentwiththefollowingdeﬁnitionadoptedbytheIndependentCommitteeofInquiryonNational

CompetitionPolicy(theHilmerCommittee)

“Inmarketscharacterisedbyworkablecompetitionchargingpricesabovelong-runaveragefullcostswillnotbepossible

overasustainedperiodasabove-commercialreturnswillattractnewmarketparticipantsorleadconsumerstochoosea

rivalsupplierorsubstituteproductWheretheconditionsforeectivecompetitionareabsent—suchaswhereﬁrmshave

alegislatedornaturalmonopolyorthemarketisotherwisepoorlycontestable—ﬁrmsmaybeabletochargepricesabove

ecientlevelsforperiodsbeyondatimewhenacompetitiveresponsemightreasonablybeexpectedSuch‘monopoly

pricing’isdetrimentaltoconsumersandtothecommunityasawhole”

ReportbytheIndependentCommitteeofInquiryonNationalCompetitionPolicyFinalReportpxxxiii



Inquiry into the east coast gas market—April 2016

Manywouldexpectthegasaccessregime(assetoutintheNationalGasLaw(NGL)and

NationalGasRules(NGR))tobecapableofaddressingthismarketfailure(thatismonopoly

pricingthatgivesrisetoeconomicineciencies)HowevertheInquiryhasfoundtheregime

isnotposinganeectiveconstraintonthebehaviourofthemajorityofexistingpipelines

ThereasonsforthisareexploredinfurtherdetailinchapteralongwiththeInquiry’s

recommendationsonhowthegasaccessregimecouldbestrengthened

 Mostpipelineoperatorsarerespondingtothechangingmarket

Thegastransmissionpipelinenetworkontheeastcoasthasundergoneamajortransformation

overthelastyearswithalargenumberofnewpipelinesbeingconstructedincludingmost

recentlythethreepipelinesservicingtheLNGfacilitiesinGladstone



Anumberofsigniﬁcant

incrementalinvestmentstoexistingpipelinesandfacilitieshavealsooccurredoverthisperiod

Themorerecentexamplesinclude

• theexpansionoftheEasternGasPipeline(EGP)theQueenslandGasPipeline(QGP)the

exportcapacityoftheDeclaredTransmissionSystem(DTS)andtheMoombatoSydney

Pipeline(MSP)

• theconnectionoftheEGPtotheMSPandtheSEAGasPipelinetotheMoombatoAdelaide

PipelineSystem(MAPS)

• theaugmentationofcompressionfacilitiesatWallumbillaandMoomba

• theconversionoftheMSPtheMAPStheSouthWestQueenslandPipeline(SWQP)the

QueenslandtoSouthAustraliaNewSouthWalesLink(QSN)theRomatoBrisbanePipeline

(RBP)andtheBerwyndaletoWallumbillaPipeline(BWP)intobi-directionalpipelines

Intotaltheserecentinvestmentsareestimatedtohavecostmillionwithoverpercent

ofthatinvestmentoccurringtoenablemoregasfromVictoriatoﬂownorthintoNewSouth

WalesanduptoQueenslandOftheprojectslistedtheexpansionoftheexportcapacityofthe

DTShasinvolvedthemostsigniﬁcantinvestmentwithmillionreportedlybeingspentto

expandtheexportcapacityforvariousshippersoverthelastyears





TheNorthernTerritoryGovernment’sdecisioninlatetoawardJemenatherightto

constructandoperatetheNGPisexpectedtoresultinfurtherinvestmentinthenexttwoto

threeyears



withJemenastatingthatitexpectsthepipelinetobecompletedin





JemenahasalsonotedthepotentialtobuildanotherpipelineconnectingMtIsaandWallumbilla

ifsucientgasfromtheNorthernTerritoryisavailable



Theseinvestmentshavefacilitatedthedevelopmentofamoreinterconnectednetworkonthe

eastcoastashighlightedinﬁgureandarepavingthewayformoreﬂexibleanddynamic

servicestomeetthechangingneedsofsomeparticipantsasoutlinedinbox

 SomeotherpipelinesdevelopedinthisperiodincludetheEGPTGPSEAGasQSNtheBWPandanumberofothersmaller

pipelinesinQueensland

 APAFinancialReportFinancialReportFinancialReportandInterimFinancialReport

 ChiefMinisteroftheNorthernTerritory‘NTAnnouncesJemenatobuildgaspipelinetoeastcoast’November

 Jemenamediarelease‘JemenatobuildNorthEastGasInterconnector’November

 ibid



Inquiry into the east coast gas market—April 2016

Figure Transmissionpipelinesontheeastcoast



Whyalla–Port Pirie

Contract carriage transaction model

Market carriage transaction model

Dominant pipeline ﬂow

Bi-directional ﬂow capability

Gas basins

Amadeus

Basin

Surat/

Bowen

Basins

Gippsland Basin

Cooper Basin

Otway Basin

Bass

Basin

Brisbane

Curtis Island

LNG

Mt Isa

Tennant

Creek

Roma

(Wallumbilla)

Ballera

Moomba

Adelaide

Pt Campbell

Port Latta

Hobart

Sydney

Longford

MSP

MAPS

SWQP

SEA Gas

Pipeline

VNI

CGP

NGP

TGP

RBP

DTS

QGP

GLNG

Pipeline

APLNG

Pipeline

WGP

BWP

QSN

EGP

AGP

Darwin

SESA

SEPS

State Pipeline Owner Regulatory status

NSW Moomba to Sydney Pipeline (MSP) APA Unregulated: Mooba to Marsden/

Lightregulation: Remainder

Eastern Gas Pipeline (EGP) Jemena Unregulated

Central Ranges Pipeline (CRP) APA Full regulation

Central West Pipeline (CWP) APA Light regulation

SA Moomba to Adelaide Pipeline System (MAPS) Epic Unregulated

SESA Pipeline (SESA) APA Unregulated

South East Pipeline Systems (SEPS) Epic Unregulated

Whyalla–Port Pirie Epic Unregulated

SEA Gas Pipeline Rest/APA Unregulated

Riverland Pipeline AGN Unregulated

Vic Declared Transmission System (DTS) APA Full regulation

Vic–NSW Interconnect (VNI) APA Unregulated

Carisbrook to Horsham Pipeline (CHP) Gas Pipelines Victoria Unregulated

South Gippsland Pipeline (SGP) Multinet Unregulated

Qld Roma to Brisbane Pipeline (RBP) APA Full regulation

South West Qld pipeline (SWQP) APA Unregulated

QSN Link (QSN) APA Unregulated

Queensland Gas Pipeline (QGP) Jemena Unregulated

Carpentaria Gas Pipeline (CGP) APA Light regulation

Berwyndale to Wallumbilla Pipeline (BWP) APA Unregulated

Wallumbilla to Darling Downs Pipeline (DDP) Origin Unregulated

Cheepie to Barcaldine Pipeline (CBP) Ergon Unregulated

Dawson Valley Pipeline (DVP) Meridian/Westside JV Unregulated

North Qld Gas Pipeline (NQGP) Vic Funds Management Corp. Unregulated

Wallumbilla to Gladstone Pipeline (WGP) APA 15-year no-coverage

APLNG Pipeline Origin/Conoco/Sinopec 15-year no-coverage

GLNG Pipeline Santos/Petronas/Total/Kogas 15-year no-coverage

Comet Ridge to Wallumbilla Pipeline Loop Santos/Petronas/Total/Kogas 15-year no-coverage

Tas Tasmanian Gas Pipeline (TGP) Palisades Unregulated

Amadeus Gas Pipeline (AGP) APA Unregulated

Northern Gas Pipeline (NGP) (proposed) Jemena n/a

 Appendixcontainsfurtherdetailontheregulatorystatusofpipelinesandhowthishaschangedovertime



Inquiry into the east coast gas market—April 2016

Box Changingdemandforpipelineservices

Thechangesunderwayintheeastcoastgasmarketandindownstreammarketsinwhich

gasuserscompete(forexampleelectricitygeneration)areaectingthenatureofthe

demandfortransportationandstorageservicesandthedegreeofﬂexibilitybeingsoughtby

shippersintheirGTAsForexample

• ManyGPGsarereducingtheiroutputfromhistoricallevelsinresponsetochanged

conditionsintheNationalElectricityMarketThishaspromptedanumberofthese

generatorstolookformoreﬂexibleandcost-eectivegastransportationservicesthat

enablethemtooperateinpeakperiodsbutdon’trequirethepaymentofaﬁxedcost

throughouttheyearSomepipelineshaverespondedtothisneedbyintroducinga

peakingservicewhichisonlypayablewhengeneratorsusetheservice

• LNGprojectshavetobeabletorespondrelativelyquicklytounexpectedoutagesoftheir

LNGplantsandorproductionfacilitiesThishaspromptedsomeLNGprojectstolookto

pipelineoperatorsformoreﬂexibletransportationandstorageservicesacrossmultiple

pipelines(forexample‘asavailable’orinterruptibleserviceswhichonlyhavetobepaid

forwhentheservicesareusedbutmaybesubjecttoaminimumbill)andtoaccessthe

bi-directionalcapabilityofsomepipelines

• Largerretailersarelookingtomovegastowhereitisvaluedmost(forexampleto

residentialcustomersindustrialusersGPGsorLNGexportprojects)andtotake

advantageofarbitrageopportunitiesthatemergeacrossthefacilitatedmarketsIna

similarmannertoLNGprojectsthishaspromptedsomeretailerstolookforgreater

ﬂexibilityintheirGTAstomovegasacrossmultiplepipelineroutes

Anotherfactorthatisinﬂuencingthischangeisthedecisionbysomeproducerstomoveto

shorter-termGSAsandtoprovidebuyerslessﬂexibilitytomanagedemandvariations(see

chapter)Thishasledsomeshipperstolooktopipelinestorage(parkandparkandloan)

servicestomanagetheirdailydemandandtoshorter-termgastransportationagreements

EvidencereceivedthroughtheInquiryindicatesthatpipelineoperatorshaveresponded

relativelywelltothechangingdemandsbyoeringmoreinnovativeservices(forexample

bi-directionalservicespeakingtransportationservicesinterruptibleservicesandpremium

storageservices)shorter-termGTAsandmultipleservicesacrossinter-connectedpipelines

(forexamplestoragecompressionredirectionandtransportationservices)

Withtheexceptionofoneortwoofthesmallerincrementalinvestmentsnotedabovethe

investmentshavebeenunderwrittenbyshippersthroughmediumtolong-termGTAsThe

demandrelatedrisksfacedbypipelineoperatorsincarryingouttheseinvestmentshave

thereforebeenrelativelylowwhichisindicativeofthedesirethatpipelineoperatorshavenot

tobeexposedtodemandrelatedrisksThisdesirecanlargelybeattributedtotheconstraints

imposedbyﬁnancierswhounderstandablywantgreatersuretyofdemandgiventhehigh

upfrontcostsassociatedwiththeseinvestmentsandthefactthattheyhavefewalternativeuses

ifdemanddoesnoteventuate

Theeectoftheseconstraintsonpipelineinvestmentcanbeseeninthefollowingstatements

thatweremadebyonepipelineoperatorduringitshearing

“Weallhaveﬁnancingsoyouknowifyouwantgooddebttermsyoucan’thavealotof

uncontractedcapacityotherwiseyourriskproﬁlewillchange”

“…wedon’tspeculativelybuildcapacityOurbusinessmodelwouldsuggestthat’stoorisky

andwecan’toerthesamelowcostofcapitaltobuildthesetypesofprojects”

Theseﬁnancialconstraintsalsoexplainwhynewpipelinesonlytendtobebuilttomeetthe

foundationshippers’demandandwhyexistingpipelinestendtobeexpandedinstagestomeet

incrementalincreasesindemandWhileithasbeenpreviouslysuggestedbypipelineoperators

thatpipelinesarebuiltorexpandedinthismannerbecauseoftheriskofregulationtherewasno

indicationofthisinthematerialpipelineoperatorsprovidedtotheInquiryTheonlyrationalethat



Inquiry into the east coast gas market—April 2016

wascitedinthismaterialwasthecapitalconstraintimposedbyﬁnancierswhichisnotuniqueto

gaspipelinesortoinfrastructurethatfacesthethreatofregulation





Someotherinterestingpointsthatareworthnotingfromﬁgurearethat

• OftheorsotransmissionpipelinesontheeastcoastAPAhasaninterestin(the

SWQPQSNBWPRBPMSPDTSCarpentariaGasPipeline(CGP)WallumbillatoGladstone

Pipeline(WGP)CentralRangesPipeline(CRP)CentralWestPipeline(CWP)theVic–NSW

Interconnect(VNI)SESAPipelineandSEAGasPipeline)



Jemenahasaninterestintwo

(theEGPandQGP)andEpichasaninterestintwo(MAPSandSouthEastPipelineSystem

(SEPS))

• Therearecurrentlyonlypipelinesthataresubjecttoregulationthreeofwhicharesubject

tofullregulation(theDTSRBPandCRP)andtolightregulation(theCWPCGPandMSP

southofMarsden)TheMSPisunregulatedbetweenMoombaandMarsdenFourpipelines

havealsocurrentlybeengranteda-yearno-coveragedetermination(theWGPAPLNG

PipelineGLNGPipelineandCometRidgetoWallumbillaPipelineLoop(CRWPL))

Furtherdetailontheregulatoryregimethatappliestotransmissionpipelinescanbefoundin

chapter

 Therearefewconstraintsonthebehaviourofexistingpipelines

Transmissionpipelinestendtohavecoststructuresthatapproximatethoseofanatural

monopolyTheyarehighlycapitalintensivetoconstructandinvolvesigniﬁcantsunkcostsin

assetswithlimitedalternativeusesPipelinecostsperunitdecreaseasthesizeofthepipeline

diameterincreasesAddingcompressiontoenhancethecapacityofanexistingpipelineisoften

muchcheaperthanbuildinganewpipelinetomeetanyneedforincreasedcapacity



While

capitalcostsarehighoperatingcoststendtoberelativelylowThisgivesacostproﬁlewhere

averagecoststendtodecreaseastransportationvolumesincreaseoverawiderangeofoutput

Asaresultofthesecharacteristicsitcanbemoreecientforonepipelinetosupplyamarket

ratherthantwoormorepipelinesFurtherthesenaturalmonopolycharacteristicscancreatea

highbarriertoentryforprospectivecompetitorstoanexistingpipelinewhichinturntendsto

enhancethemarketpowerofexistinggaspipelines

MarketpowercomesfromthelackofcompetitiveconstraintApipelineoperatorwithmarket

powerisabletoactwithoutsigniﬁcantconstraintfromcompetitorspotentialcompetitorsor

customersForthepurposesofassessingthemarketpoweroftransmissionpipelinesontheeast

coasttheInquiryconsideredthepotentialconstraintsaectingnewandexistingpipelineswhen

negotiatingwithshippersandprospectiveshippersAdistinctionhasbeendrawninthiscontext

betweenthemarketpowerofnewandexistingpipelinesbecausetheydierinanumberof

importantrespectsasoutlinedbelow

 Competitiontobuildanewpipelinecanbeeectiveinlimitingmarketpower

Ifthereiseectivecompetitiontodevelopandbuildapipeline(‘competitionforthemarket’)

thenthemarketpoweroftheultimatepipelineownerislikelytobelimitedforaperiodoftime

Bynegotiatingpriortothepipelinebeingbuiltfoundationshipperswillusuallybeabletouse

competitivetensionbetweenprospectivepipelineownerstonegotiatelong-termcontractsthat

arenotaectedbytheexerciseofmarketpower

 Thistypeofcapitalconstraintappliestoarangeofotherlargescaleinvestmentswherethereissomedegreeofdemand

riskForexamplebanksusuallyrequirecommercialrealestatedeveloperstodemonstratearelativelyhighpre-commitment

bytenantsbeforetheywilllendtothedeveloper

 APAhasapercentinterestintheSEAGasPipeline

 TherearelimitstothisdependingontheoriginaldesignspeciﬁcationofthepipelineStillthesefeaturesholdoverawide

rangeofpipelinecapacities



Inquiry into the east coast gas market—April 2016

Competitiontodevelopandbuildpipelineshasoccurredinasmallnumberofcasesinthelast

yearsForexample

• InanumberofpartiessubmittedexpressionsofinteresttotheNorthernTerritory

GovernmenttobuildtheNGPFourbidders(APAJemenaDUETandPipelineConsortia

PartnersAustralia)wereselectedfromtheseexpressionsofinteresttocompeteviaarequest

forproposalprocessUndertheproposalprocessbidderswerefreetocompetebyoering

dierentcombinationsofconstructiontimingcapacitypricingroutesandotherterms

andconditionsTherateofreturnadoptedinthewinningbidsuggeststhattherewasa

reasonablelevelofcompetitionbetweenthesebidders

ThroughthisprocesstheNorthernTerritoryGovernmentalsousedthecompetitivetension

betweenprospectivepipelineoperatorstoincludeaccessprovisionsrelatingtothesupply

ofpipelineservicesbythesuccessfulbiddertothirdpartiesthatmaywishtobecome

shippersontheNGPinthefutureintheﬁnalprojectdevelopmentagreementByfollowing

theprocesssetoutintheagreementfutureshipperscanbecomecontractualpartiestoa

transportationagreementbasedupontheaccessprovisions

• InEpicandAPAcompetedtodevelopanewpipelinetoenablegasfromQueensland

tobetransportedintothesouthernstatesEpicproposedreversingtheﬂowandexpanding

thecapacityoftheSWQPandconstructingtheQSNwhileAPAproposedtheconstruction

ofanewpipelinefromWallumbillatoBullaPark



Epicultimatelywonthiscontestwith

AGLandOriginenteringintofoundationcontractsinandrespectively



The

pricesandothertermsandconditionsinthesefoundationcontractssuggestthatAGLand

OriginbothbeneﬁtedfromthiscompetitionOwnershipoftheSWQPandQSNwaslater

transferredtoAPAwhenitacquiredtheHastingsDiversiﬁedUtilitiesFundin

Theoutcomesofthesetwocompetitiveprocessessuggestthat‘competitionforthemarket’can

imposeaneectiveconstraintonthebehaviourofnewpipelinesItisimportanttorecognise

howeverthattheeectofthiscompetitiveconstraintwilldissipateoncethenewpipelinehas

beendevelopedwhichiswhyfoundationshipperstendtousecompetitivetensionbetween

prospectivepipelineoperatorstonegotiatelong-termGTAsthatprotecttheirinvestmentsover

thetermoftheGTA

 Therearelimitedconstraintsonthebehaviourofthemajorityofexisting

pipelines

Whilesomelong-termcontractsarenegotiatedpriortoapipelinebeingdevelopedandbuilt

itismoreoftenthecasethatshippersmustnegotiatewiththeownerofanexistingpipeline

because

• afoundationshipper’scontractcomestoanend

• afoundationshipperrequiresavariationofitsGTAorrequirestransportationservicesin

additiontothoseanticipatedatthetimethefoundationcontractwasnegotiated

• anewshipperispartytothedevelopmentofagasﬁeldorisinvestinginaplantinclose

proximitytoanexistingpipeline

Theabilityandorincentiveofanoperatorofanexistingpipelinetoexercisemarketpowerin

thesecircumstancesmaypotentiallybeconstrainedbyarangeoffactorsincluding

• competitionfromotherpipelines(existingornewpipelines)

• competitionfromalternativeenergysources

• theriskofassetstranding(fullorpartial)

• thecountervailingpowerofshippers

• regulationorthethreatofregulation

 AtthetimethiscompetitionoccurredEpicwasownedbyHastingsDiversiﬁedUtilitiesFund

 AGLmediarelease‘AGLsecurespipelinedealtolinkitsgastoeasternmarkets’JulyandOriginmediarelease

‘OrigincompletesgastransportationagreementwithEpic’December



Inquiry into the east coast gas market—April 2016

Drawingoninternaldocumentsprovidedbypipelineoperatorsandothermaterialgathered

throughtheInquirytheInquiryhasexaminedtheextenttowhichthesefactorsareconstraining

thebehaviourofexistingpipelinesTheﬁndingsareoutlinedbelow

Competitionfromotherpipelines

Apipelinecanpotentiallyfacetwotypesofcompetitionfromothergaspipelines

• directcompetitionwhichinvolvestwoormoreindependentlyownedpipelinestransporting

gasfromthesamegasﬁeldtothesamedestinationor

• indirectcompetitionwhichinvolvestwoormoreindependentlyownedpipelinescompeting

tosupplygasfromdierentﬁeldstothesamedestination

Ontheeastcoastindirectcompetitionismorecommonthandirectcompetitionalthoughthere

aresomenotableexamplesofpipelinesthatservicethesameproductionanddemandareas

including

• theEGPandtheMSPviatheDTSbothofwhichprovideforthesupplyofgasfromLongford

toSydneyandCanberra

• thethreeLNGpipelines(APLNGPipelineGLNGPipelineandtheWGP)whichenablegasto

besuppliedfromtheBowenSuratbasinstotheLNGprojectsinGladstone

HistoricallycompetitionbetweenpipelineshasonlyoccurredinSydneyCanberraandAdelaide

withallotherlocationsontheeastcoast(excludingGladstone)servicedbyasinglepipeline

Thechangeinthepatternofgasﬂowsacrosstheeastcoastishowevergivingrisetosome

signiﬁcantchangesinthecompetitivedynamicsbetweenpipelines

ForexampletheexpectedreductioninthevolumeofgasﬂowingfromMoombatothesouthern

statesmeansthat

• theMAPSmaybealesseectiveconstraintontheSEAGasPipelineforsupplyintoAdelaide

thanitwasinthepast

• theMSPviaMoombamaybealesseectiveconstraintontheEGPforsupplyintoSydney

andCanberrathanitwasinthepast

Thispointwasacknowledgedintheinternaldocumentsprovidedbyanumberofthe

pipelineoperatorsandduringthehearingsashighlightedinthefollowingquotesfromtwo

pipelineoperators

“Wedon’tactuallysee[…]ascompetitiveorasacompetitorTherealityisit’sanintegrated

supplychainnowintermsofthemarketSointermsofwhere[…]andwhatwillhappenin

thefutureit’saboutwhichmarketsrequiregastothemandhowdoyougetgastothem…

Soitmaywellbecustomersrequiringﬂexibilitytobeabletotakegasdownourpipeline[…]

goingintheotherdirection…Oralternativelygascominginto[…]fromLongfordwhichmay

wellbedisplacedinsomemarketsviatheNarrabritypegasandtheLongfordgasmakingits

wayacrossinto[…]andthenpossiblyupussomewhereelseSowetendnottosee[…]asa

competitor”

“PricingoftransportationfromMoombaislessthan[…]referencetarihoweverMoomba’s

limitedavailablegassupplyreducesthelikelihoodofthisbeingacrediblealternativein

thisperiod”

TheincreaseinthevolumeofgasﬂowingnorthfromVictoriaisalsoresultinginchangesinthe

competitivedynamicswithcompetitionemergingbetween

• theEGPandMSPviatheDTSfordeliveriestoSydneyandCanberra

• thewestern(SEAGasMAPS)central(DTSMSP)andeastern(EGPMSP)routesfor

deliveriestoMoomba

Whilecompetitionisemergingonthesenewroutesthereisevidencethatsomepipeline

operatorsarestillexercisingmarketpoweralongtheseroutes(seesection)whichimplies

thatcompetitionbetweenthevariouspipelinesisnotaseectiveasmightbeexpectedOn

someofthesenewroutespipelinesthathavetraditionallycompetedwitheachotherforsupply



Inquiry into the east coast gas market—April 2016

intoAdelaideSydneyandtheACT(forexampleMAPSandSEAGasPipelineandtheMSPand

EGP)arestartingtooperateascomplementsratherthansubstitutesundersometransactions

IftheNGPisbuiltthenthecompetitivedynamicsmaychangefurtherdependingonwhether

gasissuppliedsouthfromMtIsaIftheNGPisonlyusedtosupplygastoMtIsathenitwill

competewiththeCGPforsupplytothislocationIfhoweveritisusedtosupplygasintothe

remainderoftheeastcoastthentheNGPandCGPwillbecomecomplementsandcompete

withtheQSNforsuppliesintoQueenslandfromMoombaortheSWQPforsuppliesintothe

southernstatesfromWallumbillaHowmuchitwillcompeteishoweveruncleargivenAPA

ownstheCGPSWQPandQSN

Settingtheseexamplesasidethereareashighlightedinﬁgurealargenumberofpipelines

ontheeastcoastthatarenotsubjecttoanyformofcompetitionfromotherpipelinesincluding

• majorarterialpipelinessuchastheSWQPQSNRBPDTSandtheTasmanianGas

Pipeline(TGP)

• smallerpipelinesincludingthoseservicingregionalareassuchastheBWPCGPCRP

CWPSEPSSESAPipelineSouthGippslandPipeline(SGP)RiverlandPipelineCheepie

toBarcaldinePipeline(CBP)DawsonValleyPipeline(DVP)WallumbillatoDarlingDowns

Pipeline(WDP)NorthQueenslandGasPipeline(NQGP)andlateralsonsomemajorarterial

pipelines(forexampletheWhyallaandAngastonlateralsontheMAPSandtheGrith

LithgowandWaggalateralsontheMSP)

Competitionfromalternativeenergysources

Competitionfromalternativeenergysources(forexampleelectricity)isoftencitedasa

constraintonthebehaviourofpipelineoperatorsbutthematerialgatheredthroughtheInquiry

suggeststhatatbestcompetitionfromotherenergysourcesprovidesaweakconstrainton

transmissionpipelines

Thatiswhiletherehavebeeninstancesinthepastwherecompetitionforthemarketfrom

alternativeenergysourceshasconstrainedthepricethattransmissionpipelineschargeduring

theperiodofcompetition



therewasnoevidenceintheinternaldocumentsprovidedby

pipelineoperatorsthatcompetitionfromotherenergysourcesiscurrentlyposingmuch

constraintorhasdonesointhelasttwotothreeyears

Riskofassetstranding(fullorpartial)

Inamarketcharacterisedbysunkandlargelyﬁxedcoststheriskoffullorpartialasset

strandingmayimposeaconstraintontheincentiveapipelineoperatorotherwisehastoexercise

marketpower

WhilethereissomeevidencethatthedeclineinGPGontheeastcoastandchangesinthe

patternofgasﬂowsacrosstheeastcoastareexposingsomepipelinestopartialassetstranding

riskthepipelinesthatarefacingthisriskhavenotreducedtheirpricestoattractmoredemand

tocounterthisriskTothecontrarysomehaveactuallyincreasedtheirpriceswithonepipeline

raisingpricesbyoverpercenteveninthefaceofdecliningvolumesTheriskofasset

strandingdoesnotthereforeappeartobeprovidinganeectiveconstraintonthebehaviourof

thosepipelinesfacingthisrisk

Countervailingpowerofshippers

Countervailingpowerariseswhenbuyershavespecialcharacteristics(forexamplesizeor

commercialsigniﬁcance)thatenablethemtocrediblythreatentobypassthepipeline(for

examplebybuildingtheirownpipelineorsponsoringnewentry)Whiletherehavebeen

examplesinthelastyearsoflargershippersdevelopingpipelinestobypassexistingpipelines

 OneofthemorenotableexamplesofthisformofcompetitionoccurredinMtIsainthroughacompetitivetender

processthatconsideredtwoalternatives

• thedevelopmentoflocalisedgenerationintheMtIsaregion

• thedevelopmentofanelectricitytransmissionlinethatwouldconnectNorthWestQueenslandtotheNationalElectricity

Market

AjointbidbyAPAandAGLtodeveloptheDiamantinaGPGplantinMtIsawastheultimatewinnerofthisprocess



Inquiry into the east coast gas market—April 2016

orcrediblythreateningtouseanalternativeenergysourcetherewasnoevidenceinthematerial

providedbypipelinesthatcountervailingpowerhasplacedaconstraintonthepricesnegotiated

inthelasttwotothreeyearsorthepricescurrentlybeingoered

Theriskofbypassmoregenerallyappearstobehavinglittleeectonthepricescurrentlybeing

proposedbysomepipelinesashighlightedinthefollowingstatementinonepipelineoperator’s

BoardPaper





“Theproposed[…]tari[…]hasbeencanvassedwithpotentialshippersThistariishigher

thantheeectivetarifora‘newbuild’bypasspipelineandhigherthanthecurrent[…]

backhaultari”

Regulationorthethreatofregulation

Inthemid-sstateandterritorygovernmentsagreedtoimplementanindustryspeciﬁc

accessregimeforgastransmissionanddistributionpipelinesThegasaccessregimecame

intoeectinlateWiththeexceptionofoneortwosmallertransmissionpipelinesallthe

transmissionpipelinesontheeastcoastweredeemedtoberegulatedwhentheregimecame

intoeect

Intheinterveningperiodregulationhasbeenrevokedonanumberofkeypipelinesandalarge

numberofnewpipelinesthathavebeendevelopedhavenotbecomesubjecttoregulation

TherearenowjustpipelinesthataresubjecttosomeformofregulationundertheNGLand

NGRwhichamountstolessthanpercentofthetransmissionpipelinesontheeastcoast

(seeappendixformoredetailontheregulatorystatusofpipelinesandhowthishaschanged

overtime)

Therelativelysmallnumberofpipelinesthataresubjecttoregulationisindirectcontrastto

whatoccursinothercomparablejurisdictionssuchastheUStheEuropeanUnion(EU)and

NewZealandwherethevastmajorityoftransmissionpipelinesareregulatedThemarket

powerwieldedbyexistingpipelinesiswellrecognisedinthesejurisdictionsevenincaseswhere

producersandusershaveanumberoftransportationoptionstosupplyorsourcegasasnoted

bytheBrattleGroupinareporttotheNCC





“MostsupplybasinsinNorthAmericaandEuropehavemorethanonepipelineaccessing

themManydestinationmarketshavemultiplepipelinesservingthemDespitethegreater

‘thickness’ofthesemarketspipelinesinthesejurisdictionsarestillconsideredtohavenatural

monopolycharacteristicsandareregulatedwithrespecttopriceandtermsandconditions

ofservice”

Whilemanywouldexpectthatregulationorinsomecasesthethreatofregulationwould

constrainthebehaviourofpipelinesinternaldocumentsprovidedbythepipelineoperators

revealedthatthegasaccessregimeinitscurrentformisnotposinganeectiveconstrainton

thebehaviourof

• Unregulatedpipelines—Therewasnoevidenceinthematerialprovidedbypipeline

operatorsthatthethreatofregulationwasposingaconstraintonthebehaviourofanyof

theunregulatedpipelinesThepricespaidforsomepipelinesinsalesprocessescarriedout

overthelastﬁveyearsalsosuggestthatpurchasersareassuminglittlereductioninreturns

fromthepotentialforfutureregulationSotoodoestheinternalanalysiscarriedoutbyone

pipelineoperatorwhichindicatedthatitisearningpercentmorerevenuethanitwouldif

itwassubjecttofullregulation

• Regulatedpipelines—Thereisevidencethatsomepipelinesthataresubjecttofullregulation

aretakingadvantageofthelimitationsinthegasaccessregimetoexercisemarketpower

(seechapterformoredetailontheselimitations)TheInquirywasalsopresentedwith

evidencethatatleasttwopipelinessubjecttolightregulationareexercisingmarketpower

 Thepipelineoperator’sabilitytooertarisinexcessofthebypasscoststemsfromthefactthattheindividualloads

ofmostoftheshippersonthispipelinewouldnothavebeensucienttounderpinthedevelopmentofa‘newbuild’

bypasspipelineOnthepipelineinquestiontheco-ordinationofshippersisunlikely

 BrattleCompetitioninGasPipelineMarketsInternationalPrecedentforRegulatoryCoverageDecisionsJunep



Inquiry into the east coast gas market—April 2016

ThethreatofarbitrationundertheNGLinthesecasesappearstobehavinglittleinﬂuence

onthebehaviourofthesepipelineswithsomeshippersinformingtheInquirythatthecosts

andresourcesassociatedwithanaccessdisputecoupledwiththeuncertaintysurrounding

howtheAERwouldapproachcertainissues



andtheﬁnaloutcome



discourageshippers

fromtriggeringtheseprovisionsInformationasymmetriesmayalsobecontributingtothis

reluctancetotriggertheseprovisionsbecauseshippersareunabletodeterminehowmuch

theyarebeing‘overcharged’(seechapterformoredetail)

Anumberofshippersalsonotedthelackofconstraintposedbytheexistingregimewithsome

pointingtothedecisionnottoregulate(‘cover’)theSEPSinasevidenceoftheregime’s

inabilitytoconstrainthebehaviourofpipelineoperatorsevenwhenthepipelineinquestionis

amonopolyOneshipperalsoinformedtheInquirythatithadobtainedadvicethatanother

majorarterialpipelinethatisnotsubjecttoanyformofcompetitionandhadraisedprices

bypercentwasunlikelytosatisfythetestforregulation(thecoveragecriteria)Material

providedbythepipelineoperatorinquestionindicatedthatithadalsoobtainedexpertadvice

onthisissuewhichconcludeditwasunlikelytosatisfythetestforregulationbecauseaccess

wasunlikelytoresultinamaterialincreaseincompetitioninanothermarket

Giventheexperienceshippershavehadinthisareaitisnotsurprisingthatthethreatof

regulationundertheNGLandNGRisnotposinganeectiveconstraintonthebehaviourof

pipelineoperatorsorthatshippershavebeenreluctanttoapplytohaveothermajorbottleneck

pipelinessuchastheSWQPQSNregulatedTheNationalCompetitionCouncil’s(NCC)recent

observationinthePortofNewcastlecasethat‘excessive’or‘monopolistic’pricingisnotthe

focusofPartIIIA



canbeexpectedtoaddtothereluctanceshippershavetoapplyingtohave

pipelinesregulatedunderthecurrenttestforregulationintheNGLandNGRwhichlargely

mirrorsthetestunderPartIIIAThisissueisdiscussedinfurtherdetailinchapter

Conclusionsonconstraintsfacedbyexistingpipelines

Theprecedingdiscussionsuggeststhatthemajorityofexistingtransmissionpipelinesonthe

eastcoasthavemarketpowerandtheirabilityandincentivetoexercisethatpowerisnotbeing

eectivelyconstrainedatthistimeEvenwherecompetitionispresentitisclearfromthe

materialgatheredthroughtheInquirythatcompetitionisnotposingaseectiveaconstraint

asmightbeexpectedAsimilarobservationcanbemadeaboutthegasaccessregimewhich

isalsofailingtoimposeaneectiveconstraintonpipelineoperatorseitherdirectlythrough

regulationorindirectlythroughthethreatofregulationThisissueisdiscussedinfurtherdetailin

chapter

 Pipelineswithmarketpowerareusingthatpowerandthisisto

beexpected

DuringtheInquiryconcernswereraisedbyalargenumberofmarketparticipantsabout

thewaysinwhichexistingpipelineoperatorsareexercisingtheirmarketpowerwithspeciﬁc

concernsraisedabout

• thepriceschargedforsomeservicesbeinghigherthanwouldbeexpectedinaworkably

competitivemarketorunderregulation

• thepotentialforagreaterdegreeofbundlingandreducedtransparencyoftransportation

costsacrossparticularroutesinthefuture

• thecostsbeingleviedforincrementalmodiﬁcationstopipelines(includingthecostsoffront

endengineeringanddesignstudies)

 ForexampletherewassomeuncertaintyastohowtheAERwouldvaluepipelinesthathavebeeninoperationforaperiod

oftimeandhowitwoulddealwithotherissuessuchasexcesscapacityandredundantassets

 TheInquiryisawarethatconcernswerealsoraisedabouttheaccessdisputeprovisionstotheVictorianGasMarket

TaskforcethatwaschairedbyformerFederalMinisterPeterReithandthattheTaskforcerecommendedthatfurtherworkbe

donetoensurethattheaccessdisputeframeworkisoperatingeectively

GasMarketTaskforceFinalReportandRecommendationsOctoberp

 NCCFinalRecommendationDeclarationoftheshippingchannelserviceatthePortofNewcastleNovemberp



Inquiry into the east coast gas market—April 2016

ConcernshavealsobeenraisedintheAEMC’sEastCoastGasMarketReviewaboutthepotential

forpipelineoperatorstoengageininecientpricediscrimination

TheInquiryhasexaminedtheseconcernsaspartofabroaderinvestigationintowhetherany

pipelineoperatorsareexercisingmarketpowerby

• engaginginmonopolypricing

• engaginginanti-competitivebundlingortying(forexampleforeclosingcompetitionby

chargingalowerpriceforthebundledservicethanthepriceofindividualservicesorby

makingthesaleofoneserviceconditionalonthepurchaseofanother)

• restrictingordenyingaccesstotheservicesprovidedbythepipelines

• engaginginanti-competitivepricediscrimination(forexamplebypricinginamannerthat

favoursaliatesraisesbarrierstoentryoramountstopredatorypricing)

• reducingthequalityofservicesprovidedbythepipelines

AsummaryoftheInquiry’sﬁndingsisprovidedintable

TableSummaryofFindingsonExerciseofMarketPower

Formofmarketpower Evidenceofbehaviour? Findings

Monopolypricing Yes Alargenumberofsmallandlargepipelinesservicingsupply

centrescapitalcitiesandregionalareasontheeastcoastare

pricingabovelevelsonewouldexpectinaworkablycompetitive

market

Anti-competitive

bundlingortying

Nobutpossibilityof

bundlinginthefuture

BundlingThereisnoevidencethatanypipelineoperatorsare

currentlybundlingthepriceoftransportacrosstwoormore

pipelinesTherearehoweverindicationsthatitmaybecomemore

prevalentinthefuturewhichcoulddependingontheformit

takesadverselyaectcompetition

TyingThereisnoevidencethatpipelinesaremakingthepurchase

ofoneserviceconditionalonthepurchaseofanotherservice

ormakingaccesstoapipelineconditionalontheuseofanother

pipeline

Restrictedaccessor

denialofaccess

No Accesstotheservicesprovidedbypipelineshasnotbeena

signiﬁcantissueThisisnotsurprisinggiventhemajorityof

pipelinesareverticallyseparatedandoperatingonanopenaccess

basisandthereforehavenoincentivetodiscourageaccess

Anti-competitiveprice

discrimination

No Thereisnoclearevidencethatpipelinesareengaginginanti-

competitivepricediscriminationThatisnottosayallshippersare

payingthesamepriceThedierencescanhoweverinmostcases

beexplainedby

• dierencesintheservicesobtainedbyshippersundertheir

GTAs

• dierencesinthecontracttermwithdiscountssometimes

oeredforlong-termGTAs(orpremiumspayableforshort-term

contracts)

• investmentsthatarerequiredtoprovidetheservice(for

exampleexpansions)

Thedierencesinsomecasesalsoreﬂecttheavailabilityofother

optionstotheshipperswiththepriceschargedtoshippersthat

canutiliseanalternativepipelinebeinglowerinsomecasesthan

thepriceschargedto‘captured’shippersthathavenoother

alternative

Reductionsinservice

quality

Rare Thereislimitedevidenceofpipelineoperatorstryingtoreduce

servicequalitywiththeonlyinstancescitedintheInquiry

including

• onepipelineoperatorthathasceasedtooerservicesthat

allowshipperstominimisethecostofmanagingvariations

indemand(forexampleasavailableandoverrunservices

deliverypointchanges)inanattempttoforceshippersto

contractmoreﬁrmcapacity

• anotherpipelineoperatorthathastakenalongperiodoftime

tofacilitatechangesindeliverypointsandtriedtolimitthe

numberoftimesdeliverypointscanbechangedwhichhasthe

potentialtoaectsecondarycapacitytrading



Inquiry into the east coast gas market—April 2016

Astablehighlightsthereisevidencethatanumberofmajorpipelinesareengagingin

monopolypricingandthatbundlingofservicesandpricesacrosspipelinesmaybecomemore

prevalentinthefutureThereishowevernoevidencethatpipelineoperatorsareengagingin

anti-competitivepricediscriminationExerciseoftheotherformsofmarketpowerisalsoeither

rareornon-existent

FurtherdetailonmonopolypricingisprovidedbelowInrelationtobundlingdependingonthe

formittakesthistypeofbehaviourcaneitherbeneﬁtend-users(thatisthroughlowerprices)

orforeclosecompetition(thatisbydeterringcustomersfromusingothercompetingpipelines)

WhilesomeconcernswereraisedaboutforeclosuretheInquiryhasnotseenanyevidenceof

thisbehaviourtodateThatisnottosayitcouldnotoccurinthefutureonthoserouteswhere

thereissomecompetitiontosupply



Howeverifitwastooccurthendependingontheform

thebundlingtakesrecoursemightbehadtothemisuseofmarketpowerprovisionsinsof

theCCAandortheexclusivedealingprovisionsinsoftheCCA

 Thereisevidenceofmonopolypricing

ThroughouttheInquirymarketparticipantsraisedanumberofconcernsabouttheability

ofpipelineoperatorstoexercisemarketpowerwhennegotiatingthepriceoftransportation

servicesandclaimedthatthepriceschargedforsomeservicesareexcessiveandhigherthan

wouldbeexpectedinaworkablycompetitivemarketorunderregulationTheseconcerns

centredon





• theratesofreturnthatpipelineoperatorsexpecttoearnontheincrementalinvestments

outlinedinsectionwhichhaveformedthebasisforsettingthetransportationcharges

payablebyusersoftheseinvestments

• thepricesthatarebeingchargedbypipelineoperatorsthathavealreadyrecoveredthecost

ofbuildingthepipeline

• thepricessomepipelineoperatorsarechargingforasavailableinterruptiblebackhauland

bi-directionalservices

TheInquiryhasinvestigatedtheseconcernsandfoundthatthereissomesubstancetotheclaim

bymarketparticipantsthatalargenumberofpipelineoperatorsareengaginginmonopoly

pricingandthatthepricesthatarebeingchargedforsomeservicesareexcessivePerhaps

themosttellingindicatorsoftheexcessivepricesthatarebeingchargedforsomeservices

comefromthepipelineoperators’internaldocumentswhichrevealthefollowingaboutsome

ofthemoresigniﬁcantpipelinesownedbyfourdierentpipelineoperatorsallofwhichare

currentlyunregulated

• Onemajorarterialpipelineisearningpercentmoreinrevenuethanthepipelineoperator

estimateditwouldbeearningifitwasregulated





• TheEBITreturnonasset(measuredonahistoriccostwrittendownassetvaluebasis)

earnedbyonemajorpipelinethatfacessomedegreeofcompetitionhasbeenover

percentpabetweenand





• Anothermajorpipelinethatfacessomedegreeofcompetitionexpectstogeneratean

internalrateofreturnofpercentonarecentinvestmentthathasbeenfullyunderwritten

byashipper

 ForexampleforgasﬂowingfromVictoriatoWallumbillaAPAcouldoerabundledpriceforuseoftheSWQPQSNwith

thecentralroute(DTSMSP)thatislowerthanthepricesthatwouldbepayableforuseoftheindividuallegsofthisrouteor

couldoeralowerSWQPQSNpricetocustomersthatalsousetheDTSMSPlegIfthetotalpricefortheroutewaslower

thanthepriceofusingthewesternroute(MAPSSEAGas)andtheSWQPQSN(pricedasanindividualleg)ortheeastern

route(theEGPMSP)andtheSWQPQSN(pricedasanindividualleg)thenitcouldforeclosecompetition

 Concernshavealsobeenraisedbysomemarketparticipantsaboutthefeesthatarebeingchargedforsomeancillary

services(forexamplerenominationchargescapacitytradingin-pipetradesandin-piperedirectionservices)whichthey

claimcostlittletoprovideandjustamountto‘clippingtheticket’

 Thispipelinelikeothertransmissionpipelineshasexistingcontractsinplacethatwouldbeunlikelytobeaectedbyany

decisiontoregulatethepipelinebecauseprovisionswithintheNGLprotectpre-existingcontractualrights

 Thisreturnhasbeenestimatedusingthepipelineoperator’sestimateofthewrittendownvalueofthepipelineandEBIT

valuesoverthoseyears



Inquiry into the east coast gas market—April 2016

• Onepipelineoperatorthatisfacingdecliningvolumesistryingtomaintainarateof

returnthatistimeshigherthanitestimateditwouldbeabletoearnifitwassubject

toregulation

TheInquiryrecognisesthathighproﬁtsarenotnecessarilyreﬂectiveofmarketpowerandthat

noonepieceofevidenceisdeﬁnitiveindemonstratingthatpipelinesareexercisingmarket

powerwhennegotiatingwithshippersHoweverthetotalityoftheevidencegatheredthrough

theInquirycombinedwiththelackofcompetitiveconstraintsfacedbymostpipelinesishighly

indicativeoftheexerciseofsuchpower

FurtherdetailontheInquiry’sﬁndingsisprovidedbelowNotethatitwasbeyondthescopeof

thisInquirytocarryoutadetailedforensicexaminationofthepriceschargedbyeverypipeline

ontheeastcoasttodeterminewhethertheyinvolvetheexerciseofmarketpowerInsteadthe

Inquiryhasinvestigatedtheconcernsthatwereraisedbymarketparticipantsaboutparticular

pricesIndoingsotheInquiryhashadregardtoGTAsinvoicesboardpapersﬁnancial

informationandarangeofotherinternaldocumentsprovidedbypipelineoperatorsinrelationto

themajorarterialpipelinesontheeastcoast(namelytheSWQPQSNRBPMSPEGPMAPS

SEAGasPipelineDTSandTGP)andasampleofothersmallerpipelines(namelytheBWPCGP

andSEPS)

Thehighreturnspipelinesexpecttoearnonincrementalinvestmentsareconsistentwith

monopolypricing

AsoutlinedinsectionsigniﬁcantinvestmenthasbeencarriedoutbyAPAJemenaandEpic

overthelasttwotothreeyearstoexpandconnectandordevelopbi-directionalcapabilityon

regulatedandunregulatedpipelinesandonpipelinesthatarestrictlyspeakingsubjecttosome

degreeofcompetitionTheseinvestmentsrangeinvaluefromaroundmilliontomillion

Chartsetsoutthereturnsonequitythatthevariouspipelineoperatorsexpecttoearnonthese

incrementalinvestmentswhichhaveformedthebasisforsettingthetransportationcharges

payablebyusersoftheseinvestmentsThereturnspresentedinthischarthavebeenobtained

frominternaldocumentsprovidedbythepipelineoperatorswhichinmostcaseswereprepared

toobtainboardapprovalfortheproposedexpenditureorthepricestobepaidbyshippers

GiventhecommerciallysensitivenatureofthisinformationtheInquiryhasdecidednotto

publishthenamesoftheprojects

Toputthesereturnsintoperspectivechartincludesthebenchmarkreturnonequitythatthe

AERhasusedoverthelastthreeyearswhendeterminingtherevenuerequirementofpipelines

thataresubjecttofullregulationundertheNGR



whichhasrangedfrompercentto

percent



TheInquiryhasusedthisasabenchmarkbecauseundertheNGRthereturnon

equityusedinthecalculationofaregulatedserviceprovider’srevenuerequirementmustbe

commensuratewiththeecientﬁnancingcostsofabenchmarkeciententitythatfacesa

similardegreeofrisktothatfacedbypipelineoperatorsandreﬂecttheprevailingconditionsin

themarketforequityfunds

Whilehighratesofreturnmaybewarrantedincaseswherethelevelofriskassociatedwith

aninvestmentishightheincrementalinvestmentshaveasnotedinsectionlargelybeen

 UndertheregulatoryframeworksetoutintheNGRtherevenuerequirementofapipelinethatissubjecttofullregulation

isdeterminedusingthebuildingblockmethodologywhichinvolvessummingthecostcomponents(buildingblocks)that

aprudentandecientserviceproviderwouldincurinprovidingreferenceservicesovertheregulatoryperiod(thatisthe

returnoncapitaldepreciationoperatingexpenditureandnettaxliabilities)

Oneofthekeycostcomponentsinthebuildingblockmethodologyistherateofreturnofwhichthereturnonequityisone

elementInkeepingwithrule()oftheNGRtheAERisrequiredtodeterminetherateofreturninamannerthatachieves

thefollowingobjective

“…therateofreturnforaserviceprovideristobecommensuratewiththeecientﬁnancingcostsofabenchmarkecient

entitywithasimilardegreeofriskasthatwhichappliestotheserviceproviderinrespectoftheprovisionofreference

services”

Rule()alsostatesthattheinestimatingthereturnonequityregardmustbehadtotheprevailingconditionsinthe

marketforequityfunds

 OverthelastthreeyearstheAER’sregulatorydecisionsonthereturnonequityhaverangedfrompercentto

percentSeeAERFinalDecisionJemenaGasNetworksAccessArrangement–AttachmentJunep–

andAERFinalDecisionAPAGasNetAustralia(Operations)AccessArrangement–AttachmentMarch

pNotethatwhileJemenaappealedtheAER’sdecisiononthereturnonequityitwasnotsuccessfulinthisappealSee

ApplicationbyJemenaGasNetworks(NSW)Ltd[]ACompT[]



Inquiry into the east coast gas market—April 2016

underwrittenbyuserswhohaveenteredintomedium-tolong-termGTAswiththerelevant

pipelineoperatorThedemandrisksassociatedwiththeseinvestmentsarethereforerelatively

lowanddonotexplaintherelativelyhighreturnsdepictedinchart

Chart Returnonequityexpectedtobeearnedonrecentincrementalprojects



11% 11%

13%

15% 15%

16%

19%

56%

67%

159%

AER benchmark

return on equity

for 2013–15

7.1%–8%

Projects

Aschartshowstheexpectedreturnonequityontheseprojectsrangesfrompercentto

percentWiththeexceptionofoneoftheseprojectstheexpectedreturnontheseprojects

is–timeshigherthanthereturnonequitybenchmarkestimatedbytheAERThemajority

ofthereturnsarealsofarhigherthanthereturnonequitythatwasadoptedinthewinningbid

fortheNGP

Thedierencesbetweenthereturnsdepictedinthischartthereturnonequityestimatedbythe

AERandthereturnadoptedinthewinningbidfortheNGParesubstantialandareconsistent

withthesigniﬁcantdegreeofmarketpowerthatexistingpipelineoperatorscanusewhen

negotiatingthepricestoaccessincrementalprojects

Thedierencebetweentheseexpectedreturnsandthereturnassumedinthewinningbidfor

theNGPalsoreﬂectsthefactthatcompetitionforthedevelopmentofanewpipeline(that

iscompetitionforthemarket)isgenerallyconsiderablystrongerthanitisforincremental

investmentsinexistingpipelinesIncontrasttonewpipelinesthenaturalmonopoly

characteristicsofpipelinesmeansthatitisusuallyfarcheapertoaugmentanexistingpipeline

thanitistobuildanotherpipelinetoprovideanyadditionalservicesthatmayberequired

(includingbi-directionalservices)Thereisthereforelittleprospectforcompetitioninthe

provisionofincrementalinvestmentswhichexplainswhytheirratesofreturnareinthemajority

ofcasessomuchhigherthanthereturnassumedintheNGPwinningbid

Whilenotshowninchartthereturnstowardstheupperendofthisrangeareexpectedto

beearnedoninvestmentsinbi-directionalcapabilityTheseinvestmentsareexpectedtoyielda

highreturnbecausethecostoftheconversionisrelativelysmallanditallowsthepipelinetoearn

revenueonﬂowsinbothdirections



Italsoreﬂectsthefactthatthepipelinesinquestionhave

beenfullyunderwrittenthroughlong-termGTAsonthebasisofforwardhaulasonepipeline

operatornoted

“Theequityreturn[…]reﬂectstheincrementalnatureofthereverse[…]ﬂowofthe

[…]Pipelinewhichwasoriginallyfullyfundedonthebasisof[foundationcontracts]”

[insertionadded]

 Thischartonlyincludesprojectswherethepipelineoperatorreportedtheproject’sexpectedreturnonequityTherewere

twootherprojectsthatdidn’treporttheexpectedreturnonequitywithoneprojectexpectingtogenerateaninternalrate

ofreturnofpercentandtheotherpipelineexpectingtoearnapost-taxprojectreturnofoverpercent

 Notethatsomeofthedeliveriesmayoccurbydisplacementratherthanphysicallybeingtransported



Inquiry into the east coast gas market—April 2016

Theadditionalproﬁtisbeingretainedbythepipelineoperatorswhichiswhytheyexpectto

earnreturnsintheorderof–percentforbi-directionalinvestments

Internaldocumentsalsorevealthatinmostcasesthepipelineoperatorshavesoughttorecover

thecostoftheincrementalinvestmentsoverthelifeoftheshipper’sGTAsratherthanthelifeof

theassettominimisetheirriskexposureThesepipelineoperatorsarethereforeexposedtovery

littledemandriskwiththeonlymaterialriskbeingthatusersdefaultontheircommitments

Thepriceschargedbypipelinesthathavealreadyrecoveredthecostofconstructionare

higherthanwouldbethecaseunderfullregulation

DuringtheInquiryconcernswereraisedbyanumberofmarketparticipantsaboutpipeline

operatorsthathadrecoveredthecostofconstructingthepipeline



(oralargeportionthereof)

notreducingtransportationchargestoreﬂectthisrecoveryandtherefore‘overrecovering’the

costofconstructionThethreeexamplesthatmarketparticipantscitedinthiscontextincluded

onemajorarterialpipelineandtwosmallerpipelinesIneachofthesecasesmarketparticipants

claimedthatthepricespaidbyfoundationusersofthesepipelineshadbeensettoprovidefor

theacceleratedrecoveryofthecostofconstructingthepipelineandthatoncethisoccurred

pricesshouldjustbebasedonthecostofoperatingthepipeline

Theownersofthethreepipelineswereprovidedanopportunitytorespondtotheseconcerns

andwerealsoaskedtoprovidetheirviewsonwhetherpricesshouldbereducedifthecost

ofconstructingthepipelinehadalreadybeenrecoveredfromusersThepipelineoperators

inquestionrespondedbynotingthatpastrecoveriesofcapitalarelessrelevanttothe

determinationofpricesbecausepricesareestablishedthroughcommercialnegotiations

whichareforward-lookinginnatureElaboratingonthisfurtheronepipelineoperatorstated

thefollowing

“Theﬁnancialtreatmentorvaluationmethodologiesemployedonmostassets…havelittle

correlationwiththeoriginalconstructioncostsFoundationcustomersmayreceiveprice

reductionsafteracommerciallynegotiatedtimeperiodhoweveroncethesecontractshave

reachedtheendoftheirtermnewpriceswillbedevelopedbasedoninputs…futureoperating

proﬁlereplacementcostsandcommercialmarketsignals”

Anotherpipelineoperatornotedthat

“…thetarisandassociatednon-pricetermsofaccessforourpipelinesaresubjecttovarious

forward-lookingconsiderationsandconstraintssuchas

• thedeliveredpriceofgastothedestinationmarketormarketsbymeansofoneormore

alternativepipelines

• theextenttowhichupstreamproducersthatareabletoinjectgasintothesepipelines

beneﬁtfrombuyerswithchoicesastowhichendmarketgasistobeshipped

• theextentofsparecapacityonboththeprincipalandeachalternativecompetingpipeline

• thepricesprevailingunderexistinglongtermtakeorpaycommitmentsbyexisting

shippers

• theextenttowhichexistingshippers(oneithertheprincipaloranyalternativecompeting

pipeline)holdsparecapacityundercontractandsoareabletocompetetoprovidethat

sparecapacitytothirdpartiesand

• acrossallofthesevariablestheextenttowhichthepresenthighlydynamicnatureofthe

eastcoastgasmarketmaycausethemtochangeovertherelevantperiodforwhichany

newtransportationcontractpriceistobestruck”

 Theterm‘constructioncost’isusedheretorefertotheoriginalcostofdevelopingthepipelineandanycostsincurredin

expandingextendingorotherwisemodifyingthepipelineincludingareturnonthoseinvestments



Inquiry into the east coast gas market—April 2016

Thethirdpipelineoperatornotedthefollowing

“Forpipelinessubjecttoeitherlightornoregulationtarishavenorelationshipwiththe

capitalcostsofapipelineandareaderivationofmarketforceswithlightregulationproviding

foranAERdisputeresolutionprocessifnegotiationoftarisfailsInsuchaprocessthereis

norequirementforpipelinetaristobedeterminedbyreferencetounrecoveredcapitalcosts

and[…]considersthatsuchanapproachmaynotbeconsistentwithanumberoftherevenue

andpricingprincipleswhichareapplicable”

Theviewsexpressedbythesepipelineoperatorsareatoddswiththeviewsexpressedby

shippersashighlightedinthefollowingstatementmadebyCentralPetroleuminasubmissionto

theAEMC’sEastCoastGasMarketReview





“InCentral’scasegasreservessoldintotheEastCoastmarketneedtobetransportedalong

theAmadeusGasPipeline(AGP)thenewlyannouncedNGPandthendowntheCarpentaria

GasPipeline(CGP)WhilsttarisfortheNGPhavebeenestablishedandareclearlylinked

toactualcostsandinvestmentsforanewbuildtheAGPandCGPareexistingpipelines(of

severaldecades)withpreviousgastransportationagreementshavingalreadyunderwritten

theinvestmentAsmentionedabovepipelinetransportationtarisparticularlyinthecase

ofmatureexistingpipelinesappearoutofsyncwithactualoperatingcostsandreasonable

investmentreturns”

Kimberly-ClarkAustralia(KCA)expressedsimilarviewsaboutthistypeofbehaviourinits

applicationtotheNCCfortheSEPStoberegulated



TheInquiryrecognisesthatarangeoffactorsmayresultinapipelineoperatorbeingableto

‘overrecover’thecostofconstructionManyhavelittletodowiththeexerciseofmarketpower

Forexampleanunexpectedincreaseindemandlaterinthelifeofapipelinemayenableitto

‘overrecover’itsconstructioncostsevenifitfaceseectivecompetitionEquallythepipeline

could‘underrecover’ifdemandwasunexpectedlylowthoughthechancesofthisarereduced

bytheuseoflong-termGTAs

WhilethisisthecaseifthepipelinewassubjecttofullregulationundertheNGLandNGRthe

scopetochargepricesthat‘overrecover’thecostofprovidingtheservicewouldbelimited

becauseoneofthemorefundamentalprinciplesintheNGRisthatanassetshouldonlybe

depreciatedonceoveritseconomiclife



Ineectthismeansthatoncethevalue



oftheasset

hasbeenrecoveredfromusersregulatedpriceswouldbebasedontheforwardlookingcost

ofoperatingandmaintainingthepipeline(includingthecostofcarryingoutanyfuturecapital

works)ThisprinciplewasadoptedinatleasttwooftheGTAsthatwereprovidedtotheInquiry

withprovisionsintheseGTAsprovidingforpricestofalloncethecostofconstructionhadbeen

recovered



TheInquiryhasexaminedtheconcernsraisedbymarketparticipantsbycomparingtheprices

currentlybeingchargedbythepipelinesinquestionwiththepricesthatcouldbeexpected

toprevailifthepipelinesweresubjecttofullregulationIndoingsotheInquiryhasuseda

discountedcashﬂowmodelandacombinationofpubliclyavailableinformationandmaterial

providedintheInquirytodeterminewhetherthecostsincurredintheconstructionofthese

 CentralPetroleumSubmissiontoAEMCPipelineRegulationandCapacityTradingDiscussionPaperFebruary

 KCAApplicationforCoverageofaPipelineOctober

 Seer()(d)oftheNGR

 Thewayinwhichanassetwouldbevaluedifitwassubjecttofullregulationwilldependonwhetheritwascommissioned

priortothecommencementoftheGasCodeinlateorafterthisdateSpeciﬁcally

• ForpipelinescommissionedbeforetheGasCodecameintoeectsspeciﬁesfactorsthattheregulatormay

takeintoaccountwhensettingthevaluewhichincludesamongstotherthingsthedepreciatedactualcost(DAC)the

depreciatedoptimisedreplacementcost(DORC)arecentsalespriceandthecircumstancesofthatpurchasethebasis

onwhichtarishavebeen(orappeartohavebeensetinthepast)theeconomicdepreciationofthepipelineandthe

historicreturnstothepipelineoperatorSectionfurtherstatesthatthevalueshouldnotnormallyfalloutsidethe

rangesetbytheDACandtheDORC

• ForpipelinescommissionedaftertheGasCodecameintoeectss–oftheGasCodestatethattheinitialcapital

baseistobebasedontheactualcostsincurredintheconstructionofthepipelinepluscapitalexpenditurelessredundant

assetsandlessdepreciationandcapitalcontributions

 InbothofthesecasestheGTAswereagreedtoaspartofafoundationcontractthatwasenteredintobeforethepipeline

wasdeveloped



Inquiry into the east coast gas market—April 2016

threepipelineshavebeenrecoveredfromusersThekeyinputsintothismodelincluded

estimatesofthecostsincurredintheconstructionandoperation(thatiscapitalexpenditure

operatingexpendituredepreciationtaxandarateofreturn)ofthepipelineandtherevenue

earnedtodate

Theresultsofthismodellingrevealedthattwoofthepipelineshavealreadyrecoveredthecost

ofconstructionfromusers



whiletheotherhasrecoveredasubstantialproportionofthese

costs(~percent)andisexpectedtorecovertheremainderinthenextﬁveyears

UsinginformationprovidedbythepipelineoperatorstheInquiryhasestimatedwhatthe

priceswouldbeifthepipelinesweresubjecttofullregulationandpriceswerebasedonthe

forwardlookingcostofoperatingandmaintainingthepipelinesastheNGRrequireThis

analysisindicatesthatthepricesonthetwopipelinesthathavealreadyrecoveredtheircost

ofconstructionare–timeshigherthantheywouldbelikelytobeiftheyweresubjectto

fullregulation

Thepriceschargedbysomepipelinesforasavailableinterruptibleandbackhaulservicesare

excessive

Asgasﬂowsbecomemoredynamicthroughouttheeastcoastthedemandforasavailable





interruptible



backhaul



andbi-directionalservicesandotherancillaryservicesisincreasing

particularlyamongstgasﬁredgeneratorsLNGprojectsandproducersFinancialdataprovided

bythepipelineoperatorsindicatesthatthisisagrowingsourceofrevenueforsomepipelines

Itisalsocontributingtoasubstantialincreaseintheproﬁtabilityofthosepipelineswherethe

costshavebeenunderwrittenbylong-termfoundationcontractsbecauseunliketheUSwhere

revenuefromtheseserviceswouldbeusedtoreducetheﬁrmtransportationratepipeline

operatorsareretainingthebeneﬁt

DuringtheInquiryconcernswereraisedbymarketparticipantsaboutthepricesthatanumber

ofpipelineoperatorsarechargingfortheseserviceswithsomenotingthatthepricesare

excessiveandarediscouragingﬂowsofgasintothesouthernstatesSimilarconcernshavealso

beenraisedinthecontextoftheAEMC’sEastCoastGasMarketReview

TheInquiryhasinvestigatedtheseclaimsusingtheindicativebenchmarkssetoutinbox

 InoneofthesecasestheInquirywasabletocorroborateitsﬁndingswithstatementsfromanannualreportwhich

indicatedthatthepricesinthefoundationcontracthadbeensettorecovertheconstructioncostsoveranaccelerated

periodoftimeinlinewiththeexpectedlifeoftheﬁeldsusedtosupplythelocationThisassumptionwasalsoreﬂectedin

thepricepaththathadbeenadoptedinthefoundationagreement

 Anasavailableserviceasitsnamesuggestsallowsabuyertotransportgaswithoutreservingandhavingtopayfor

capacityonadailybasissubjecttotheavailabilityofcapacityThepriorityaccordedtothisserviceislowerthanthat

accordedtoaﬁrmtransportationservice

 Likeanasavailableserviceaninterruptibleservicealsoallowsabuyertotransportgaswithoutreservingandpaying

forcapacityonadailybasisbutthepriorityaccordedtothisserviceisusuallylowerthantheasavailableservicesothe

pipelineoperatorcancurtailtheserviceifitbecomescapacityconstrainedorhigherpriorityservicesarerequired

 Abackhaulserviceinvolvesthenotional‘transportation’ofgasintheoppositedirectiontothepredominantﬂowofgasThe

transportationisnotionalbecausetheservicedoesnotactuallyresultinthephysicaltransportationofgasintheopposite

directionRathertheserviceinvolvesaphysicalswapwithgas‘exchanged’atthepointatwhichitisintendedtoenterthe

pipelineforanequivalentamountofgasatthebackhauldeliverypointThepracticaleectofthebackhaulserviceisthat

thenetforwardhaulﬂowisosetbythevolumesofgasnominatedforbackhaulIfthereisaninsucientvolumeofgas

beingtransportedonaforwardhaulbasisthenthebackhaulservicewillbeinterruptedwhichiswhythisserviceisusually

onlysoldonaninterruptiblebasis



Inquiry into the east coast gas market—April 2016

Box Benchmarksforasavailablebackhaulandbi-directionalprices

Thebenchmarkssetoutinthisboxareindicativeonlyandshouldnotbeconstruedasan

endorsementbytheInquiryofthepricinglevelsimpliedbythesebenchmarks

Asavailableandinterruptibleservices

Thereisnowell-acceptedregulatoryprincipleforthepricingofasavailableorinterruptible

servicesinAustraliabuttheprinciplethathasbeenadoptedintheEUandtheUSisthatthe

priceofasavailableorinterruptibleservicesshouldnotexceedthepriceofﬁrmcapacity





TheInquiryhasthereforeusedthisasabenchmark





InAustraliaﬁrmcapacitychargestendtobepayableonthebasisofreservedcapacitywhile

asavailableandinterruptiblechargesarepayableonthebasisofactualvolumestransported

Soifacustomerwithaﬁrmtransportationserviceonlytransportspercentofitsreserved

capacityonaday(thatisapercentloadfactor)thepricepayableonaperGJofgas

transportedbasiswouldbeequivalenttoapercentﬁrmcapacitycharge

Todevelopanequivalentasavailableandinterruptiblepricethatcanbeusedasa

benchmarktoassessthepricesbeingchargedbyeachpipelinetheInquiryhasuseddata

fromtheBulletinBoardtocalculatetheﬁveyearaverageloadfactorforeachpipelineThe

averagerangedfrom–percentUsingthepipelinewithapercentloadfactoras

anexampleifthepipelinewaschargingmorethanpercentoftheﬁrmcapacitycharge

forasavailableservicesthiscouldbeviewedasexcessive(thatisbecauseitishigherthan

theequivalentpriceforﬁrmcapacity)

Backhaulservices(non-physical)

Likeasavailableandinterruptibleservicesthereisnowellacceptedregulatoryprinciple

forthepricingofbackhaulservicesinAustraliabuttheInquiryisawarethattheAER’s

predecessortheACCChaspreviouslyapprovedbackhaultaristhatarepercentlower

thantheforwardhaultari



IntheEUtheAgencyforCooperationofEnergyRegulators

hasstatedthatthepriceforthisserviceshouldbesettoreﬂecttheactualmarginal

(additional)coststhatthepipelineoperatorincurstoprovidethisserviceandshallnotbe

belowzero



WhiletheprincipleadoptedintheEUhasmerittheInquiryisnotinapositiontoestimate

theincrementalcostsofprovidingthisservicesoforthepurposesofassessingtheprices

thatpipelinesarecurrentlychargingforbackhaulservicestheInquiryhasemployedthe

percentofforwardhaultaribenchmarkthathaspreviouslybeenadoptedbytheAER



Inquiry into the east coast gas market—April 2016

Bi-directionalservices

Inasimilarmannertoasavailableinterruptibleandbackhaulservicesthereisnowell

acceptedregulatoryprincipleforthepricingofbi-directionalservicesinAustraliaTheInquiry

isawarehoweverthatintheUSinterstatepipelineschargethesamepricefortheseservices

asﬁrmforwardhaulservicesandanyadditionalrevenuederivedfromtheseservicesistaken

intoaccountinthecalculationoftheﬁrmrate(thatisthebeneﬁtofbeingableto‘transport’

greatervolumesofgasandthefuelcostsavingsthatarisebecausesomedeliveriesoccurvia

displacementratherthantransportationarepassedontoshippers)

Forthepurposesofassessingthepricesthatpipelinesarecurrentlychargingfor

bi-directionalservicestheInquiryhasdecidedtoemployasimilarprincipletothatused

intheUSThatisthebi-directionalpriceshouldbenogreaterthantheﬁrmforwardhaul

capacitycharge

UsingthesebenchmarkstheInquiryhasfoundthefollowing

• Theasavailableandinterruptiblechargesleviedbymostpipelinesarelowerthanwouldbe

impliedbymultiplyingthepipeline’saverageloadfactorbytheﬁrmtransportationcharge

Therearehoweverthreemajorpipelinesthatarechargingconsiderablymorethanthis

benchmarkundersomeGTAswithpricesforasavailableorinterruptibleservicesranging

frompercenttopercentoftheﬁrmtransportationchargeonthesepipelinesThese

chargesareexcessiveandsuggestthatthepipelinesinquestionfacelittleconstraintinthe

pricingoftheseservicesincludingfromprimarycapacityholderswhoshouldinprinciplebe

abletocompetetoprovidesimilarservices(seechapter)

• Thebackhaulchargescurrentlybeingpaidbyshippersareeitherlessthanorequaltothe

benchmarksetoutinbox(thatispercentoftheforwardhaultari)TheInquiry

howeverwasinformedbyonemarketparticipantthatithasrecentlyreceivedanoerfora

backhaulserviceontwokeypipelineswheretheratewassetequaltotheforwardhaulrate

whichisconsiderablyhigherthanthebenchmark

• Thebi-directional



chargesleviedbytwopipelineswerehigherthanthecostoftheforward

haulservicebutinbothcasesthecontractswererelativelyshortterminnatureandinone

casetheGTAprovidesforthepricetofalliftheshipperexercisesanoptiontoextendthe

contracttermIncontrasttotheUSthereisnoevidencethatanyofthepipelineoperators

thatareoeringbi-directionalserviceshavereducedthepricespayableonforwardhaul

servicestoreﬂecttheadditionalrevenuethattheyarerecoveringfromtheseserviceswhich

iswhytheratesofreturnthatpipelineoperatorsexpecttoearnontheseprojectsaresohigh

Pipelinemonopolypricingisoccurring

Tosummarisethereisevidencethatalargenumberofpipelinesaretakingadvantageof

theirmarketpowerbyengaginginmonopolypricingwithtenofthepipelinesthatwere

investigatedhavingbeenfoundtobeengaginginsomeorallofthebehavioursoutlinedabove

 Article(b)ofRegulation(EC)Nostatesthatthepriceofinterruptiblecapacityshallreﬂecttheprobability

ofinterruptionThisregulationhasbeeninterpretedbytheAgencyforCooperationofEnergyRegulatorsinEuropeas

requiringthepriceofinterruptiblecapacitytobesoldatadiscounttotheﬁrmcapacitypricewiththelevelofthediscount

toreﬂecttherisk(likelihoodandduration)ofinterruptionssothatiftheriskofinterruptionislowthediscountshouldbe

lowandviceversaACERFrameworkGuidelinesonrulesregardingharmonisedtransmissiontaristructuresforgas

Novemberp

 IntheUSthepriceofinterruptibleservicesoninterstatepipelinesregulatedbytheFederalEnergyRegulatoryCommission

(FERC)iscappedattheﬁrmratebutanyrevenuederivedfromtheseservicesmustbetakenintoaccountwhencalculating

theﬁrmratesothepipelinedoesn’trecovermorethantheallowedrevenue

 Thisbenchmarkmayoverstatetheamountthatneedstoberecoveredfromthepipelineoperatoriftheprimarycapacity

hasbeenfullycontracted(oralargeportionhasbeencontracted)becausethepipelineoperatorwillalreadyberecovering

theﬁxedcostsofoperatingthepipelinefromprimarycapacityholders

 ACCCEastAustralianPipelineLtdAccessArrangementMoombatoSydneyPipelineSystemOctoberp

 ACERFrameworkGuidelinesonrulesregardingharmonisedtransmissiontaristructuresforgasNovemberp

 Theterm‘bi-directional’isusedinthiscontexttorefertobothaservicethatenablesgastogoinbothdirectionsora

servicethatenablesgastogointheoppositedirectiontothepredominantﬂowofgasbutwhichisnotnecessarilyaback

haulservicebecausethepipelineﬂowcanchangeifrequired



Inquiry into the east coast gas market—April 2016

inadditiontootherformsofmonopolypricingThetenpipelinesincludeinnoparticularorder

theSWQPQSNBWPRBPCGPMSPEGPSEPSMAPSDTSandTGP





Asthislisthighlightssomeofthepipelinesthatwerefoundtobeengaginginmonopolypricing

arestrictlyspeakingsubjecttosomedegreeofcompetition(thatistheMSPEGPandMAPS)

whileothersaresubjecttofullorlightregulation(thatistheRBPDTSCGPandhalfofthe

MSP)Thisﬁndingreinforcestheobservationthatcompetitionisnotposingasaneective

constraintonthebehaviourofpipelineoperatorsasmightbeexpectedandthatthegasaccess

regimeinitscurrentformisalsofailingtoimposeaneectiveconstraintonpipelineoperators

eitherdirectlythroughregulationorindirectlythroughthethreatofregulationFurtherdetailon

whythegasaccessregimeisnotconstrainingthebehaviourofpipelineoperatorscanbefound

inchapter

Whilethereisnodoubtthatthechangesunderwayontheeastcoasthaveprovidedsome

pipelineoperatorswithagreateropportunitytoengageinthisbehaviourtheInquiryhasfounda

numberofexamplesofpipelinesengaginginthisbehaviourbeforethechangescommenced





ThemonopolypricingobservedbytheInquiryshouldnotthereforebeviewedastransitoryin

natureRatheritreﬂectstheenduringmarketpowerthatalargenumberofpipelinesonthe

eastcoastpossessandtheincentiveandabilitytheyhavetoexercisethatmarketpowerwhen

settingprices

Ithasbeencontendedbysomepipelineoperatorsthatpipelinechargeshaveonlybeen

increasingbyinﬂationTheInquiryhasfoundthatthepricesspeciﬁedinlonger-termGTAshave

tendedtoonlyriseinlinewithinﬂationinlinewiththepriceescalationprovisionsonlyallowing

foraCPIbasedescalationoverthecontracttermHoweverthisdoesnoteliminatethepotential

formonopolypricingWheretheinitialpricesinaGTAaresetatmonopolylevelsthenincreases

tothesepricesattherateofinﬂationwilltendtokeepthesepricesatornearmonopolylevels

WheretheinitialpricesinaGTAaresetatalevelmoreconsistentwithcompetitiveoutcomes

theseprovisionsmaylimitthepipelineoperators’opportunitytomovefromcompetitivepricing

levelstomonopolypricinglevelsoverthecontracttermHowevertheevidencegathered

throughtheInquiryindicatesthatpipelineoperatorshaveengagedinsuchbehaviourwhen

enteringintonewGTAsorwhensomeexistingshippershavesoughtanamendmenttotheir

existingcontractstoobtainnewservices

 Monopolypricingbypipelinesadverselyaectseconomic

eciency

Monopolypricingbypipelineoperatorscanadverselyaectmarketparticipantsbecause

• itresultsinlowerex-plantgaspricesforproducersandorhigherdeliveredgasprices

forusers

• itcancausesigniﬁcanttransfersofwealthfromproducersusersandconsumerstothe

pipelineoperators

Monopolypricingcanalsohaveadverseconsequencesfortheecientoperationofthegas

marketandeconomiceciencyinupstreamanddownstreammarketsbecauseitcanresultin

• lowerthanecientlevelsofgasuseandinvestmentindownstreamfacilities

• lowerthanecientlevelsofgasproductionandinvestmentingasexplorationand

reservesdevelopment

• inecientutilisationofpipelinesandpotentialdistortionsingasﬂowsacrossthemarket

whichcanpreventgasfromﬂowingtowhereitisvaluedmost

 ThepipelinethatwasfoundnottobeengaginginanyoftheseformsofbehaviourwastheSEAGasPipelinethecapacity

ofwhichhasbeenfullycontractedunderthreelong-termfoundationcontractsThepresenceoftheselong-termGTAs

meansthatthepipelineoperatorhasbeenunabletoengageinmonopolypricingSeehttpapacomauour-business

energy-infrastructuresouth-australiaaspx

 Forexampleatleastonepipelineoperatorhasbeenchargingrelativelyhighasavailablechargesforsometimeandoneof

thepipelineswasfoundtohaverecovereditsconstructioncostsin



Inquiry into the east coast gas market—April 2016

 Monopolypricingbypipelinesaectsgasprices

Monopolypricingbyapipelineoperatorcanresultin

• producersreceivinglessforthegastheysupply(lowerex-plantgasprices)

• industrialuserspayingmoreforthegastheyuse(higherdeliveredgasprices)

• end-userspayingmoreforgasandelectricityandpayingmoreforproductsthatrequiregas

intheirproduction(higherpricesforend-users)

Theeectofmonopolypricingoneachofthesepricesandinturnoneconomiceciency

largelydependsonthealternativesavailabletoproducersusersandconsumersMonopoly

pricingbypipelinescanalsohaveanindirecteectonthepricepaidforgasbyusersthatdon’t

directlyuseaparticularpipelineInthesouthernstatesinparticularpipelinechargesaectthe

alternativesgasproducersandgasusersfacewhentheynegotiatepriceswitheachotherSo

monopolypricingonapipelinecanaectpricebargainingoutcomesforgasdeliverythatmay

notusethatpipeline(anindirectpriceeect)

Factorsaectingtheex-plantpriceofgas(directeect)

Highertransportationchargescanlowertheex-plantpriceofgasIfuserscansourcegasfrom

elsewherethenproducersfacinghighertransportationchargesmayhavetolowertheirex-plant

pricetoremaincompetitive

Thetwokeyfactorsthatwillaecttheimpactofmonopolypricingontheex-plantpriceof

gasarethealternativesavailabletoproducersatoneendofthepipelineandthealternatives

availabletousersattheotherend

Theimpactofmonopolypricingontheex-plantpriceofgaswillbelargerif

• producerscannotcommercially‘avoid’thepipelinebysendingsomeoralloftheirgasto

anotherdestinationusingadierentpipeline

• userscancommercially‘avoid’thepipeline—thatistheycanobtaingassuppliesfrom

producerssupplyingfromdierentgasﬁeldsandusingdierentpipelines





Theabilityofaproducerorausertocommercially‘avoid’thepipelinewilldependonanumber

offactorsincludingthecostofproducingthegasandthecostofdeliveringthegastoits

destinationInsomecasesitmaybetechnicallyfeasibleforgastobesenttoanumberof

destinationsbutitmayonlybecommerciallyviableorcommerciallyattractivetosendittoone

destination



Theeectoflowerex-plantpricesonthevolumeofgassuppliedwilldependonwhethera

producerisabletoearnasucientreturntoinduceittosupplygas(orcontinuetosupply)

Thiswilldependonwhethertheproducerhasmadesigniﬁcantsunkinvestmentstofacilitatethe

productionofgas

Iftheproducerhasmadetheseinvestmentssubstantialfallsintheex-plantpricemaybe

necessarybeforethevolumeofgassuppliedintothemarketisaectedatleastintheshort

termInthiscasethereisscopeforlargetransfersofwealthfromproducerstothepipeline

operatorIfthoseinvestmentshavenotyetbeenmadeandgassuppliesaredependentonnew

investmentsinexplorationanddevelopmentthenafallintheex-plantpricehasthepotentialto

causesigniﬁcantreductionsinthevolumesofgasproduced

Factorsaectingthedeliveredpriceofgas(directeect)

Thesametwofactorsoutlinedabovewillalsoaecttheimpactofmonopolypricingonthe

deliveredpriceofgasTheimpactofmonopolypricingonthedeliveredpriceofgaswillbe

largerif

• userscannotcommercially‘avoid’thepipeline—thatistheyhavenoalternativebutto

purchasegasthatisdeliveredtotheirlocationviathepipeline

 ThisassumesthattheotherpipelinehasadierentownerandisnotalsoengaginginmonopolypricingIftheotherpipeline

isalsoengaginginmonopolypricingtheex-plantpriceofgasislikelytobeaectedonbothpipelines

 Duetothelongdistancestootherdestinationsforinstance



Inquiry into the east coast gas market—April 2016

• producerscancommercially‘avoid’thepipelinebysendingsomeoralloftheirgasto

anotherdestinationusingdierentpipelines



Againthedeliveredpriceofthegasmaymeanthat‘avoiding’thepipelinemaynotbe

commerciallyviableorcommerciallyattractiveforaproducerorauserevenifavoidanceis

physicallypossible

Theeectofhigherdeliveredgaspricesonthevolumeofgasusedwilldependonatleasttwo

factorsOneisthealternativestousinggasIfusershavemadesigniﬁcantsunkinvestmentsthat

‘tie’theusertogasasanenergysourceorfeedstockthensubstantialincreasesinthedelivered

pricemaybenecessarybeforevolumesofgasusedaresubstantiallyaectedTheotheristhe

abilityofretailersindustrialusersandGPGstopassonthehigherdeliveredpricestoendusers

Ifausermanufacturesproductsforexportorfacesimportcompetitionthenitmayhavelittle

scopetopassonthehighercostofdeliveredgasifitisapricetakerinthatmarketIftheuser

suppliesproductstodomesticconsumersthescopetopassonhigherdeliveredgaspricesis

likelytobegreater

Higherpricesforend-users(directeect)

Monopolypricingbypipelinescandirectlyaectthelevelofgasusebyaectingthedelivered

priceofgas—withhigherdeliveredpricesgenerallyleadingtoreducedlevelsofgasuseIn

additionthereisanotherlessdirecteect—intheeventthatmonopolypricingreducesthe

ex-plantpriceofgasandthisreducesthevolumeofgasproduceditwillhavetheeectof

increasingthepriceofgasinthemarketAllotherfactorsremainingthesamelessgasavailable

fordomesticusewillresultinhigherdomesticgasprices

TotheextentthatretailersindustrialusersandGPGspaymoreforgasitwillultimatelybe

reﬂectedinhigherpricesfortheproductsthattheyortheircustomerssupplyAsaresultover

thelongtermmonopolypricingofpipelineswillleadresidentialcustomerstopaymorefor

gasandelectricityandforotherend-userstofacehigherpricesforproductsthatusegasin

theirproduction

Hightransportationchargesonsomepipelinescanalsoaectgaspricesinthesouthernstates

evenifusersdon’tutilisethosepipelines(indirecteect)

AsdiscussedinchaptergaspricesinQueenslandarenowshapedbytheLNGnetbackprices

asaresultoftheintroductionoftheexportoptionintheeastcoastgasmarketHowever

domesticgasusersinthesouthernstatesfaceadierentpricingdynamiccreatedbythe

distanceseparatingthedomesticusersandproducersinthesouthfromtheexportfacilities

inQueenslandAsshowninchartthecostoftransportationbetweenWallumbillaand

theuser’slocationiscreatingarangeofpossiblegaspricingoutcomesinthesouthernstates

encapsulatedbythegapbetweenthebuyerandselleralternatives(cappedatthebuyer’s

maximumwillingnesstopayandwithaﬂoorofthemarginalcostofsupply)Asdiscussedin

chaptertheGBJVislikelytochargedomesticusersinthesouthernstatesapriceapproaching

thebuyer’salternativeintheabsenceofgenuinecompetitiveconstraints

Chartillustratestheimpactpipelinechargesarelikelytohaveongaspricingoutcomesin

thesouthernstatesinthisenvironmentThetopandbottomsolidlinesrepresentthebuyer

andselleralternativesinascenariowheretransportationchargesonallpipelinesontheroute

betweenWallumbillaandthebuyer’slocationaresetatamonopolylevelThetwomiddledotted

linesrepresentthebuyerandselleralternativesinthescenariowheretransportationcharges

onthesameroutearereducedsigniﬁcantlyfromthemonopolypricinglevelImportantlythe

transportationchargesonthisrouteimpactonthepricingoutcomesinthenegotiationbetween

thepartiesevenifthepartiesdonotintendtouseanyofthepipelinesonthisroute(forexample

becausegasiscomingfromVictoriaratherthanfromWallumbilla)

 ThisassumesthattheotherpipelineshaveadierentownerandisnotalsoengaginginmonopolypricingIftheother

pipelineisalsoengaginginmonopolypricingthedeliveredpriceofgasislikelytobeaectedonbothpipelines



Inquiry into the east coast gas market—April 2016

Chart Impactofreducedtransportationcostsonthebargainingframeworkforgassupplynegotiationsin

thesouthernstates

Transport costs

Conceptual buyer’s maximum willingness to pay

Conceptual marginal cost of supply

Gas price

AU$/GJ

Not to scale

Oil price

US$/barrel

LNG netback—buyer alternative

LNG netback—seller alternative

Chartshowsthatreducingtransportationchargesislikelytoresultinanarrowerrangeof

possiblepricingoutcomesfordomesticusersinthesouthernstates(thespacebetweenthetwo

dottedlines)with

• themaximumpricethebuyerwouldbewillingtopayfallingbecauseitcostslesstotransport

gassouth

• theﬂoorpriceforthesellerrisingbecausethereductioninthetransportationcostmeansitis

moreattractivetoexportgas

Criticallyinanenvironmentwheredomesticgasusersinthesouthernstatesarelikelyto

payapriceapproachingthebuyer’salternativethemaximumpricetheymayhavetopayis

reducedThegreaterthedierencebetweenthemonopolytransportationchargesandecient

transportationchargesontherelevantpipelinesthegreaterislikelytobetheadverseimpactof

inecientmonopolypipelinepricingondomesticgaspricingoutcomesinthesouthernstates

TableshowstheimpactofreducingtransportationchargespayableontheMSPandSWQP

QSNontheLNGnetbackpricesinSydneyusingthesameassumptionsasthoseintheexample

setoutinboxinchapterTableshowsthreescenarioswherethetransportationcharges

onthesepipelinesarereducedbypercentpercentandpercentfromtheircurrent

levelsThesetransportchargereductionlevelsareforillustrativepurposesonlybecausethe

Inquiryhasnotestimatedthelevelsofpipelinepricesorofpipelinepricereductionsthat

wouldbeconsideredecientThepricereductionsof–percentareconsideredofinterest

giventhat

• Onepipelineestimatedthatitwasearningpercentmoreinrevenuethanitbelievesit

wouldifitwasregulatedwhichwouldimplyapproximatelyapercentreductioninprices

iftheﬁrmmovedtoitsestimateofrevenueunderregulation

• Ontwopipelinesthathavealreadyrecoveredtheirconstructioncostspipelinechargeswere

–percenthigherthanachargebasedsolelyonthecostofrecoveringtheforward

lookingcostofoperatingandmaintainingthepipeline



Inquiry into the east coast gas market—April 2016

Table ScenarioAnalysis—Likelyeectofreductionintransportationchargesonthebuyer’salternative

priceinSydney(AUDGJ)

TransportationChargesScenarios

CurrentCharges percent

Reduction

percent

Reduction

percentReduction

LNGnetbackpriceatWallumbilla 

Transportationfuelcosts 

TransportationchargesforSWQP

QSN(west)andMSP(Moombato

Wilton)*

   

LNGnetbackpriceSydney—

Buyer’sAlternative

   

Reductioninbuyer’salternative   

Note Thetransportationchargesinthistablearethesameasthoseusedinbox

Tableshowsthatreducingtransportationchargesby–percentcouldleadtoa

–dierenceinthemaximumpricepayablebydomesticusersinthesouthernstates

 Monopolypricingbypipelinesaectseciency

ItiswidelyrecognisedthattheexerciseofmarketpowermayreduceeconomicwelfareThis

mightoccurforexamplewhereapipelinewithmarketpowerraisesthetransportpriceabove

thelong-runaveragecostofsupplyreducingthevolumeofgasdelivered

Thesehigherpricesleadtoaninecientlylowlevelofuseofgasbecausemonopolypricing

hastheeectofrestrictinguseonlytothoseuserswithawillingnesstopayofatleastthat

priceThisleadstoaninecientallocationoftheeconomy’sresourcesacrosssectorsand

ﬁrmsasthelevelofeconomicactivitymakinguseofgaswillbebelowitsecientlevelFor

exampledomesticuserswillnotusegasattheecientlevelinvestmentdecisionswillbe

aectedandenergyusedecisionsbetweenGPGandcoalﬁredgenerationwillbedistorted

Thiskindof‘allocativeeciency’isakeyreasonbehindtheeconomicregulationofsomeother

monopolyinfrastructureservicingdomesticdemandforexampleelectricitytransmissionand

distributionnetworks

Howeverinsomecasesthepricepaidtotransportgasmayhavelittleornoimpactonthe

demandforpipelineservicesThismightoccurforexamplewherethegasisexclusivelysold

onaworldmarket(forexampleintheformofLNG)atacompetitiveworldmarketpriceand

thatpriceismateriallyabovethecostofexistingdomesticgasproductionAlternativelythis

mightoccurwhereagasuserisreliantongasasafeedstockorenergysourceandisunable

tosubstitutetootherfuelsourceswithoutamajorre-conﬁgurationofplantInbothofthese

casesduetothelackofalternativesthevolumeofgastransportedmaynotvaryoverarange

ofpossiblepipelinechargesInthesecasesthedemandforpipelineservicesissaidtobehighly

‘inelastic’inresponsetoachangeinthepriceAnothersituationwherethepipelinepricehasno

impactonthevolumeofgastransportediswherethepipelinecanpricediscriminatebetween

customerschargingeachcustomeranamountjustshortoftheamountwhichwouldinduce

thatcustomertoreducegasproduction(inthecaseofaproducer)orswitchtoanalternative

fuel(inthecaseofagasconsumer)Insuchcasesachangeinpipelinechargesmerelybrings

abouta‘wealthtransfer’betweenpipelineusers(forexamplegasproducersorconsumers)and

thepipeline

Whileitissometimessaidthatapurewealthtransferhasnoimpactonoveralleconomicwelfare

andthereforeisnotarelevantpolicyconsiderationthecircumstancesarerareinpractice

anddonotapplyintheeastcoastgasmarketTheInquiryconsidersthatduetoalackof

informationaboutthedemandforpipelineservicespricediscriminationisseldom‘perfect’in

practiceespeciallywherethepipelineownersellstoagasretailerratherthansellingdirectly

todownstreamcustomersInadditiongasisnotexclusivelysoldonaworldmarketata

competitiveworldmarketpriceWhilesomeusersmayhaveinelasticdemandoverashort

periodtherearemanydierentuserswithavarietyofdemandresponsestodierentprices



Inquiry into the east coast gas market—April 2016

Aspreviouslynotedexercisingmarketpowerthroughmonopolypricingislegitimate

commercialbehaviourInamarketeconomyguidedbytheproﬁtmotivethisshouldbe

expectedPipelineoperatorshaveanincentivetotransportthevolumeofgasthatwillmaximise

theirproﬁtsHoweverdoingsoinawaythatdoesnotultimatelyreducevolumeislikelyto

bedicult

• Wherepipelineoperatorsoerasinglepricetheproﬁtmaximisingvolumeislikelytobe

lessthanthevolumeofgasthatwouldbeproducedandusedintheabsenceofmonopoly

pricingInthesituationwhereasinglepriceisoereddemandislikelytorespondto

changesinthatpriceespeciallyovertimeorwheretherearemanyuserswithdierentlevels

ofwillingnesstopay

• Wherepipelinesoermultiplepricesinanattempttopricediscriminateanysuchattempt

isunlikelytoavoidreductionsinquantitysuppliedintothemarketPricediscriminationby

pipelineoperatorsbetweendierentgasusersislikelytobedicultItishardtoaccurately

assesstheeectofapricepointonvolumeforanindividualuserInadditioninmany

situationsthepipelineoperatorsarenotsellingdirectlytotheenduserbutinsteadareselling

toaretailerthatthensellstoanindustrialcustomerThepipelineoperatorscannoteasilysee

theimpactoftheirhigherpipelinechargesontheseendusersastheydonotdealdirectly

withthem

• Wherepipelinesoermultiplepricesinanattempttopricediscriminateitisalsodicult

forthemtoaccuratelyassesstheeectofapricepointonvolumeforanindividual

gasproducer

Pipelineoperatorsareunlikelytobeabletoaccuratelyassesstheimpactoftheirpricingonthe

ex-plantpriceofgasandthedeliveredpriceofgasTheyareunlikelytobeabletoaccurately

assesstheimpactofthosepricechangesonthewillingnessofproducerstosupplygas

andwillingnessofgasuserstousegasYetthiswouldbeneededtohaveasituationwhere

monopolypricinghadnoimpactonthevolumeofgasproducedandusedinthemarket





Evenastaticorshort-runsituationwhereasimplewealthtransfermightconceivablyoccur

ignorestheeectofthepotentialexerciseofmarketpowerontheincentivesforinvestment

upstreamanddownstream

Upstreamanddownstreamcustomerswillalmostalwaysberequiredtomakematerial

sunkinvestmentsForexampleproducersmakesubstantialinvestmentsinexplorationand

developmentofgasﬁeldsandintheprocessingofgasgasusersmakeinvestmentsinplantand

equipmentwhichusesgasasanenergysourceorasafeedstockTheseinvestmentsaresubject

tothethreatofhold-uptheriskthatoncesunkthepipelinewillraiseitschargesexpropriating

thevalueoftheseinvestmentsBothpipelineoperatorsandshippersrecognisethisriskandseek

tomitigateittypicallybyenteringintolong-termGTAsbeforemakingmajorinvestments





AsthisInquiryconﬁrmsallmajorpipelineinvestmentsinAustraliahavebeenlargelyorentirely

underwrittenthroughlong-termGTAswithmajorcustomers

Howeverlong-termGTAsarenotaperfectsolutiontothisproblemLong-termGTAsare

inevitablyincompleteOvertimecircumstancesarisewhichwerenotanticipatedatthe

outsetThelocationofmajorgassourcesandmajorgasconsumersmaychangeovertime

bringingnewcustomerstoseekaccesstothepipelinewhichwerenotpresentatthetimeof

constructionInadditionforreasonsoftransactioncostssmall‘massmarket’customerscannot

enterintosuchlong-termGTAsdirectly

 Itisopentoregulatorstobeconcernedwithconsumerwelfareintherarecasewheremonopolypricingishavinglittleorno

eectonallocativeeciency

 Pipelinesarealsosubjecttothethreatofhold-upOnceapipelineisbuiltitcan’tberedeployedtoanotherrouteandhas

fewalternativeusesAshippercouldaskforapipelinetobebuiltbutoncethepipelineisbuilttheshippercouldthen

refusetopaymorethanapricethatjustcoversthepipelineoperator’svariablecostsOncethepipelineisbuiltthepipeline

operatormayhavelittlechoicebuttoacceptsincetheﬁxedcapitalcostsofthepipelinearesunkanditmaybeabletodo

littleelsewiththeassetKnowingthisthepipelineoperatormaybeunwillingtoinvestinbuildingthepipelineintheﬁrst

placeLong-termcontractscanhelpreducethehold-upproblembyspecifyinginadvanceofinvestmentshowpriceswillbe

formedandotherrulesandcriteriawillbeapplied



Inquiry into the east coast gas market—April 2016

Itfollowsthatwhilelong-termGTAscanprovideadequateprotectiontotheinterestsofthe

initial(foundation)customersforaperiodoftimebeyondthisperiodoftimeupstreamand

downstreamusersareincreasinglysubjecttoathreatofhold-upfromexistingpipelinesThis

reducestheirincentivetoinvestandforegoessomeofthepotentialgainsfromtrade

Thishold-upeectgivesrisetolowerthanecientlevelsofinvestmentThiseectcan

potentiallybereducedthroughsomeformofcontrolontheabilityofpipelinestoexercise

marketpowerbyraisingprices

 Monopolypricingofgaspipelinesaectsdownstreammarketeciency

Monopolypricingofgaspipelinesaectsdownstreamusage

Theprevioussectionhighlightedhowmonopolypricingofpipelinescanaectthedelivered

pricepaidforgasbyindustrialusersandconsumersThesehigherpricesleadtoanineciently

lowlevelofuseofgas

TheInquiryhasheardspeciﬁcexamplesfrommarketparticipantsofexcessivetransportation

chargesaectinggasuseandinvestmentindownstreamfacilitiesThroughtheInquiryanumber

ofusersnotedthatexcessivetransportationchargescanlimitthepotentialopportunityfor

bringinggasfromtheNorthernTerritoryorQueenslandintothesouthernstatesorfromVictoria

intoQueensland

AreportbyDeloitteAccessEconomicsinnotedthathigherdeliveredgaspriceswillcause

reducedoutputandredistributionofresourcesandeconomicactivitiestootherstates



Public

examplesofactualandpotentialimpactsgiveninthatreportattributabletorisingdelivered

gaspriceswerepotentialimpactonpricesforOrica’sAmmoniafacility(inNSW)withalikely

shutdownshoulditnotbeabletoaccessthecheapStrikegasithadinvestedinalongwith

reductionsinproductionatRioTintoAluminium’sQueenslandYarwunAluminareﬁneryAlsoin

CSRannouncedtheclosureofitsIngleburnglassfactorycitingasafactorthatincreasing

energyandmanufacturingcostsinAustraliahaveexacerbatedViridian’scompetitiveposition

relativetoimports





Whiletheseexamplesfocusedonthedeliveredpriceofgasthecommoditypricewillasnoted

abovebeinﬂuencedbytransportationcostsbecauseofthebuyer-sellernetbackframework

(seetable)AustralianPaperstatedtoarecentVictorianinquirythatallofitsinvestment

inVictoriaiscurrentlyatriskduetothefailureofthegasmarketstoprovidelong-term

competitivelypricedgastomanufacturersandindustry



TheInquiryheardsimilarcomments

fromotherVictorianindustrialusersduringthecourseoftheInquiry

Whilsttheseexamplesarefocusedonthecommoditypricechangeincludingthroughthe

inﬂuenceoftransportationchargesonsoutherncommoditygaspricingchangesintheoverall

deliveredpriceviachangesinthetransportationchargewouldalsobeexpectedtoaect

gasusage

Pipelinepricingreducesdownstreaminvestmentviaholdup

IndownstreammarketsinvestmentsinfacilitiesthatusegassuchasGPGsindustrialfacilities

andLNGplantscanbesigniﬁcantandoftenirreversibleIfthepipelineoperatorappropriates

most(orevenall)ofthe‘economicsurplus’fromthefacilityoncetheinvestmenthasbeenmade

thenitmayalsoresultinunderinvestmentinthesefacilitieslowerlevelsofoutputfromthese

facilitiesandlessinnovationForexamplethiscouldoccurifthetransportationchargeissetas

highasthedierencebetweenthepricethefacilityreceivesforitsend-productandthevariable

costofproducingthatproductTheriskofthisoccurringisgreatestwhenthereisonlyone

pipelinethatthefacilitycanviablyuse

 DeloittesAccessEconomicsGasmarkettransformations—EconomicconsequencesforthemanufacturingsectorAreport

totheAustralianIndustryGroupandothersJulyavailableathttpwwwdeloittecomauenpageseconomics

articlesaustralian-gas-market-transformationshtml

 CSRmediarelease‘RestructureofViridianglassoperationsandtradingupdate’March

 AustralianPaperSubmissiontotheInquiryintoOnshoreUnconventionalGasinVictoriaavailableathttpwww

parliamentvicgovauepcinquiry



Inquiry into the east coast gas market—April 2016

Ifusershavesomechoiceaboutwheretolocateorrequireanewpipelinetobedevelopedto

servicetheirlocationthentheabilityofthepipelineoperatortoengageinthisbehaviourmay

beconstrainedtosomeextentbycompetitionUsersinthiscasemaybeabletoreducetheir

exposuretothisriskbyenteringintolong-termGTAsbeforetheyinvestIfhoweverthelength

oftheGTAdoesnotperfectlyalignwiththelifeoftheinvestmentsthentheywillbeexposed

totherisksoutlinedabovewhentheircontractsend(thatistheriskofhold-up)Theymay

alsobeexposedtothisriskifmorecapacityisrequiredoverthetermoftheGTAthanhasbeen

contractedThishighlightsamorefundamentalproblemwithlong-termGTAswhichisthatit

isnotpossibletocoverallpossibleoutcomesinaGTASoevenifthereisaGTAinplaceauser

maybeexposedtotheriskofhold-up

Ifontheotherhandusershavenochoiceaboutwheretheylocateandthereisanexisting

pipelineinplacethentheywillbeexposedtotherisksoutlinedaboveoverthelifeof

theinvestment

EvidencereceivedthroughtheInquiryindicatesthatGTAsinmostcasesarenotlinkedtothelife

oftheupstreamanddownstreaminvestmentssotheriskoutlinedaboveisagenuineriskfaced

bymarketparticipantsShippersalsoprovidedsomeexamplesofcaseswheretheyhavean

existingGTAbutvariationstotheGTAhaveresultedinmonopolypricing

• InTasmaniadespitemillioninfederalfundingbeingsetasideforanextensionofthe

gasdistributionsystemfromPortLattatoSmithtonevidenceindicatesthatpricingbythe

transmissionpipelineoperatorinﬂuencedin-turnbynegotiationswithitsmaincustomer

HydroTasmaniacontributedtotheextensionnotoccurringThatistheInquiryconsiders

thatthepipelineoeredpriceswhichwerearoundpercenthigherthantheyhad

beeninthepast(thatisbecausethepipelineoperatorwastryingtorecovertherevenueit

expectedtoloseasaresultofHydroTasmaniareducingitsMDQpost-)andthatthis

contributedtotheprojectnotproceeding

• InregionalSouthAustraliaKCArunsatissuefactorywhichreceivesgassupplyontheSEPS

onwhichitwasafoundationcustomerfromuntilthecontractexpiredinThe

foundationcontractchargedpricesonaslidingscalewithchargeshigherinthebeginning

yearsandlowerintheyearsafterwhichthecapitalcosttobuildthepipelinewasassumedto

berecoveredTheSEPSwasinitiallyregulatedbutbecameunregulatedinfollowingan

applicationbyEpicEnergy(underdierentownershiptothecurrentownership)in

Afterthecontractexpiredinthe‘old’Epicsigniﬁcantlyincreasedtheprevailingtari

KCAappliedtohavetheSEPSregulated(‘covered’)inandnotedinitsapplicationa

numberofbeneﬁtsitperceivedfromobtainingcoverageincluding

– thatcoveragewasrequiredtomaintainitscompetitivepositioninthemarketandsurvive

asamanufacturerintheregion

– thatcoverageshouldstimulatedemandforgasinthedownstreammarketleadingto

greaterthroughputontheSEPSandmoreecientutilisationofthepipeline

– thatcoveragewouldencouragegreaterdiversityofsupplybythelikesofBeachEnergy

whichcoulddisplaceOrigin’spositionasadominantretailertoregionalareas

NotwithstandingthebeneﬁtscitedbyKCAboththeNCCandSouthAustralianMinisterfor

MineralResourcesandEnergyfoundthattheSEPSfailedtomeetthecoveragecriteriabecause

itcouldnotbeshownthataccessorincreasedaccesstothepipelinewaslikelytopromotea

materialincreaseincompetitioninanothermarket



TheSEPSthereforeremainsunregulated

 NCCFinalRecommendation—ApplicationundertheNationalGasLawforacoveragedeterminationfortheSouthEastern

PipelineSystemAprilpandSouthAustralianMinisterforMineralResourcesandEnergyHonTKoutsantonis

DecisionoftheRelevantMinistertoSectionoftheNGLinrelationtoanapplicationforcoverageoftheSouthEastPipeline

SystemOctober



Inquiry into the east coast gas market—April 2016

Pipelinepricesaectwhetherornotgasgetstoitshighestvalueuse

TheconstructionandoperationoftheLNGplantsmeansthattransportationchargesalsohave

thepotentialtoaecttheallocationofresourcesbetweendomesticgasuseandgasexport

Wherepipelinepricesexceedlongrunaveragecoststheycanleadtoaninecientallocationof

resourcesbetweenthedomesticuseofgasandtheexportofLNGPricesondierentpipelines

havedierenteectsonthelevelofgasusefordomesticpurposesversusgasuseforexport

becausedierentpipelinesservicethesedierentdemandcentres

IfdomesticpipelinesareengaginginmonopolypricingbuttheLNGpipelinesarenotthenthis

couldresultingasthatwouldotherwisehavebeensuppliedintothedomesticmarketbeing

divertedtospotLNGsalesevenifthegashasagreatervalueifuseddomesticallyTable

aboveindicatesthatapercentreductioninﬁrmpricesontheSWQPMSPsouthwould

reducepricesbyaroundGJonthatroutemeaningeectivelythattheLNGspotpricecould

beuptoGJlowerbutgasstillﬂowtodomesticusersAsnotedalsoinchapterasavailable

andinterruptiblepricingontheSWQPMSPisinexcessofGJwhichmeansinshorter-term

excesssupplysituations(forexampleanLNGtrainisoineorLNGspotpricesarepersistently

low)thenareductioninasavailableandinterruptiblepricingby(percent)forexample

increasesthechancethatgaswillﬂowtodomesticmarketsThisinturncouldaectdomestic

marketdepthandliquidity



Transportationchargespenaltiesandancillaryservicechargesthatincorporatesomeelement

ofmonopolypricingcanalsoaecttheecientutilisationofpipelinesandpreventgasfrom

ﬂowingtowhereitismosthighlyvaluedbyaectingtheprospectsfortrading

ForexampleifpipelinesconnectedtotradingmarketsincludingontheSWQPandMSPto

SydneytheSWQPandMAPStoAdelaideandtheRBPtoBrisbaneareengaginginmonopoly

pricingthiscouldaecttheliquidityoftradingontheSTTMswheregasisboughtandsoldat

amarket-clearingpriceItwillleadtoahigherdeliveredgascostandreducetheproﬁtsthata

supplierwouldbeabletoobtainbysellinggasviathosemechanismsItcouldrenderthesale

ofgasviathosemechanismsentirelyunviableforaparticularsupplierparticularlyonethatis

locatedfurtherfromthemarketthananothersupplierFurtherifmonopolypricingimpacts

onsouthernroutes(thatisthroughtheSWQP)aregreaterthanontheRBPthenthiscould

resultingasstayinginBrisbane(orgas-poweredgenerationintheregion)evenifthegashasa

greatervalueinthesouthernstates

 Monopolypricingofgaspipelinesaectsupstreammarketeciency

Monopolypricingofgaspipelinescanaectproduction

Asnotedabovetransportationchargesthatincorporatesomeelementofmonopolypricingare

likelytoreducetheex-plantpricereceivedbyproducers

Alowerex-plantpriceislikelytomakemarginalgassuppliesuncommercialLowerproductionof

gaswillresultinlowerlevelsofgasuseinthedomesticmarketandorfewerexportsEitherisa

lostopportunitythatwouldotherwiseenhanceeconomicgrowthandwelfare

TheInquiryhasheardspeciﬁcexamplesfrommarketparticipantsofexcessivetransportation

chargesaectingexplorationandproduction

ForexampleduringtheInquiryoneproducerthatisseekingtosupplygasfromtheNorthern

Territorytotheeastcoastnotedaninabilitytonegotiatecontractsforthetransportofgas

beyondMtIsawithexistingpipelinesthatreasonablyreﬂectthecostsofprovidingthoseservices

(speciﬁcallybackhaulwithinexistingmaturepipelines)Thepipelinesinquestionprovidethe

onlyalternativefortheproducertotransportitsgastotheeastcoastmarketTheproducer

claimsthetransportationchargesoeredappearexcessiveanddonotreﬂectthereasonable

costsassociatedwithprovidingthoseservicesmostnotablybackhauluncontractedcapacity

ThisismakingthesupplyofgasbeyondMtIsauncommercialandfurtherexplorationforgas

intotheeastcoastunjustiﬁedTheproduceraddedthatthehightransportationchargeshavea

 AGLcommentedontheimpactoftransmissionpricingonmarketdepthandliquidityinitsResponsetoHarperReviewDraft

ReportNovemberp



Inquiry into the east coast gas market—April 2016

negativeimpactonaproducer’sabilitytoraisecapitalfornewgasexplorationanddevelopment

capitalforprovenreserves

TheInquiryisalsoawareofatleasttwootherprospectiveproducersinthesouthernstates

whosefutureproductionlevelsarelikelytobeinﬂuencedbythetransportationchargeslevied

bythepipelinestheyareconnectedtobothofwhichhavebeenfoundtobeengagingin

monopolypricing

Afurtherparticularriskisevolvingintheeastcoastgasmarketwherethepricesthatsome

producersarereceivingarelinkedtooilpricesandthepricesinGTAsareﬁxedforthetermof

theGTAInthisenvironmentaGTAthatwasenteredintowhentheoilpricewasUSper

barrelmayifthegasproducerisresponsibleforpayingthetransportationchargeresultinthe

producerreceivinglessthanthecostofproductioniftheoilpricefallstoUSperbarrelWhile

theGTAmayhaveoriginallybeenstruckata(monopoly)pricethatmadetheproductionofgas

commercialitmayhavetheunintendedeectoflimitinggassuppliesascircumstanceschange

AGTAoriginallystruckatalower(competitive)pricemayhavehadlessofalaterconsequence

ongassupplies

Pipelinepricingreducesupstreaminvestmentviaholdup

GasexplorationandthedevelopmentofgasreservescanbeexpensiveandriskyInorderfor

theseactivitiestobecommercialtheexpectedproﬁtsfromsuccessfulprojectsmustoutweigh

theexpectedlossesfromunsuccessfulprojectsIfthepipelineoperatorappropriatesmost(or

evenall)ofthe‘economicsurplus’fromtheproducer(thatisbysettingthetransportation

chargeashighasthedierencebetweenthecostofproducingthegasoncethegas

reserveshavebeenprovenandthevalueofthegasattheendlocation)thenitmayresultin

underinvestmentingasexplorationanddevelopment

Whereproducershavesomechoiceaboutwheretolocateorrequireanewpipelinetobe

developedtoservicetheirlocationthentheabilityofthepipelineoperatortoengageinthis

behaviourmaybeconstrainedtosomeextentbycompetitionHoweverproducersmayoften

belimitedintheirchoiceaboutwheretolocateasthelocationofgasﬁeldsislargelyﬁxedand

aproducermaynothavethecontrolofmultipleﬁeldsthatmightallowsuchachoiceWherea

newpipelineisrequiredtoservicetheirlocationproducershavemuchgreateropportunityto

reducetheirexposuretothisriskbyenteringintolong-termGTAsbeforetheyinvest

AsnotedabovethelengthoftheGTAmaynotperfectlyalignwiththelifeoftheinvestments

andtherisksofhold-upremainwhentheircontractsendIfproducershavenochoiceabout

wheretheylocateandthereisanexistingpipelineinplacethentheywillbeexposedtotherisks

outlinedaboveoverthelifeoftheinvestmentEvidencereceivedthroughtheInquiryindicates

thatGTAsinmostcasesarenotlinkedtothelifeoftheupstreamanddownstreaminvestments

sotheriskoutlinedaboveisagenuineriskfacedbyproducers

Identifyingspeciﬁcexamplesofupstreaminvestmentthatdonotoccursolelyduetotheriskof

hold-upisdicultHowevertheInquiryissatisﬁedthathold-uporthepotentialforhold-up

hasbeenafactorintheexamplesrelatingtoupstreaminvestmentdiscussedinthissectionand

thatthepotentialforhold-upislikelytobeakeyconcernofprospectiveinvestorsinupstream

explorationandproduction



Inquiry into the east coast gas market—April 2016

7 Strengthening the gas pipeline access regime will

improve economic eﬃciency in the gas market and

related markets

Giventheapparentpervasivenessofmonopolypricingandthedetrimentaleectthistypeof

behaviourcanhaveoneconomiceciencyintheupstreamanddownstreammarketsandon

consumersmoregenerallyitisrelevanttoconsiderwhytheexistinggasaccessregimeisnot

imposingmoreofaconstraintonthebehaviourofpipelineoperators

Thegasaccessregimewasimplementedbystateandterritorygovernmentsalmostyears

agoAtthetimetheregimewasimplementedwiththeexceptionofoneortwosmaller

pipelinesallthetransmissionpipelines



ontheeastcoastweredeemedtobecoveredand

subjecttoeconomicregulationLessthanpercentoftransmissionpipelinesarenowsubject

toanyformofregulationThisisinstarkcontrasttoothercomparableinternationaljurisdictions

suchastheUSNewZealand(NZ)andtheEUwherethevastmajorityoftransmissionpipelines

aresubjecttoeconomicregulation

Notonlyarefewtransmissionpipelinescurrentlyregulatedbutthethreatofregulationisalso

failingtoimposeaneectiveconstraintonthebehaviourofanumberofunregulatedpipelines

ThisisbecausethecurrenttestforregulationundertheNGLisnottargetedtotherightmarket

failure(thatismonopolypricingthatresultsineconomicineciencies)Alsoothergapsinthe

regulatoryframeworkandinformationasymmetriesare

• allowingpipelinesthataresubjecttoregulationtocontinuetoengageinmonopolypricing

• limitingtheabilityofshipperstoidentifytheexercisesofmarketpowerandtonegotiate

eectivelywithpipelineoperators

Putsimplythegasaccessregimeinitscurrentformisnotconstrainingthebehaviourofpipeline

operatorsinthemannerthatpolicymakersintendedNorisitcontributingtotheattainmentof

theoverarchingobjectiveoftheregimetheNationalGasObjective(NGO)whichisto





“promoteecientinvestmentinandecientoperationanduseofnaturalgasservicesfor

thelong-terminterestsofconsumersofnaturalgaswithrespecttopricequalitysafety

reliabilityandsecurityofsupplyofnaturalgas”

ToaddresstheseissuestheInquiryrecommendsanumberofchangestostrengthenthegas

accessregimeandensurethatitisﬁtforpurposetargetedandproportionatetothemarket

failureidentiﬁedinthisInquiryandconsistentwiththeNGO

 HowpipelinesareregulatedinAustraliaandotherjurisdictions

 Australia’sgasaccessregimewasoriginallyimplementedtoprovidea

constraintonthebehaviourofpipelineoperators

Thegasaccessregimewasoriginallyimplementedbystateandterritorygovernmentsin

throughtheGasPipelineAccess(SouthAustralia)Act(GPAL)andtheNationalThirdParty

AccessCodeforNaturalGasPipelineSystems(theGasCode)ThestatedobjectiveoftheGas

Codewastheestablishmentofaframeworkforthirdpartyaccesstogaspipelinesthatwould

amongstotherthingspreventtheabuseofmonopolypowerbypipelineoperatorsandprovide

rightsofaccessonfairandreasonabletermsforboththepipelineoperatorandusers



Followingtheindependentreviewofthestrategicdirectionforenergymarketreformthatwas

chairedbyWarwickRParertheProductivityCommission’s–reviewofthegasaccess

regimeandtheExpertPanelreportonenergyaccesspricingCOAGdecidedtoimplement

anewlegalgovernanceandregulatoryframeworkThisnewframeworkcommencedonJuly

 OneofthetransmissionspipelinesthatwasnotregulatedatthistimewastheCheepietoBarcaldinePipeline

 ThisobjectiveissetoutinsoftheNGL

 NationalThirdPartyAccessCodeforNaturalGasPipelineSystemsNovemberp



Inquiry into the east coast gas market—April 2016

andwasgiveneectviatheNGLandNGRWhilemanyaspectsoftheoriginalregime

wereretainedintheNGLandNGRanumberofimportantreﬁnementsweremadetoreducethe

riskofregulatoryerrorthecostofregulationandregulatoryrelatedinvestmentrisksincluding

• theinclusionofanobjectsclause(theNGO)andrevenueandpricingprinciples



intheNGL

whichwereimplementedtoprovidedecisionmakerswithgreaterguidanceonthemattersto

beconsideredwhenmakingdecisionsandtolimittheriskofregulatoryerror

• theintroductionofa-yearno-coverageoptionforgreenﬁeldspipelineswhichwas

implementedtocountertheadverseeectregulationmayotherwisehaveongreenﬁeld

investment







• theintroductionofalighterhandedregulationoptionwhichwasimplementedtominimise

regulatorycostsandreducetheriskofregulatoryerrorincaseswherethepipeline’smarket

powerisconstrainedinsomeway

Underthecurrentregimeregulation‘coverage’appliesif

• thepipelinewasdeemedtobeacoveredpipelinewhentheGasCodecameintoeect

• acoverageapplicationismadetotheNationalCompetitionCouncil(NCC)andtherelevant

MinisterhavingregardtotheNCC’srecommendationissatisﬁedthepipelinemeetsallthe

coveragecriteriasetoutinsoftheNGL(seebox)

• anunregulatedpipelinevoluntarilysubmitsanaccessarrangementtotheAERor

• thepipelineisdevelopedthroughanAERapprovedtenderprocess

Theaccessregimealsoprovidesfor

• coveragetoberevokedifatleastoneofthecoveragecriteriaisnotsatisﬁed

• apipeline’scoveragestatustochangeovertimeifcircumstanceschange

• greenﬁeldspipelinestobegranteda-yearexemptionfromcoverageifoneormoreofthe

coveragecriteriaarenotsatisﬁed

Ifapipelineiscoveredthenitmaybesubjecttoeitherfullorlightregulation(seebox)The

dierencebetweenthesetwoformsofregulationcanbesummarisedasfollows

• FullregulationApipelinesubjecttofullregulationmustperiodicallysubmita‘fullaccess

arrangement’totheAERandobtainitsapprovalfortheproposedpriceandnon-priceterms

andconditionsofaccessthatwillapplytothereferenceservice(s)(aservicethatissought

byasigniﬁcantportionofthemarket)overtheregulatoryperiodWhenassessingthe

proposedaccessarrangementtheAERisrequiredtohaveregardtotherelevantprovisions

intheNGRandtherevenueandpricingprinciplesintheNGLAlthoughAERapprovalof

anaccessarrangementisrequiredthepipelineoperatorandshippersoncontractcarriage

pipelinescanstillenterintoagreementsthatdierfromtheapprovedarrangement

• LightregulationThisformofregulationismoreakintothenegotiate-arbitratemodelwith

greateremphasisplacedoncommercialnegotiationandinformationdisclosureandthe

AERonlyplayingaroleifthedisputeresolutionprovisionsaretriggeredAlightregulation

pipelineisalsoprohibitedfromengagingininecientpricediscriminationorotherconduct

thatmayadverselyaectaccessorcompetitioninothermarkets

TheNGLalsoincludesameritsreviewmechanismwhichisdesignedtominimisetherisk

ofregulatoryerrorinrelationtocoverageformofregulationandaccessarrangement

decisionsInadditiontothissafeguardtheNGLprotectspre-existingcontractualrightsand

allowspartiestoreachalternativearrangementstothosesetoutinanaccessarrangement

Theprotectionofcontractualrightsmeansnewpipelinesandotherinvestmentscanstillbe

underwrittenbyshippersthroughmedium-tolong-termGTAswhichreducesregulatoryrelated

investmentrisks

 TheseprincipleswhicharesetoutinsoftheNGLstateamongstotherthingsthatthepipelineoperatorshouldbe

providedareasonableopportunitytorecoveratleasttheecientcostsofprovidingservicestherateofreturnshouldbe

commensuratewiththeregulatoryandcommercialrisksinvolvedinprovidingreferenceservicesandregardshouldbehad

tothecostsandrisksofunderandoverinvestmentandunderandoverutilisationofapipeline

 A-yearno-coverageapplicationcanalsobemadeforamajorextensionofanexistingpipelinethatisnotacovered

pipelineoralightregulationpipelineiftheextensionhasbeenexemptedbytheAER

 Thisoptionwasincorporatedintothegasaccessregimein



Inquiry into the east coast gas market—April 2016

Box Independentreviewsofthegasaccessregime

ParerReview—TowardsaTrulyNationalandEcientEnergyMarket()

InCOAGagreedtocommissionanindependentreviewofthestrategicdirectionsfor

energymarketreforminAustraliaThereviewwasconductedbyaninindependentPanel

whichwaschairedbyWarwickParerInthecourseofthisreviewconcernswereraised

abouttheeectthatregulationcanhaveoninvestmentingreenﬁeldspipelinesToaddress

thisconcernthePanelrecommendedthatgreenﬁeldpipelinesbeallowedtoseeka-year

bindingrulingthatthepipelinebeunregulatedIndoingsothePanelnotedsucharuling

would‘eliminateanyregulatorydisincentives(perceivedorotherwise)fornewpipelines

fortheﬁrstyearsofoperationandshouldremovethepotentialincentiveto‘undersize’

pipelinestominimiseregulatoryrisk’



ProductivityCommission—ReviewoftheGasAccessRegime(–)

IntheCommonwealthgovernmentaskedtheProductivityCommissiontoreview

thegasaccessregimeInitsﬁnalreporttheProductivityCommissionraisedanumberof

concernsaboutthepotentialforregulationtoleadtoinecientinvestmentbecauseof

regulatoryerrorregulatoryriskandasymmetrictruncationandrecommendedthefollowing

toaddresstheseconcerns





• introducinganoverarchingobjectsclauseandclearpricingprinciplestoguide

decisionmakers

• allowinglighterhandedregulationwhenapipelinedoesnotexertsubstantial

marketpower

• allowinggreenﬁeldspipelinestoobtainabinding-yearno-coveragerulingiftheydo

notmeetthecoveragecriteriato‘reducethepotentialchillingeectofregulation’on

theseinvestments

ExpertPanelonEnergyAccessPricing(–)

IntheMinisterialCouncilonEnergyestablishedtheExpertPanelonEnergyAccess

Pricingtoadviseontheharmonisationofrevenueandnetworkpricingingasandelectricity

LiketheProductivityCommissiontheExpertPanelrecommendedtheintroductionofa

lighthandedregulatoryoption



Italsoendorsedtheproposed-yearregulatoryholiday

forgreenﬁeldspipelinesbecauseitconsideredtheriskofregulatoryerrortobegreatestfor

greenﬁeldspipelinesgivendemandgrowthisuncertainTheExpertPanelalsofoundthe

potentialforandconsequencesofregulatoryerrorinrelationtomaturepipelinesismuchless

pronouncedandrecommendedtherisksbedealtwithbyensuringthat‘theobjectiveforthe

regulatorisappropriatetheguidanceisclearandthatthemechanismsinplaceforreviewof

theregulator’sdecisionsareappropriate’



 ParerWRTowardsaTrulyNationalandEcientEnergyMarketp

 ProductivityCommissionReviewoftheGasAccessRegimeJunepxxii

 ExpertPanelonEnergyAccessPricingReporttotheMinisterialCouncilonEnergyAprilp

 ExpertPanelonEnergyAccessPricingReporttotheMinisterialCouncilonEnergyAprilp



Inquiry into the east coast gas market—April 2016

Box Coveragecriteriaandformofregulationdecisions

Coveragecriteria

ThecoveragecriteriaintheNGLrequiretheNCCandtherelevantMinisterto

considerwhether

• access(orincreasedaccess)totheservicesprovidedbymeansofthepipelinewould

promoteamaterialincreaseincompetitioninatleastoneothermarket(criterion(a))

• itwouldbeuneconomictodevelopanotherpipelinetoprovidetheservicesprovidedby

meansofthepipeline(criterion(b))

• access(orincreasedaccess)totheservicesprovidedbymeansofthepipelinecanbe

providedwithoutunduerisktohumanhealthorsafety(criterion(c))

• access(orincreasedaccess)totheservicesprovidedbymeansofthepipelinewouldnot

becontrarytothepublicinterest(criterion(d))

IndecidingwhetherornotthecoveragecriteriaaresatisﬁedtheNCCandMinisterare

requiredtohaveregardtotheNGO

Formofregulationdecisions

TheNCCisresponsiblefordecidingwhetherapipelineshouldbesubjecttofullorlight

regulationInmakingsuchadecisiontheNCCisrequiredbysectionoftheNGL

toconsider

• thelikelyeectivenessoffullandlightregulationinpromotingaccess

• theeectoffullandlightregulationonthecoststhatmaybeincurredbyanecient

serviceproviderecientusersandprospectiveusersandend-users

TheNCCisalsorequiredtohaveregardtotheformofregulationfactorstheNGOandany

othermattersitconsidersrelevantTheformofregulationfactorsrequireconsiderationtobe

givento

• thepresenceandextentofanybarrierstoentryinamarketforpipelineservices

• thepresenceandextentofanynetworkexternalities(ieinterdependencies)betweena

serviceprovidedbythepipelineoperatorandanyothernaturalgasservicesitprovides

oranyotherserviceitprovidesinothermarkets

• theextenttowhichanymarketpowerpossessedbyaserviceproviderisoris

likelytobemitigatedbyanycountervailingmarketpowerpossessedbyauseror

prospectiveuser

• thepresenceandextentofanysubstituteandtheelasticityofdemandinamarketfora

pipelineserviceinwhichapipelineoperatorprovidesthatservice

• thepresenceandextentofanysubstituteforandtheelasticityofdemandinamarket

forelectricityorgas(asthecasemaybe)

• theextenttowhichthereisinformationavailabletoaprospectiveuseroruserand

whetherthatinformationisadequatetoenabletheprospectiveuserorusertonegotiate

onaninformedbasiswithapipelineoperatorfortheprovisionofapipelineservice

Likeacoveragedecisiontheformofregulationappliedtoaparticularpipelinecanbealtered

overtimeifconditionschange

 Gaspipelinesinothercomparablejurisdictionsaregenerallysubjectto

regulation

Tableprovidesabriefoverviewoftheregimesthathavebeenputinplacetoregulategas

pipelinesinNZtheEUandtheUS



Inquiry into the east coast gas market—April 2016

TableRegulationofgaspipelinesinotherjurisdictions

NZ EU US

Descriptionof

transmission

pipelineindustry

Therearetwomajortransmission

pipelinesinNZbothofwhichare

regulated

Therearealargenumberof

transmissionpipelinesintheEUwhich

arerequiredtooerservicesonanon-

discriminatorybasisandaresubject

toregulationbynationalregulatory

authoritiesMostpipelinesare

regulatedbutsomethatrunparallelto

otherpipelinesarenot

TheUSgasmarketconsistsofmultipletransmissionpipelinesbetweensupplybasinsand

distantdemandcentresmostoftenlocatedinterstateAllmajorinterstatetransmission

pipelinesareregulatedunlessthepipelineoperatorcandemonstratethatitlackssigniﬁcant

marketpowerNopipelineshavebeenabletodemonstratethistodate

Economic

Regulator

CommerceCommission NationalregulatorsandtheAgencyfor

CooperationofEnergyRegulators

FederalEnergyRegulatoryCommission(FERC)(forinterstatepipelines)

Backgroundto

theintroduction

ofregulation

RegulatedunderthecurrentPartof

theCommerceActsinceThe

NewZealandGovernment’sdecision

toregulatefollowedareviewbythe

CommerceCommissionin–

underthepre-Partofthe

CommerceActwhichinvolved

anassessmentofwhethertheservices

providedbypipelinesaresuppliedina

marketinwhichcompetitionislimited

andifregulationisnecessaryordesirable

intheinterestsofpipelineusersThe

CommerceActnowprovidesfornon-

exempttransmissionanddistribution

pipelinestoberegulatedandsubjectto

informationdisclosureandthedefault

-customisedprice-qualitypathformof

regulation

Memberstateshavebeenresponsible

forregulatingtransmissionpipelines

forsometimeThroughtheSecond

GasDirectiveandRegulationin

theEUrequiredmemberstates

toregulateaccesstotransmission

pipelinesandtaristobetransparent

andnon-discriminatoryandreﬂect

theactualcostsincurredInthe

ThirdGasDirectiveandRegulation

requiredtheverticalseparation

oftransmissionfromproductionand

retailtheintroductionoftheentry-

exitmodelandthedevelopmentof

EUwidenetworkcodesonarangeof

mattersincludingthirdpartyaccess

Theinitialdecisiontoregulateinthesfollowed‘ﬁnancialabuses’oflargemulti-state

verticallyintegratedpipelinedistributioncompaniesInthePublicUtilityHolding

CompanyActrequiredinterstatepipelinestodivestdistributionthetheGasActinvoked

accountingregulationFurtherchangesoccurredinthesfollowinggasshortagesinthe

sandperceivedinecienciesinpricingForexampleFERCOrderresultedinbuyers

nolongerhavingtobuygasandtransportationonabundledbasiswhileFERCOrder

requiredallpipelinestoconverttothirdpartyaccesspreventedbundledsalesandrequired

separationofpipelineoperatorsfromsupplyaliates



Inquiry into the east coast gas market—April 2016

NZ EU US

Keyfeaturesof

theregulatory

regime

Regulatedpipelinesaresubjectto

• Economicregulationofnon-

contestableservices

• Informationdisclosureregulation

• TheCommerceActalsoincludesalist

ofexemptpipelinesApipelinecan

beaddedtothislistiftheMinisteris

satisﬁeditsservicesaresuppliedina

marketwherethepipelinedoesnot

haveasubstantialdegreeofmarket

powerandviceversa

Inadditionoperatingcodesoverseen

bytheco-regulatoryindustrybodyset

outring-fencingprotocolsandnon-price

termsandconditionsofaccess

Regulatedpipelinessubjectto

• Economicregulationofnon-

contestableservices

• Limitedinformationdisclosure

• Networkcodeswhichamongst

otherthingssetouttherules

relatingtothirdpartyaccess

capacityallocationcongestion

managementtaristructures

balancingandtrading

Interstatepipelinesaresubjectto

• Economicregulationofnon-contestableservicesprovidedbyexistingandnewpipelines

• Signiﬁcantinformationdisclosurerequirementswhichamongstotherthingsrequire

pipelineoperatorstodiscloseoperatingandﬁnancialandinformationandcontractprices

BeforeanewinterstatepipelinecanbedevelopedintheUSitmustbeauthorisedbyFERC

Authorisationwillusuallybegrantedifthedevelopercanshowitisunderpinnedbylong-term

contractsThenewpipelinewillautomaticallybecomesubjecttoregulationwiththeprices

andtermsandconditionsofaccesssetoutinthefoundationGTAsbecomingthedefaultfor

regulatedtaris

InterstatepipelinescanapplytoFERCtocharge‘marketbased’(unregulated)ratesUnderthe

frameworkFERChasdevelopedapipelinewillonlybeallowedtochargemarketbasedrates

ifitcandemonstrateitdoesnothavesigniﬁcantmarketpower



Inquiry into the east coast gas market—April 2016

Astablehighlightstheregimesineachjurisdictionarequitebespokebuttherearesome

importantfeaturesincommon

• themajorityoftransmissionpipelinesinthesejurisdictionsaresubjecttoacomprehensive

formofeconomicregulation

• informationdisclosureisakeyelementofmostoftheseregimesalthoughthelevelof

disclosureisgreaterintheUSwhereinformationtransparencyisseenascriticaltoenabling

shipperstonegotiateeectivelyandalsolimitthescopeforpricediscrimination

• allnon-contestableservicesaresubjecttoregulation

TheﬁrstofthesefeaturesisnotablegiventhatintheUSandtheEUmostsupplysourcesand

demandcentresareservicedbymorethanonepipelineyeteconomicregulationiswidespread

AstheBrattleGroupnotedinareporttotheNCC





“MostsupplybasinsinNorthAmericaandEuropehavemorethanonepipelineaccessing

themManydestinationmarketshavemultiplepipelinesservingthemDespitethegreater

‘thickness’ofthesemarketspipelinesinthesejurisdictionsarestillconsideredtohavenatural

monopolycharacteristicsandareregulatedwithrespecttopriceandtermsandconditions

ofservice”

Anothernoteworthypointisthatthedecisiontoregulateortorevokeregulationinthese

jurisdictionshasnotturnedonwhetheraccesswillpromoteamaterialincreaseincompetitionin

anothermarketasitdoesinAustraliaIthasinsteadtendedtoturnonwhetherthepipelinehasa

substantialdegreeofmarketpowerandtheabilityandincentivetoexercisethatpower

ForexampleinNZtheCommerceCommissionisrequiredtoconsiderwhetherthe‘gaspipeline

servicesaresuppliedinamarketwheretheownerhasasubstantialdegreeofmarketpower’

whenmakingarecommendationtotheMinisteronwhetherapipelineshouldbeaddedtoor

deletedfromthelistofexemptpipelinesintheCommerceAct(NZ)





IntheUSaslightlydierentapproachhasbeentakenwiththeoperatorsofnewandexisting

interstatepipelinespresumedtohavesubstantialmarketpowerandregulationonlybeing

removedifthepipelineoperatorcandemonstrateitlackssigniﬁcantmarketpower



Thatis

thepipelineoperatormustshowthatitlacksthepowertoproﬁtablymaintainpricesabove

competitivelevelsforasigniﬁcantperiodoftimeWhenevaluatingsuchanapplicationthe

FederalEnergyRegulatoryCommission(FERC)willconsider

• themarketinwhichthepipelineservicesareprovided

• thepipeline’smarketsharethedegreeofmarketconcentrationandthepotentialforthe

pipelineoperatortoacttogetherwithotherpipelinestoraiseprices



• whetherthereareanyconstraintsonthepipelineoperator’smarketpowerincludingthe

availabilityof‘goodalternatives’



thepotentialforentrythecountervailingpowerof

shippersandanyotherconstraintsontheabilityorincentivetoexercisemarketpower

WhileprovisionhasbeenmadeintheUSforregulationtoberevokedalltheinterstatepipelines

remainregulatedandsubjecttofullregulationbyFERC

 BrattleGroupCompetitioninGasPipelineMarketsInternationalPrecedentforRegulatoryCoverageDecisionsJune

p

 CommerceAct(NZ)sA

 FERCAlternativestoTraditionalCost-of-ServiceRatemekingforNaturalGasPipelinesandRegulationofNegotiated

TransportationServicesofNaturalGasPipelinesFERC

 FERCusestheHerﬁndahl-HirschmanIndex(HHI)tomeasuremarketconcentrationandappliesathresholdofbelow

whichitapplieslessscrutinyThisthresholdimpliesfourtoﬁvegoodalternativestotheapplicant’sservice

 A‘goodalternative’isdeﬁnedbyFERCashavingapricelowenoughqualityhighenoughandbeingavailablesoonenough

topermitsubstitution



Inquiry into the east coast gas market—April 2016

 Limitationsinthegasaccessregimemeanitdoesn’tprovidean

eectiveconstraintonpipelines

AtthetimetheGasCodewasimplementedallbutoneofthetransmissionpipelinesinthe

eastcoastweredeemedtobecoveredandsubjecttofullregulationIntheinterveningperiod

coveragehasbeenrevoked



onallbuttransmissionpipelinesandonenewpipelinehas

becomecoveredthroughacompetitivetenderprocess



Therearenowjustcovered

pipelinesintheeastcoastthreeofwhicharesubjecttofullregulation(thatistheDTSRBP

andCRP)andtolightregulation(thatistheCGPCWPandtheMSPsouthofMarsden)





Appendixprovidesmoredetailontheregulatorystatusoftransmissionpipelinesontheeast

coastandhowthishaschangedovertime

Thereductioninthenumberofregulatedpipelinesoverthelastyearsprovidessomeinsight

intothediminishinginﬂuencethatthegasaccessregimeishavingontransmissionpipelines

Sodotheﬁndingsintheprecedingchapteronmonopolypricingandthelimitedinﬂuencethe

regimeishavingonthebehaviourofregulatedandunregulatedtransmissionpipelines

Thereasonswhytheregimeishavinglittleinﬂuenceonthebehaviourofpipelinesarethree-fold

• ﬁrstthecoveragecriteriaestablishahurdleforregulationthatisunlikelytobemetbythe

majorityoftransmissionpipelinesontheeastcoastgiventhecharacteristicsoftheeastcoast

gasmarketThecriteriaarealsoastheProductivityCommissionhasnotednotdesignedto

addressthemarketfailurethathasbeenobservedinthisInquirywhichismonopolypricing

thatgivesrisetoeconomicineciencieswithlittleornoeectonthelevelofcompetitionin

dependentmarkets

• secondthereareanumberoffeaturesoftheregulatoryframeworkthatareineect

allowingpipelinesthataresubjecttofullregulationtostillengageinmonopolypricing

• thirdthereislimitedpubliclyavailableinformationonthecostsincurredbypipeline

operatorsinprovidingservicesorontherelationshipbetweenthesecostsandtheprices

chargedforserviceswhichislimitingtheabilityofshipperstoidentifyanyexerciseof

marketpower

Furtherinsightintowhythegasaccessregimeisnotconstrainingthebehaviourofpipeline

operatorscanbefoundinthefollowingstatementinAGL’ssubmissiontotheHarperReview





“ItisAGL’scurrentexperiencethatextendedregulationofmonopolytransmissionproviders

andgastransmissionnetworkpricingisneededEvenwithincreasinginterconnection

thedisparityofbargainingpowerbetweenpipelineoperatorsandshippersisleadingto

economicallyinecientoutcomesandnegativelyimpactingmarketdepthandliquidity…

 InthecaseoftheSWQPandQGPcoveragewasrevokedbytheQueenslandGovernmentinthetransitiontotheNGLand

NGRbymakingaregulationratherthanthroughaformalassessmentofwhetherthetwopipelinessatisﬁedthecoverage

criteriaBythesameregulationtheQueenslandGovernmentchangedtheformofregulationontheCGPtolightregulation

andhasprohibitedanychangeinthisregulatorystatusbeingmadeuntiltheendofApril

 TheCRPbecamecoveredthroughacompetitivetenderprocessratherthananapplicationofthecoveragecriteriaUnder

theNGLaproponentofapipelinehasanoptiontousetermsandconditionsofaccessaccompanyingacompetitivetender

processfortheconstructionofapipelineastheregulatedtermsandconditionsofaccessforthepipelineThecompliance

processforthisrequiresproposingtermsandconditionsofaccessinatenderprovidingcertaindocumentationfortheAER

inacompliancereportAtleastsixmonthspriortothecommissioningofatenderapprovalpipelinetheserviceprovider

(successfultenderer)mustsubmitaproposedaccessarrangementwhichreﬂectstheproposedtermsandconditions

ofaccess

 TheMSPbetweenMoombaandMarsdenisunregulatedbecausetheCommonwealthMinisterforIndustryTourismand

Resourceswasnotsatisﬁedthatcriterion(b)wasmetonthispartofthepipelinewhenitconsideredAPA’sapplicationfor

therevocationofcoverageoftheMSPin

 AGLResponsetoHarperReviewDraftReportNovemberp



Inquiry into the east coast gas market—April 2016

“Thedisparityofbargainingpowerarisesbecausepipelinesremainpracticallyspeaking

monopolyinfrastructureMostpipelinesare‘uncovered’andnotsubjecttoeconomic

regulationWhilecoverageorthethreatofcoveragetheoreticallyoperatesasaconstraint

topipelineoperatorsintheircommercialnegotiationswithshipperspipelinecoverageis

actuallyhardtoobtainandonceobtainedtendstoleadtoanaccessarrangementwith

onlylimitedscopeForexampleoperatorsof‘covered’pipelineshavehistoricallyonlybeen

requiredtooeronereferenceservice(typicallyastandardﬁrmforwardhaulservice)while

thepricesandtermsforremainingservicesremainsubjecttoone-sidedbilateralnegotiation

Thisinequalityofbargainingpowerisexacerbatedasshippersretailersaregenerallytiedtoa

pipelinebasedontheirlong-termupstreamgassupplydecisions”

DuringtheInquiryanumberofothershippersalsonotedthelackofconstraintposedby

theexistingregimeandpointedtothefailureoftheSEPStosatisfythecoveragecriteriaas

evidenceoftheregime’sinabilitytoconstrainthebehaviourofpipelineoperatorsevenwhenthe

pipelineinquestionisamonopolyandthereisevidenceofmonopolypricingAnothershipper

informedtheInquirythatithadbeenadvisedthatamajorarterialpipelinethatituseswhich

isnotsubjecttocompetitionfromanotherpipelinewasalsounlikelytosatisfythecoverage

criteriaThisadvicewasconsistentwithexpertadvicethatthepipelineoperatorobtained

whichwasprovidedtotheInquiryandwhichnotedthatthepipelinewasunlikelytosatisfythe

coveragecriteriabecauseaccesswasunlikelytoresultinamaterialincreaseincompetitionin

anothermarket

TheobservationsmadebyAGLandothershippersinthiscontextareconsistentwiththe

Inquiry’sﬁndingsandhighlighttheneedfortheregulatoryregimetobestrengthenedsothatit

canposeamoreeectiveconstraintonthebehaviourofpipelineoperatorsaspolicymakers

originallyintended

 Thecoveragecriteriaarenotdirectedtotherightmarketfailure

ThecoveragecriteriaintheircurrentformlargelymirrorthedeclarationcriteriainPartIIIAofthe

CCALikePartIIIAanapplicationforapipelinetobecomecoveredmustshowthatthepipeline

isuneconomictoduplicate(criterion(b))andthataccessisrequiredtopromoteamaterial

increaseincompetitioninupstreamordownstreammarkets(criterion(a))Itmustalsoshow

thataccesscanbeprovidedwithoutunduerisktohumanhealthandsafety(criterion(c))and

thataccesswouldnotbecontrarytothepublicinterest(criterion(d))

Thecriterionthathasprovedmostdiculttosatisfyinpipelinecoverageandrevocationof

coveragedecisionsoverthelastyearsiscriterion(a)



Thisisbecausepipelineoperatorsare

withoneortwoexceptionsnotverticallyintegratedandsodonothaveanincentivetodeny

accessorbehaveinawaythatadverselyaectscompetitioninanupstreamordownstream

marketTothecontrarytheygenerallyhaveanincentivetoencourageaccesstomaximise

proﬁtsandreducetheriskofassetstrandingWhilepipelineoperatorsmaynothaveanincentive

toadverselyaectcompetitioninanothermarkettheystillhaveanincentivetoengagein

monopolypricingandashighlightedinchapterareactingonthatincentive

 Inallbuttwooftheapplicationsthathavebeenmadeforcoveragerevocationofcoverageand-yearno-coverage

determinationsinrelationtotransmissionpipelinesintheeastcoastoverthelastyearsthecaseforcoveragehasfailed

onthebasisofcriterion(a)notbeingsatisﬁedCriterion(a)wasfoundnottobesatisﬁedinthesecasesbecausethe

dependentmarketswerefoundtobeworkablycompetitivethepipelineoperatorwasfoundtolacktheincentiveandor

abilitytoadverselyaectcompetitioninthesemarketsandorthereweresequentialmonopoliesThetwoexceptionswere

• TheMSP—AtthetimethisdecisionwasmadeAGLhadapercentinterestinAPAandoneofthefactorsthatthe

CommonwealthMinisterpointedtowhennotingthatcriterion(a)waslikelytobesatisﬁedinthiscasewasthe‘substantial

riskofverticalleveragingdiscriminationinfavourofthewholesaleandretailmarketsgiventhecloserelationshipbetween

AGLEAPLandAustralianPipelineLimited’

• TheDVP—Thecoveragestatusofthispipelinehaschangedthreetimesoverthelastyearsandwhileitiscurrently

unregulatedinthepastithasbeenfoundtosatisfycriterion(a)becausetheownersofthispipelinehaveinterests

inupstreamproductionandwerefoundtohaveanincentivetoleverageitsmarketpowerfromtransmissionintothe

upstreammarket

Furtherdetailonthesedecisionscanbefoundinappendix

SeeCommonwealthMinisterforIndustryTourismandResourcesApplicationsforCoverageofCertainPortionsofthe

MoombatoSydneyGasPipelineSystemDecisionNovemberCommonwealthMinisterforIndustryTourismand

ResourcesApplicationforCoverageoftheDawsonValleyPipelineDecisionAprilp

SeealsoNCCPastApplicationsRegisterhttpnccgovauapplications-pastpastapplicationsforthedecisionsA

summaryofthekeydecisionscanalsobefoundinAEMCStageFinalReportEastCoastWholesaleGasMarketand

PipelineFrameworksReviewJulyappendixD



Inquiry into the east coast gas market—April 2016

Thehurdleposedbycriterion(a)hasineectallowedpipelineoperatorstoengagein

monopolypricinginarelativelyunconstrainedmannerThisisoperatingtothedetrimentof

economiceciencyandconsumersmoregenerallybecausemonopolypricingcangiveriseto

lowerthanecientlevelsofgasproductionandexplorationinvestmentlowerthanecient

levelsofgasuseandinvestmentindownstreammarketsinecientutilisationofpipelinesand

distortionsingasﬂowsacrossthemarket

Theemphasisthatcriterion(a)placesoncompetitionindependentmarketsisarguablyatodds

withtheNGOAsnotedintheSecondReadingSpeechtheNGLhaseconomiceciencyand

thelong-terminterestsofconsumersofgasasitscentralfocus





“Thelong-terminterestofconsumersofgasrequirestheeconomicwelfareofconsumers

overthelong-termtobemaximisedIfgasmarketsandaccesstopipelineservicesare

ecientinaneconomicsensethelong-termeconomicinterestsofconsumersinrespectof

pricequalityreliabilitysafetyandsecurityofnaturalgasserviceswillbemaximised”

InitsInquiryintotheNationalAccessRegimetheProductivityCommissionnotedthat

criterion(a)hadbeenframedinthiswaybecausecompetitionisviewedasaproxyforthe

eciencygainsassociatedwithaccessandthegainsmustbematerialenoughtocounter

thedirectandindirectcostsofregulation



Howevertheproblemwithusingcompetitionas

aproxyforeciencyisthatcompetitionandeciencyarenotsynonymousThatiswhile

competitionmaypromoteeciencysigniﬁcanteciencyimprovementscanstillbeachievedin

upstreamanddownstreammarketswithoutanychangeincompetitioninarelatedmarketifa

pipeline’smarketpowerisconstrainedForexample

• Theeliminationofmonopolypricingonapipelinethatisusedbytworetailerstosupplygas

toaregionalareamaynotgiverisetoanychangeincompetitionintheretailmarket(for

examplebecausethescaleofthemarketmaybetoosmalltoattractanyothercompetitors)

butcouldstillbeneﬁtconsumersintheregionifthecostsavingsarepassedon

• Restrictingapipelineoperator’sabilitytoeectawealthtransferfromproducerscanalsobe

expectedtoresultineciencyimprovementsintheupstreammarketbutmaynothaveany

eectonthelevelofcompetitioninthismarketifitresultsinexistingproducerscarryingout

moreexplorationandsupplyingmoregasintothemarketInthisexampletherewouldbean

eciencyimprovementandanimprovementinconsumerwelfarebutnochangetothelevel

ofcompetition



• Eliminatingmonopolypricingonapipelinethatisusedtosupplyaminingcompany

competinginaglobalcommoditiesmarketthatisalreadyworkablycompetitivecouldresult

ingreaterinvestmentbytheminingcompany(thatisbecausetheriskofholdupisreduced)

andincreasethevolumeofcommoditiesitsuppliesintothemarketIftheminingcompany

isalowercostoperatorthentheincreaseinsupplywoulddisplacehighercostsuppliersand

theequilibriumcommoditypricewouldfallInthisexamplerestrictingapipelineoperator’s

abilitytoengageinmonopolypricingwouldresultinanimprovementineconomiceciency

andconsumerwelfarebutwouldhavelittletonoeectoncompetitionifthemarketis

alreadyworkablycompetitive

• Inasimilarmannertothepreviousexamplerestrictingapipelineoperator’sabilitytoengage

inmonopolypricingonapipelinethatisusedtosupplyanindustrialcustomerthatcompetes

inaworkablycompetitivemarketinAustraliacouldresultingreaterinvestmentbythat

companyinitsfacilityandgreateroutputWhilethismaynotgiverisetoanychangeinthe

levelofcompetitioninthemarkettherewouldstillbeaneciencyimprovementandifthe

industrialcustomerisalowercostproduceritcouldalsoresultinareductioninpricesfor

thatproductwhichwouldbeneﬁtconsumers

 SouthAustralianHansardNationalGas(SouthAustralia)BillLegislativeAssemblyAprilp

 ProductivityCommissionFinalReport—NationalAccessRegimeOctoberp

SimilarcommentswerealsomadeintheHarperReviewSeeHarperReviewFinalReport—CompetitionPolicyReview

Marchp

 NCCFinalRecommendation—ApplicationforcoverageoftheSouthEasternPipelineSystemAprilp



Inquiry into the east coast gas market—April 2016

Inallofthesecasesconstrainingthepipelineoperator’sexerciseofmarketpowerwouldbe

consistentwiththeeciencyprinciplesembodiedintheNGOandwouldbeinthelong-term

interestsofconsumerseventhoughithasnoeectoncompetitioninanothermarketUnder

thecoveragecriteriahoweverthisbehaviourwouldnotbesucienttotriggerregulationevenif

thegainsfromtheeciencyimprovementsexceededthecostsofregulation

Theproblemswithrelyingoncompetitionasaproxyforeciencywereacknowledgedbythe

ProductivityCommissioninitsInquiryashighlightedinthefollowingextract





“…competitioncanbeanimpreciseproxyforeciencyinsomecircumstancesparticularly

withregardtomonopolypricingThismaybethecasewheremonopolypricingbyan

infrastructureserviceproviderdoesnotaectthelevelofcompetitionindependentmarkets”

WhiletheProductivityCommissionconsideredchangingcriterion(a)toaneciencytestit

concludedthatsuchatestwouldbe‘unworkable’



andthattoolsotherthanPartIIIAmay

berequiredwhereanexerciseofmarketpowerhasnoeectoncompetitioninadependent

market





“Wherecompetitionisnotdisruptedbutmonopolypricingexistsitmaybethecasethata

dierentformofinterventionisjustiﬁedForexamplesomeindustries(suchasairports)are

subjecttopricessurveillanceunderPartVIIAoftheCCAanddeclarationcouldsupersedethe

useoftheselessintrusiveapproaches…Monopolypricingmayalsobeaddressedthrough

pricingregulationunderindustryspeciﬁcaccessregimes(suchasisthecaseforelectricity

networks)”

ThemarketfailuredescribedbytheProductivityCommissioninthiscontextisthesameone

thattheInquiryhasfoundThatispipelineoperatorsareusingtheirmarketpowertoengagein

monopolypricingattheexpenseofconsumersandeconomiceciency(contrarytotheNGO)

buttheexerciseofthismarketpowerappearstobehavinglittletonoeectoncompetition

independentmarketsRatherthanallowingthismarketfailuretopersistthereisacasefor

replacingthecoveragecriteriaintheNGLwithanewtestthataddressesthemarketfailuremore

directlyandensuresthattheNGOandpolicymakers’originalintentions(thatispreventingthe

‘abuseofmonopolypower’andprovidingforaccessonfairandreasonableterms)aremet

SimilarviewswerealsoreachedbyindependenteconomicconsultantsIncentaandCastalia

inseparatereportspreparedfortheAEMContheappropriatenessofthecoveragecriteriaasa

testforregulationundertheNGLThefollowingextractstakenfromtheIncentareporthighlight

whatitseesasthemainshortcomingofthecoveragecriteriaandhowitshouldbeaddressed

“Ratherthanaproblemofthedenialofaccesstheissuewithrespecttogaspipelinesisone

ofmonopolypricingItisourviewthatcriterion(a)isnotcentrallyfocusedonthisquestion

whichinturnraisesaprospectthatpriceregulationmaynotbeappliedwhenitisjustiﬁed”





 ProductivityCommissionFinalReport—NationalAccessRegimeOctoberp

 ibidpp–

 ProductivityCommissionFinalReport—NationalAccessRegimeOctoberpandProductivityCommission

DraftReport—NationalAccessRegimeMayp

 TheviewexpressedbytheProductivityCommissioninthiscontextisconsistentwithitsviewthattheonlymarketfailure

thatPartIIIAshouldbeusedtoaddressis

“…anenduringlackofeectivecompetitionduetonaturalmonopolyinmarketsforinfrastructureserviceswhereaccess

isrequiredforthirdpartiestocompeteeectivelyindependentmarkets”

TheNCCmadeasimilarobservationinitsrecommendationontheapplicationfordeclarationofthePortofNewcastleIn

thiscasetheNCCnotedthat

“DeclarationundertheNationalAccessRegimeisnotamechanismforimpositionofpriceregulationandwasnever

intendedtobesuch‘Excessive’‘monopolistic’or‘gouging’pricingperseisnotthefocusofPartIIIAWheresuchpricing

inonemarketmerelytransfersincomeorvaluefromonepartyinasupplychaintoanotherwithoutmateriallyimpacting

competitioninanyothermarketPartIIIAdoesnotprovidearemedyThefocusoftheRegimeisonpromotionof

competitioninmarketswherethelackorrestrictionofaccesstoinfrastructureservicesprovidedbyfacilitiesthatcannot

beeconomicallyduplicatedwouldotherwiselimitcompetition”

SeeProductivityCommissionNationalAccessRegimeFinalReportOctoberpandNCCFinalrecommendation

DeclarationoftheshippingchannelserviceatthePortofNewcastleNovemberpp–

 IncentaAssessmentofthecoveragecriteriaforthegaspipelineaccessregimeSeptemberp



Inquiry into the east coast gas market—April 2016

“OnthebasisthatweconsiderthattheregimeunderPartIIIAisfocusedonaddressinga

dierenteconomicproblemtotheonethatemergesfromsubstantialmarketpowerheld

bygaspipelinesitfollowsthatwedonotthinkthereisapressingneedforthecontinued

alignmentbetweenthisregimeandtheoneforgasaccesscoverageAsdemonstratedby

theHilmerReviewthenationalaccessregimewasneverintendedtoprovidearegimefor

priceregulationininstancesofmarketpowerBycontinuingtoapplyaformoftestfocused

onprovidingregulatedaccesstoacircumstancewhereregulationshouldfocusmoreon

pricethereisanincreasedriskthatregulationisnotappliedincircumstanceswhereitwould

otherwisebejustiﬁed





“Itisourviewthatthepotentialrisksofunderorover-regulationthatariseunderthecurrent

regimeforgascoveragecanbeaddressedbyaskingamorestraightforwardquestion

namelydothecostsofregulationoutweighitsbeneﬁtsInthiscasethisquestioncan

largelybeansweredbyaskingwhetheragaspipelineownerpossessesandisabletoapply

substantialandenduringmarketpower”



Castaliaformedasimilarviewalthoughitsuggestedthatthetestforregulationcouldjust

beamendedbyreplacingtheterm‘competition’incriterion(a)withtheterm‘eciency’and

restoringthefocusofcriterion(b)toanaturalmonopolytest



BreakingthenexusbetweenthegasaccessregimeandPartIIIA

Whilesomemarketparticipantsmayraiseconcernsabouttheproposaltobreakthenexus

betweenthegasaccessregimeandPartIIIAitisclearfromtheprecedingdiscussionthatPart

IIIAisnotdesignedtoaddressmonopolypricingthathaslittletonoeectoncompetitionand

thatanalternativetestisrequiredundertheNGL

FurthersupportforthisviewcanbefoundintheReportbytheIndependentCommitteeof

InquiryonNationalCompetitionPolicy(theHilmerCommittee)whichdrewacleardistinction

betweentheregulatorymeasurestobeemployedwhendealingwithanaturalmonopolythat

hasverticalinterests(thatisaccessregulation)andonethatdoesnot(thatispricebased

regulation)



Thisdistinctioncanbeseeninthefollowingextracts

“Wheretheownerofthe‘essentialfacility’isnotcompetinginupstreamordownstream

marketstheownerofthefacilitywillusuallyhavelittleincentivetodenyaccessfor

maximisingcompetitioninverticallyrelatedmarketsmaximisesitsownproﬁtsLikeother

monopolistshowevertheownerofthefacilityisabletouseitsmonopolypositiontocharge

higherpricesandderivemonopolyproﬁtsattheexpenseofconsumersandeconomic

eciencyInthesecircumstancesthequestionof‘accesspricing’issubstantiallysimilar

toothermonopolypricingissuesandmaybesubjectwhereappropriatetotheprices

monitoringorsurveillanceprocessoutlinedinchapter



“Wheretheownerofthe‘essentialfacility’isvertically-integratedwithpotentiallycompetitive

activitiesinupstreamordownstreammarkets…thepotentialtochargemonopolypricesmay

becombinedwithanincentivetoinhibitcompetitors’accesstothefacility”



 IncentaAssessmentofthecoveragecriteriaforthegaspipelineaccessregimeSeptemberp

 ibid

 CastaliaAEMCGasAccessRegimeAdviceAugustp

 TheInquiryrecognisesthatPartIIIAmaybecapableofbeingappliedinsomelimitedcircumstanceswheretheinfrastructure

ownerhasnoverticalinterestsbutthereisevidencethatitisengaginginpricediscriminationorotherbehaviourthathasa

materialimpactoncompetitioninarelatedmarket

SeeSydneyAirportCorporationLtdvAustralianCompetitionTribunal[]FCAFC

 ReportbytheIndependentCommitteeofInquiryonNationalCompetitionPolicyFinalReportpp–



Inquiry into the east coast gas market—April 2016

“Wheretheconditionsforworkablecompetitionareabsent—suchaswhereaﬁrmhasa

legislatedornaturalmonopolyorthemarketisotherwisepoorlycontestable—ﬁrmsmay

beabletochargepricesabovetheecientlevelforperiodsbeyondthosejustiﬁedbypast

investmentsandriskstakenorbeyondatimewhenacompetitiveresponsemightreasonably

beexpectedSuch‘monopolypricing’isseenasdetrimentaltoconsumersandtothe

communityasawhole”



WhiletheHilmerCommitteerecommendedthatmonopolypricingbedealtwiththroughprice

monitoringorpricessurveillancethereareanumberofexamplesofpriceregulationbeing

appliedinasimilarmannertothatprescribedintheNGRwhereanaturalmonopolydoesnot

haveverticalinterests(forexampleelectricitynetworksandNBNCo)Experiencewithprice

monitoringinportsandairportshasalsoshownthatsuchmonitoringhaslittleornolonger-term

impactontheconductofanaturalmonopolyandthatataminimumpartiesnegotiatingaccess

tothesefacilitiesshouldbeabletohaverecoursetoadisputeresolutionmechanismifthereisa

disputeaboutthepriceortermsandconditionsofaccess

Anotherwayoflookingatthisissueistoconsiderwhatwouldoccurifthereweretwopipelines

competingtosupplyalocationwithnootheralternatives(forexampletheMSPandtheEGP

intoSydney)andthepipelinesproposedtomergeMostcompetitionauthoritieswouldblock

suchaproposalbecausethelossofcompetitionwouldbeexpectedtohaveadetrimentaleect

oneconomicoutcomes(forexamplethroughhighertransportationcostsandhigherprices

forproductswheregasisakeyinput)andeconomiceciencyinupstreamanddownstream

markets(forexamplelowerthanecientlevelsofgasproductioninvestmentinexploration

gasuseandinvestmentindownstreamfacilities)Thiseconomicharmjustiﬁesapolicyaction

whichinthiscasewouldbetoopposethemergerIftherewasjustonepipelineoperatingto

supplyalocation(forexampletheSWQPortheTGP)thenapplyingthesamerationalethere

wouldbeacaseforimplementingsomeformofpriceregulationtoconstrainthepipeline

operator’sbehaviour



Finallyitisworthnotingthatthelinkthatcurrentlyexistsbetweenthegasaccessregimeand

PartIIIAoftheCCAisuniqueandthatarangeofotherapproacheshavebeenusedinvarious

industriestoimposeregulationincluding

• variousgovernmentsrequiringassetownerstosubmitanaccessundertakingoranindustry

speciﬁcregimethroughlegislationorotherlegalinstruments



• variousgovernmentsandregulatorybodiesdeemingcertainassetsorservicestobe

declaredunderPartIIIAorunderotherindustryspeciﬁcregimesincludingthegasaccess

regimewhentheGasCodeﬁrstcameintoeect





• governmentsadoptinganindustryspeciﬁcaccessregimethatprovidesforanalternativetest

todeterminewhetheranassetorserviceshouldberegulatedandortheformofregulation

tobeapplied





 ReportbytheIndependentCommitteeofInquiryonNationalCompetitionPolicyFinalReportp

 InpracticetheremaybedierentlegalstandardsappliedtomergercontrolasopposedtonewregulatorycontrolsHere

theInquiryismerelyobservingthatthereisacaseforgovernmentactiontoaddressspeciﬁceconomicoutcomeswhether

thoseoutcomesarisefrommergerorfromsomeotherroutetomonopoly

 ThisapproachhasbeenusedbytheCommonwealthgovernmenttoimposeregulationonairportsuntilandwheat

exportterminalsIthasalsobeenusedtorequireAustralianRailTrackCorporation(ARTC)tosubmitavoluntaryaccess

undertakingtotheACCC

 Thisapproachwasusedbystateandterritorygovernmentstoregulateelectricitynetworksandwasalsousedwhen

theGasCodecameintoeectTheapproachhasalsobeenusedbytheACCCtoimposeregulationonanumberof

telecommunicationsservicesandtheCommonwealthGovernmenttoimposeregulationonallNBNservicesandotherhigh

speedbroadbandservices

 ForexampletheACCChasthepowertodeclareservicesunderPartXICoftheCCAeitheronitsowninitiativeorin

responsetoarequestforaccessIndecidingwhethertodeclareaservicetheACCCisrequiredtoconsiderwhetheritwill

promotethelong-terminterestsofend-usersIndoingsotheACCCisrequiredtohaveregardtowhetheritwillachieve

• theobjectiveofpromotingcompetitioninmarketsforlistedservices

• theobjectiveofany-to-anyconnectivityinrelationtocarriageservicesthatinvolvecommunicationbetweenend-users

• theobjectiveofencouragingtheeconomicallyecientuseofandinvestmentintheinfrastructurebywhichlisted

servicesaresuppliedandanyotherinfrastructurebywhichlistedservicesareorarelikelytobecomecapableofbeing

supplied

OnceaserviceisdeclaredtheACCCcanmakeanaccessdeterminationfortheservice



Inquiry into the east coast gas market—April 2016

PartIVoftheCCAisunlikelytoprovideaneectiveremedy

AlthoughPartIVoftheCCAisoftencitedasabackstoptoaccessregulationitisunlikelythat

theexerciseofmarketpowerbypipelineoperatorsasobservedinthisInquirywouldbecaptured

bythispartoftheCCAThisisbecauseasnotedabovethemajorityofpipelineoperators

arenotverticallyintegratedItwouldbedicultthereforetodemonstratethattheoperator

ofanuncoveredpipelinethathasengagedinmonopolypricinghastakenadvantageoftheir

substantialmarketpowerforoneofthepurposesproscribedunders





Summary

Tosummarisethecoveragecriteriaarenotdesignedtoaddressthemarketfailurethathasbeen

observedinthisInquiryIfanewtestisnotimplementedthenpipelineoperatorswillcontinueto

engageinmonopolypricinginarelativelyunconstrainedmannerThiswillinturnoperatetothe

detrimentoftheeastcoastgasmarketandeconomiceciencyinupstreamanddownstream

marketsthecostsofwhichwillultimatelybebornebyconsumers

Whileimplementinganewtestwillresultinthenexusthatcurrentlyexistsbetweenthetestfor

regulationintheNGLandPartIIIAandthegasaccessregimebeingbrokenthisisconsistent

withwhathasoccurredinotherindustryspeciﬁcregimesItisalsoinkeepingwiththedistinction

theHilmerCommitteedrewbetweentheregulatorymeasurestoemploywhendealingwitha

naturalmonopolythathasverticalinterests(thatisaccessregulation)andonethatdoesnot

(thatispricebasedregulation)

Theproposaltobreakthisnexusshouldnotbeconstruedasamorefundamentalcriticismof

PartIIIAAstheACCCnotedinitssubmissiontotheNationalAccessRegimePartIIIAhasan

importantroletoplayinAustralia’sregulatoryframeworkincaseswhereaccessisrequiredto

competeeectivelyindependentmarketsandthereisnoindustryspeciﬁcregimeinplace





Thereishoweveralreadyanindustryspeciﬁcregimeinplaceingaswithaclearlydeﬁned

objective(thatistopromoteecientinvestmentinandecientoperationanduseofnatural

gasservicesforthelong-terminterestsofconsumersofnaturalgas)TheInquiry’sobservations

onthecoveragecriteriaanditsrecommendationonhowthetestforregulationshouldbe

changedareconﬁnedtothisregime

TheInquiry’srecommendationonhowthetestforregulationcouldbechangedissetoutin

section

 Othergapsintheregulatoryframeworkareallowingpipelinessubjecttofull

regulationtoengageinmonopolypricing

Inadditiontothemorefundamentallimitationsoutlinedabovethereareanumberoffeaturesof

theregulatoryframeworkwhichmeanthatevenifapipelineissubjecttofullregulationitmay

stillbeabletoexercisemarketpower

ForexampletheAERiscurrentlyonlyrequiredbytheNGRtoapproveonanexantebasis

thepriceofaccesstothe‘referenceservice(s)’oeredbythepipelineIntheNGRareference

serviceissimplydeﬁnedasaservicesoughtbyasigniﬁcantportionofthemarketBy

contrasttheelectricityregulatoryregimeidentiﬁesregulatedservicesbyanassessmentofthe

contestabilityoftheservices



The‘referenceservice’approachusedintheNGRhasresulted

inanumberofnon-contestableservicesbeingexcludedfromtheAER’sexantereviewwhereas

 ThisisconsistentwiththeadvicethattheMajorEnergyUsershasreceivedontheapplicabilityofPartIVoftheCCAwhich

wasattachedtoitsJulysubmissiontotheIssuesPaper

 ACCCProductivityCommissionReviewoftheNationalAccessRegime—SubmissiontoIssuesPaperFebruary

 UndertheNationalElectricityRulestheAERisrequiredtodeterminethelevelofregulationtoapplytoindividualservices

usingaserviceclassiﬁcationframeworkthatamongstotherthingsrequiresconsiderationtobegiventowhetherthe

servicesarecontestable(thatissubjecttosomeformofcompetitionorthethreatofcompetition)ornon-contestable



Inquiry into the east coast gas market—April 2016

non-contestableservicesarearguablyaprimarytargetforregulation(becausethereisno

competitiveconstraintonthepipelineoperator’sprovisionofthoseservices)





Whilethethreatofarbitrationshouldinprincipleimposeaconstraintonthepipelineoperator’s

behaviourwhendeterminingthepricesoftheseservicestheInquiryhasbeeninformedby

marketparticipantsthatthecostsandresourcesassociatedwithanaccessdisputecoupled

withtheuncertaintysurroundingtheﬁnaloutcomecandiscourageshippersfromtriggering

theseprovisionsInformationasymmetriesmayalsobecontributingtothisreluctanceto

triggertheseprovisionsbecauseshippersareunabletodeterminehowmuchtheyarebeing

‘overcharged’Onemarketparticipantalsonotedthatthereislittleutilityinbeingabletotrigger

adisputeinrelationtoanexistingcontractbecauseanyaccessdeterminationwouldbebound

bythepre-existingcontractualrightsbetweenthepartieswhichareprotectedundertheNGL

Theselimitationsmeanthatoperatorsoffullregulationpipelinesmaystillbeabletoengage

inmonopolypricingwhensettingthepriceofnon-referenceserviceswhichiswhathasbeen

observedinthisInquiry

AnothergapintheregulatoryframeworkoutsidetheDTSinVictoria



stemsfromthe

discretionthatcurrentlyexistsundertheNGRtoexcludeexpansionsofafullregulationpipeline

fromthedeﬁnitionofthecoveredpipelineThishasresultedintranchesofcapacityonsome

fullregulationpipelinesnotbeingsubjecttoregulationWhileadecisiontoexcludeexpansions

mustbeapprovedbytheAERthereislittleguidanceintheNGRonthematterstheAERisto

considerwhenmakingsuchadecisionMoreproblematichoweveristhefactthatiftheAER

allowstheinvestmenttobeexcludedfromthecoveredpipelinetheonlyremedythatusershave

ifthepipelineoperatorengagesinmonopolypricingistoapplytotheNCCfortheexpansionto

becoveredForthereasonssetoutabovethisisunlikelytobesuccessful



Knowledgeofthese

dicultiesmeansthatpipelineoperatorsmaybeabletoengageinmonopolypricingonthe

expandedcapacityinarelativelyunconstrainedmanner

TheInquiry’srecommendationonhowtoaddresstheseandotherpotentialgapsinthe

regulatoryframeworkapplyingtofullregulationpipelinesissetoutinsection

 Informationasymmetriescanlimitashipper’sabilitytoidentifymonopoly

pricingandnegotiateeectively

Anotherlimitationwiththecurrentregimeisthatthereislittlepubliclyavailableinformationon

thecostsincurredbypipelineoperatorsinprovidingservicesandtherelationshipbetweenthese

costsandthepriceschargedforservicesThisisindirectcontrasttootherjurisdictionssuchas

theUSwhereﬁnancialreportingisseenascriticaltoenablingshipperstodeterminewhether

thechargesare‘justandreasonable’andtonegotiateeectivelywithpipelineoperators





TheinformationthatinterstatepipelineoperatorsintheUSarerequiredtoreporttoFERCona

quarterlyandannualbasisincludesamongstotherthings





• thepipeline’sbalancesheetincomestatementandcashﬂowstatement

 Whereareferenceserviceisasubstituteforalloftheotherservicesprovidedbythepipelineoperator(ortherewasachain

ofsubstitutability)thenitmaypossibletorelyonjustregulatingthereferenceserviceTheconcepthereisthatregulating

thepriceofthereferenceservicewillthenconstrainthepriceofotherservicesoeredAsimilarapproachwastakeninthe

NBNCoSpecialAccessUndertakingHoweveritappearsunsatisfactorytorelyonthissubstitutabilityundertheNGRgiven

thenatureoftheservicesprovidedAcommonreferenceservicefortransmissionpipelinesistheprovisionofﬁrmforward

haulcapacityOtherservicessuchasbackhaulbidirectionalrenominationandasavailableservicesmayatbestbepartial

substitutesforﬁrmforwardhaulcapacityInanyeventthedegreetowhichtheseservicesarepotentialsubstitutesforﬁrm

forwardhaulcapacityremainsuntestedbyregulatorsduetotheseservicesremainingoutsideofregulationeitherdueto

pipelinesbeinguncoveredorduetotheservicefailingtomeetthecurrentNGRrequirementthataservicebesoughtbya

signiﬁcantportionofthemarket

 TheDTSissubjecttoaVictorianMinisterialOrderregulationwhichstatesthatallextensionstoandexpansionsoftheDTS

aretoformpartofthecoveredpipeline

 Anotherreasonwhyitwouldbediculttodemonstratethattheexpansionwouldsatisfythecoveragecriteriaisthatthe

pipelinesthatarecurrentlysubjecttofullregulationhavenotactuallybeenfoundtosatisfythecoveragecriteriaTheywere

eitherdeemedtobecoveredwhentheGasCodecameintoeect(theDTSandRBP)orbecamecoveredthroughthe

competitivetenderprovisions

 FERCOrderNoC-CAugustp

 FERCFormNoAnnualReportofMajorNaturalGasCompaniesandSupplementalForm

 InterstatepipelineoperatorsarealsorequiredtoreporttoFERConthepricesandotherkeytermsandconditionsstruckin

GTAsThisinformationisviewedbyFERCasnecessaryto‘provideshipperswiththepricetransparencytheyneedtomake

informeddecisionsandtheabilitytomonitortransactionsforunduediscriminationandpreference’

FERCOrderNoFebruaryp



Inquiry into the east coast gas market—April 2016

• detailedinformationonthevalueofthepipeline’sassetsandaccumulateddepreciation

• detailedinformationontherevenuereceivedfortransportationstorageandotherservices

andvolumestransported

• detailedinformationonthecostsincurredintheprovisionofservicesincludingthecostof

anycapitalworksunderconstruction

IntheSecondReadingSpeechfortheNGLtheHonPatrickConlonnotedtheimportanceof

shippershavingaccesstocostrelatedinformationbutitappearsthatlittlehasbeendoneto

datetoaddressthisinformationgap





“…customerscanonlynegotiatewithserviceproviderswhentheyhaveadequateinformation

todeterminewhetherornotpaymentsrequiredofthemaccuratelyreﬂecttheecientcost

ofprovidingtheserviceInacompetitivemarkettheecientcostisrevealedascompeting

providersseektooutbideachotherdowntothepointwheretheyarecoveringtheircosts

plusanormalproﬁtWhereabusinessisanaturalmonopolythisdoesnotoccurandit

canbedicultforconsumersandregulatorstoaccessinformationfromnaturalmonopoly

serviceproviders”

CentralPetroleumalsonotedinitssubmissiontotheAEMC’sEastCoastGasMarketReviewthat

thelackoftransparencyontheactualcostsincurredbypipelineoperatorsthecapitalatrisk

previousinvestmentreturnsandthepipelineoperator’scostofcapitalmeantthatitwasdicult

toassessthereasonablenessofoers



TheInquiry’srecommendationonhowtoaddressthislimitationissetoutinsection

 Thegasaccessregimeshouldbestrengthenedtoprovideamore

eectiveconstraintonpipelineoperators

TheInquiryhasgivensomethoughttohowthegasaccessregimecouldbestrengthenedso

thatitposesamoreeectiveconstraintonthebehaviourofpipelineoperatorsIndoingso

theInquiryhasbeencognisantoftheeectthatregulationcanhaveoninvestmentinnovation

andtheothercostsandrisksthatregulationcanexposepartiestoTherearehoweveralready

sucientsafeguardsintheNGLandNGRtoamelioratethesecostsandrisksmanyofwhich

havebeenimplementedasaresultofrecommendationsbytheParerReviewtheProductivity

CommissionandtheExpertPanelonEnergyAccessPricing(seebox)TheInquiryisnot

recommendinganychangestothesesafeguards

TheproposedimprovementsareinsteaddesignedtomakethetestforregulationundertheNGL

andotheraspectsofthisindustryspeciﬁcregimeﬁtforpurposetargetedandproportionate

tothemarketfailurethathasbeenobservedbytheInquiry(thatismonopolypricingthat

resultsineconomicineciencies)andwillpromotetheNGOIftheproposedimprovementsare

implementedtheInquirywouldexpectthepriceschargedbypipelineoperatorstomovecloser

towardstheecientcostofsupplywhichwillinturnresultin

• lowerdeliveredgaspricesforcustomersthattransporttheirowngasandotherend-usersof

gasifretailerspassthebeneﬁtsoflowerchargesthrough

• moreecientlevelsofgasproductionandinvestmentinexploration

• moreecientlevelsofgasuseandinvestmentindownstreamfacilitiesthatusegas

• moreecientutilisationofthetransmissionpipelineslessdistortionsintheﬂowofgas

acrossthemarketandgasﬂowingtowhereitisvaluedmosthighly

 Therearealwayssomecostsandriskswithregulationbutthesecanbe

amelioratedthroughexistingsafeguardsintheNGLandNGR

ThekeyriskofregulationisthatitcandistortinvestmentincentivesIftheregulationistoo

intrusivesociallybeneﬁcialinvestmentsmaynotoccurTheInquiryrecognisesthatregulation

 SouthAustralianHansardNationalGas(SouthAustralia)BillLegislativeAssemblyAprilp

 CentralPetroleumSubmissiontothePipelineRegulationandCapacityTradingDiscussionPaperFebruaryp



Inquiry into the east coast gas market—April 2016

ofgaspipelinescanhaveanumberofunintendedconsequencesItisimportanttoincorporate

safeguardsintheregulatoryregimetominimisetheriskoftheseoccurring

FirstregulationhasthepotentialtodeterinvestmentsinpipelinesPipelinesarelong-lived

assetsThedemandfortheuseofapipelinewilldependonthevolumeofgasavailableat

oneendofthepipelineandthedemandforgasattheotherendAtthetimeinvestmentina

pipelineissunktheseareuncertainTheexpectationthatsuccessfulprojectswillberegulated

(thatisasymmetricrisktruncation)risksmakingmoremarginalprojectsuncommercial

Thisriskcanbeaddressedpossiblytoalargedegreebythepipelineoperatorenteringinto

long-termGTAswithshippersFoundationcustomerstypically‘underpin’investmentsinnew

pipelinesandmajorenhancementsofexistingpipelinesBypurchasingcapacityonthepipeline

usersorproducerstakesomeoftheriskotherwisebornebytheinvestorTotheextentthese

contractsfullyfundtheinvestment(includingcompensatingthepipelineoperatorforany

associatedrisk)thenregulationoftransportchargesattheexpiryofthesecontractsmayonly

havealimitedeectoninvestmentingaspipelines

Secondthepotentialfornewinvestmenttoberegulatedmaycauseinvestorstodelay

constructingthepipelineuntilthefutureprospectsofthepipelinebecomemorecertain

Thirdregulationmayresultinthe‘front-loading’oftransportationchargesTheexpectationthat

transportationchargeswillberegulatedwilllikelyresultininvestorsattemptingtoacceleratethe

recoveryofcapitalTheconsequenceishigherchargesearlierinthelifeofthepipeline



WhileregulationcanhavetheseeectstherearealreadyanumberofsafeguardsintheNGL

andNGRthataredesignedtocountertheseeectsincluding





• The-yearno-coveragedeterminationprovisionswhichallowthedevelopersofgreenﬁelds

pipelinestoseekaregulatoryholidayundertheNGLbeforethepipelineiscommissionedif

theycandemonstrate

– thedevelopmentsatisﬁesthedeﬁnitionofa‘greenﬁeldspipelineproject’undertheNGL

whichiscurrentlydeﬁnedas

 apipelinethatisstructurallyseparatefromanyexistingpipeline(whetherornotitisto

traversearoutedierentfromtherouteofanexistingpipeline)

 amajorextensiontoanexistingpipelinethatisnotacoveredpipelineor

 amajorextensiontoapipelinethatissubjecttolightregulationifithasbeengrantedan

exemptionbytheAER

– theproposedpipelinedoesnotsatisfyoneormoreofthecoveragecriteria





• TheprotectiontheNGLaccordscommerciallynegotiatedcontractswhichineectmeans

thatpipelineoperatorsandshipperscancontinuetoenterintomutuallybeneﬁcialcontracts

tounderwriteinvestmentsifitisecienttodoso

• Thelighterhandedformofregulationthatcanbeappliedifcertainconditionsaresatisﬁed

(seebox)

 Asnotedinchapterthereisevidencethatpipelineoperatorsalreadytryandrecovercostsoverashorterperiodoftime

thantheeconomiclifeoftheassetstoreducetheirdemandrelatedrisks

 InadditiontotheseprovisionstheNGRalsoincludesspeculativeinvestmentprovisionsTheseprovisionsallowpipeline

operatorsthataresubjecttofullregulationtocarryoutmore‘speculative’investmentsthatmaynotpasstherelevant

expendituretestintheNGRatthetimetheinvestmentismadebutmaydosointhefuture(forexamplebuildingin

additionalcapacitythatmaynotberequiredforsometime)Undertheseprovisionsthatportionoftheinvestmentthat

doesn’tsatisfytheexpendituretestandisnotrecoveredthroughasurchargeorcapitalcontributionwillbeexcludedfrom

theregulatoryassetbasebutcanberolledinatalatertimeifitdoessatisfythetestTheprovisionsalsoallowforadierent

rateofreturntobeappliedtothisinvestmenttoreﬂectitsmorespeculativenature(ruleoftheNGR)

 Thedecisiontolimitthescopeofthe-yearregulatoryholidayinthiswaywasmadeonthebasisofthefollowing

recommendationthattheProductivityCommissionmadeinits–ReviewoftheGasAccessRegime

“TheCommission’srecommendationtointroducebindingno-coveragerulingswouldgiveregulationfreeperiodsofat

leastyearstonewpipelinesthatdonotsatisfythecoveragecriteriaExtendingtheapplicationofregulationfreeperiods

tonewpipelinesthatsatisfythecoveragecriteriacouldreducecompetitioninupstreamanddownstreammarketsand

possiblydistortinvestmentThecaseforprovidingregulationfreeperiodstoallnewpipelinesisweakenedfurtherbythe

Commission’srecommendationtohaveamonitoringoptionasanalternativetoaregulatedaccessarrangementwith

referencetaris”

SeeProductivityCommissionFinalReportReviewoftheGasAccessRegimeJunep



Inquiry into the east coast gas market—April 2016

• Themeritsreviewprovisionswhichapplytodecisionstoregulateapipelinelightregulation

determinationsandregulatorydecisionsbytheAER

• TheNGOandrevenueandpricingprinciplesintheNGLwhichtheAERisrequiredtotake

intoaccountwhenmakingaregulatorydecisionandtheAustralianCompetitionTribunalis

alsorequiredtoconsiderwhenreviewingsuchadecisionbytheAER

TheInquirycanseethevalueofthesesigniﬁcantsafeguardsandisnotsuggestingthatanyof

thesesafeguardsberemoved

 Thereismeritinintroducinganalternativetestforregulation

Asnotedinsectionthetestforregulationcurrentlyembodiedinthecoveragecriteria

isnotposinganeectiveconstraintonthebehaviourofpipelineoperatorsbecauseitisnot

designedtobetriggeredbymarketpowerthatresultsinmonopolypricingandeconomic

inecienciesbuthaslittletonoeectoncompetitioninupstreamordownstreammarkets

ToaddressthisdeﬁciencytheInquiryrecommendsthatthecoveragecriteriabereplaced

withanewtestthatwouldbetriggerediftherelevantMinisterhavingregardtotheNCC’s

recommendationissatisﬁedthat

• thepipelineinquestionhassubstantialmarketpower

• itislikelythatthepipelinewillcontinuetohavesubstantialmarketpowerinthemediumterm

• coveragewillorislikelytocontributetotheachievementoftheNGO

Inbroadtermstheapplicationofthistestwouldrequireconsiderationtobegivento

• Thedegreeofmarketpowerthepipelinepossesses(thatisasaresultofbarrierstoentry

andwhererelevantanyotherintereststhepipelineoperatorhasinthemarketorinother

marketsthatgiverisetoadditionalmarketpower)andtheextenttowhichthispowerislikely

tobeeectivelyconstrainedby

– competitionfromanalternativepipeline

– competitionfromalternativeenergysources

– theriskofassetstranding

– anycountervailingpowerheldbyshippers

– anyotherrelevantfactors(forexampleiftheGTAsonfootlimitthepipelineoperator’s

abilitytoexercisemarketpowerintheshort-tomedium-term)

• Theprospectthatthepipeline’smarketpowerwilldissipateinthemedium-termwhich

willinvolveanassessmentofthelikelyfutureinvestmentinpipelineinfrastructureandlikely

futuredemandforgastransportationservices

• Whetherconstrainingthepipeline’smarketpowerwillorislikelytopromoteecient

investmentoperationandortheuseofnaturalgasservicesforthelong-terminterests

ofconsumersofnaturalgaswithrespecttopricequalitysafetyreliabilityandsecurityof

supplyofnaturalgas

Itisimportanttonotethattheinclusionofthelatterelementofthistestisnotintendedto

involveadetailedtechnicalassessmentoftheeciencybeneﬁtsassociatedwithregulationAs

theProductivityCommissionhaspreviouslynotedcarryingoutsuchanassessmentwouldbe

analyticallycomplex



andwouldinvolveasigniﬁcantnumberofassumptionsThetestisinstead

intendedtoinvolveaqualitativeassessmentofwhethercoveragewillorislikelytocontributeto

theachievementoftheNGOwhichishowthesetypesofassessmentsareusuallyundertakenin

Australiainotherregulatorycontexts

Incontrasttothecoveragecriteriathistestreﬂectsthecharacteristicsofthemarketandwill

provideamoreeectiveconstraintonthebehaviourofpipelineoperatorsinturnthiswillresult

ineciencyimprovementsinthegasmarketandupstreamanddownstreammarketsand

 ThispointwasnotedbytheProductivityCommissioninitsreviewoftheNationalAccessRegime

“…assessmentsofeciencywouldbeanalyticallycomplex(potentiallyrequiringconsiderationofeciencyimpactsin

multipledependentmarkets)diculttosubstantiateandwouldincreaseregulatorydiscretionpotentiallyresultingin

moreerrors”

ProductivityCommissionNationalAccessRegimeOctoberp



Inquiry into the east coast gas market—April 2016

beneﬁtconsumersmoregenerallyThetestisalsotargetedandproportionatetothemarket

failureobservedinthisInquiryandisconsistentwiththeprinciplesembodiedintheNGOand

withpolicymakers’originalintentionswhenimplementingthegasaccessregime

Itisworthnotinginthiscontextthatbecausepre-existingcontractualrightsareprotectedunder

theNGLthechangetothetestmayhavelittletonoeectonsomepipelinesintheshort-to

medium-termifthecapacityhasbeenlargelycontractedForexampleontheSWQPoneof

thefoundationcustomer’sGTAdoesn’texpireuntilwhiletheotherfoundationcustomer’s

contractexpiresin



Thechangeshouldhoweverimposeaconstraintonthepipeline

operator’sbehaviourwhenthosecontractscometoanendandwhenenteringintoanynew

contractsincludingcontractsforthesaleofasavailableorinterruptibleservices

WhiletheInquiryissatisﬁedabouttheneedtomovetothisnewtestithasnotbeenpossible

aspartoftheInquirytoconsultwithmarketparticipantsonthespeciﬁcmattersthatshould

beconsideredwhenapplyingthistestoronhowthenewtestshouldbeimplementedThe

InquirythereforerecommendsthattheCOAGEnergyCouncilasktheAEMCtocarryoutfurther

consultationontheseissuesandtoadviseitoftheamendmentsthatwouldneedtobemade

totheNGLandNGRtogiveeecttothisnewtestSomeofthematterstheAEMCwillneedto

consideraspartofthisprocessinclude

• thefactorstobeconsideredbytheNCCandMinisterwhenassessingwhetherthetest

issatisﬁed

• whoshouldhavetheonustodemonstratethetestissatisﬁed

• howthenewtestshouldbeimplementedwhenitcomesintooperation

• howthenewtestwillinteractwithotherelementsoftheaccessregimeincludingthe-year

no-coverageprovisionsandthefullandlightregulationframework

Factorstoconsiderwhenassessingwhetherthetestissatisﬁed

AsIncentanotedinitsreporttotheAEMC



theformofregulationfactorsinsoftheNGL

(seebox)provideagoodbasisfordeterminingwhetherapipelinehassubstantialmarket

powerandarebroadlyconsistentwiththemattersFERCandtheNZCommerceCommission

considerTheAEMCmayhoweverwanttoconsiderwhetheranyreﬁnementsoradditions

shouldbemadetothesefactors

Forexampletheremaybevalueinprovidingfurtherclarityonthedegreeofcompetitionthat

wouldneedtobeobservedfortheNCCandMinistertobesatisﬁedthatcompetitionactsas

aneectiveconstraintonthepipelineoperator’smarketpowerThisisbecausecompetition

betweentwopipelinesmaynotprovideaneectiveconstraintonmonopolypricingand

becausecompetitivedynamicscanchangeashighlightedinchapterIntheUSFERChas

dealtwiththisissuebyadoptingathresholdconcentrationmeasurebelowwhichitappliesless

scrutinyTheremaythereforebemeritintheAEMCconsideringwhetherathresholdshouldbe

adoptedandhowthepotentialforpipelinestoengageincoordinatedconductshouldbetaken

intoaccount

Whoshouldhavetheonustodemonstratethetestissatisﬁedornotsatisﬁed

UnderthecurrentgovernanceframeworktheNCCandtheMinistermustbesatisﬁedthata

pipelinemeetsthecoveragecriteriaIntheUSadierentapproachhasbeenusedwithall

interstatepipelinespresumedtohavesubstantialmarketpowerandtheonusplacedonthe

pipelineoperatortodemonstrateitlackssigniﬁcantmarketpowerifitwantstobesubjectto

market-based(unregulated)ratesThebeneﬁtoftheUSapproachisthatitovercomessomeof

theinformationasymmetriesthattheMinisterandNCCwouldotherwisefacewhenassessing

whetherornotthepipelinehassubstantialmarketpowerAsimilarapproachhasalsorecently

beenusedbytheCommonwealthgovernmentinrelationtobulkwheatportterminalfacilities

withallportterminalserviceprovidersdeemedtobesubjecttofullregulationwhenthenew

 AGLmediarelease‘AGLsecurespipelinedealtolinkitsgastoeasternmarkets’JulyandOriginmediarelease

‘OrigincompletesgastransportationagreementwithEpic’December

 IncentaAssessmentofthecoveragecriteriaforthegaspipelineaccessregimeSeptemberp



Inquiry into the east coast gas market—April 2016

regimecameintoeectandprovisionmadeforalighterhandedoptioniftheACCCorMinister

havingregardtocertainmattersdecidesanexemptionshouldbegranted



Theremaybe

valuethereforeinconsideringwhetherthisapproachcouldbeusedinthiscontextandthecosts

andbeneﬁtsthatwouldbeassociatedwithemployingsuchanapproach

Howthenewtestshouldbeimplemented

Pipelinesthatareregulatedatthetimethetestcomesintoeectshouldbeassumedtosatisfy

thenewtestandtoretaintheircurrentregulatorystatusatthattimeFromanadministrative

perspectivetherewouldalsobevalueinconsideringwhetheranyotherunregulatedpipelines

shouldbedeemedtosatisfythetestandbesubjecttofullorlightregulationfromthedatethe

newtesttakeseectaswasdonewhentheGasCodewasoriginallyimplemented



Ifthisis

notdonethenadditionaltimemayneedtobebuiltintothecurrentdecisionmakingprocessto

providetheNCCandrelevantMinisterswithtimetodealwithanyadditionalapplicationsthat

maybemadeoncethenewtestisimplemented

Inasimilarmannertotheexistingregimeprovisionshouldbemadeforthecoveragestatusof

apipelinetochangeovertimeinresponsetochangingcircumstancesThatiscoverageshould

becapableofbeingrevokedifapipelineisnolongerfoundtohavesubstantialmarketpower

Converselycoverageshouldbecapableofbeingappliedifapipelinethatmaynothavehad

substantialmarketpoweratonepointintimeislaterfoundtohavesubstantialmarketpower

(forexamplebecauseanyconstraintsthatmayhaveexistedinthepastarenolongereective)

Interactionofthenewtestwithotherelementsoftheaccessregime

The-yearno-coverageprovisionsintheNGLcurrentlyrequiretheNCCandMinistertobe

satisﬁedthatoneormoreofthecoveragecriteriaarenotmetTheAEMCwillthereforeneed

toconsiderwhetheranynewpipelinethatsatisﬁesthedeﬁnitionofagreenﬁeldspipelineinthe

NGL



should

• automaticallybegranteda-yearno-coveragedeterminationor

• berequiredtodemonstratetheydon’tsatisfythemarketpowertest

Thebeneﬁtoftheﬁrstoptionisthatitwouldprovidepotentialdevelopers(forexampleJemena

asthedeveloperoftheNGP)withgreatercertaintyabouttheirabilitytoobtainsucharulingand

wouldeliminateanyregulatoryrelatedrisksthatmayotherwisecomefromtheapplicationofthe

marketpowertestItisalsounlikelythatagreenﬁeldspipelinewouldhavesubstantialmarket

powerintheearlyyearsofitslifeparticularlyifitisdevelopedasaresultofaprocesswhere

therehasbeen‘competitionforthemarket’

TheAEMCwillalsoneedtoconsiderhowthenewtestwillinteractwiththetestthatiscurrently

usedtodeterminewhetherapipelineshouldbesubjecttofullorlightregulationAtpresentthe

testrequirestheNCCtoconsider

• thelikelyeectivenessofthealternativeformsofregulation

• theeectofthealternativeformsofregulationonthecoststhatmaybeincurredbyan

ecientserviceproviderecientusersandprospectiveusersandend-users

IndoingsotheNCCisrequiredtohaveregardtotheNGOtheformofregulationfactors

(seebox)andanyothermattersitconsidersrelevantGiventheapplicationofthemarket

powertestwilleectivelyinvolveanassessmentofsomeofthesamefactors



thatareincluded

intheformofregulationfactorsitmaybeappropriatetoexcludesomeofthesefactorsfromthe

testforwhetherregulationshouldbefullregulationorlightregulation

 SeePortTerminalAccess(BulkWheat)CodeofConductcl

 Thisapproachhasalsobeenusedinanumberofotherindustriesincludingmostnotablytheelectricityindustryand

telecommunicationsindustrywhereassetsorservicesweredeemedtoberegulated

 ThedeﬁnitionofagreenﬁeldspipelineissetoutinsoftheNGLwhichstatesthatagreenﬁeldspipelinemeans

• aprojectfortheconstructionofapipelinethatistobestructurallyseparatefromanyexistingpipeline(whetherornotit

istotraversearoutedierentfromtherouteofanexistingpipeline

• amajorextensiontoanexistingpipelinethatisnotacoveredpipeline

• amajorextensiontoacoveredpipelinebymeansofwhichlightregulationservicesareprovidedifthatextensionis

exemptedbytheAER

 Inparticularss(a)-(f)oftheNGL



Inquiry into the east coast gas market—April 2016

 Othergapsintheregulatoryframeworkshouldbeconsideredandremedied

Asnotedinsectiontherearesomegapsintheregulatoryframeworkwhichmeanthat

evenifapipelineissubjecttofullregulationitmaystillbeabletoengageinmonopolypricingin

relationtonon-referenceservicesandexpansionsthatdonotformpartofthecoveredpipeline

TheremayofcoursebeothergapsthathavenotbeenidentiﬁedthroughtheInquiryandthat

shouldbeaddressedincludinggapsthatareemergingasaresultofthechangesunderwayin

themarketForexampleifthedemandforasavailablebi-directionalandbackhaulservices

continuestogrowthentheremaybevalueinincorporatingsomeprinciplesintotheNGRthat

setout

• howthepricesoftheseservicesshouldbeestablished

• howtheAERistodealwithuncertaindemandforsuchservices

• whethertherevenuederivedfromsuchservicesshouldbeusedtoreducetherevenue

requirementonforwardhaulservicesorinsomewayrebatedtocustomers

TheInquirythereforerecommendsthattheCOAGEnergyCouncilasktheAEMCtoreview

Parts–oftheNGRandtomakeanyamendmentsthatmayberequiredtoaddressthegaps

identiﬁedbytheInquiryandthemoregeneralconcernraisedduringtheInquiryabouttheability

ofpipelinesthataresubjecttofullregulationtobeabletoexercisemarkettothedetrimentof

consumersandeconomiceciencyIncarryingoutthisreviewtheAEMCshouldalsoconsider

whetheranychangescanbemadetothedisputeresolutionmechanismintheNGLandNGR

tomakeitmoreaccessibletoshipperssothatitprovidesamoreeectiveconstraintonthe

behaviourofpipelineoperators





IdeallythisreviewwouldbecarriedoutatthesametimetheAEMCconductsitsconsultationon

theformthatthenewmarket-powerbasedtestwilltakeandhowitshouldbeimplementedso

thatallthechangescanbeimplementedasapackage

 Providingshipperswithbetterinformationwouldenablethemtomore

eectivelynegotiatewithpipelineoperators

Anotheraspectofthegasaccessregimethatshouldbestrengthenedistheinformation

disclosurerequirementsTheInquiryisawarethattheAERalreadyhasthepowerundertheNGL

togatherﬁnancialandoperationalinformationfrompipelinesthataresubjecttofullandlight

regulationandthatithasimposedsimilarannualreportingobligationsonelectricitynetworks

Ifasimilarobligationwasimposedrequiringthereportingofinformationonanindividual

pipelinebasisforeachgastransmissionpipelinethatoperatesonanopenaccessbasis(thatis

bothregulatedandunregulatedpipelines)



thenshipperswouldhavemoreinformationto

determinewhetherornotthepricestheyareoeredonindividualpipelinesarecostreﬂective

TheInquirythereforerecommendsthattheCOAGEnergyCouncilasktheAEMCtoexplore

• howthescopeoftheinformationdisclosureprovisionsintheNGLshouldbeexpandedto

allowtheAERtoobtainandpublishinformationfromunregulatedpipelinesoperatingonan

openaccessbasis

• thetypeofﬁnancialandoperationalinformationthatpipelineoperatorsshouldberequired

todiscloseandthefrequencywithwhichitshouldbedisclosednotingthatthepurposeof

thisdisclosureistoenableshipperstonegotiateeectivelywithpipelineoperatorsandto

determinewhetherproposedpricesarecostreﬂective

 TheInquiryisawarethatconcernswerealsoraisedabouttheaccessdisputeprovisionstotheVictorianGasMarket

TaskforcethatwaschairedbyformerFederalMinisterPeterReithandthattheTaskforcerecommendedthatfurtherworkbe

donetoensurethattheaccessdisputeframeworkisoperatingeectively

 Thereferencetopipelinesprovidingopenaccessisdesignedtoﬁlteroutthosepipelinesthatareonlyusedbytheownerof

thepipeline

 Forgreenﬁeldpipelinestheinformationreportingshouldallowsucienttransparencytofacilitateshippersnegotiating

tarisbeyondtheregulatoryholidayperiod



Inquiry into the east coast gas market—April 2016

8 Transport capacity and hub services can be further

unlocked to increase eﬃcient use

Prospectiveusersofcontractcarriagepipelinesandhubservices



intheeastcoastgasmarket

caneitherpurchasecapacitydirectlyfrompipelineoperatorsorfromprimarycapacityholders

throughasecondarytradeOnpipelinesandcompressorsthatarecontractuallycongested

secondarycapacitytradingcangiverisetosigniﬁcantimprovementsintheeciencywithwhich

thepipelineorcompressorisutilisedandcapacityisallocatedItisrelevantthereforetoconsider

whetherthistradeisoccurringandifthereareanybarrierstoitoccurring

EvidencegatheredthroughtheInquiryindicatesthatsomesecondarycapacitytradingby

primarycapacityholdersisoccurringonmostmajorarterialpipelineswithlonger-termtrades

beingthemostcommonformoftradeWhileshorter-termcapacitytrades(thatisforadayor

week)werelessprevalenttheywerefoundtohaveoccurredinQueenslandandSouthAustralia

withGPGsandindustrialuserscommonlyinvolvedOnsomepipelinesincludingkeyroutes

betweenthenorthandsouthparticipantsseekingpipelineservicesareacquiringsecondary

capacitydirectlyfrompipelineoperatorsthroughasavailableandinterruptibleservicesrather

thanfromprimarycapacityholders

ThroughtheInquiryandtheAEMC’sEastCoastGasMarketReviewconcernswereraised

aboutprimarycapacityholdersonmajorpipelineswithholdingcapacity(thatiseconomic

withholding



orrefusingtonegotiateaccess)TheInquiryhasinvestigatedtheseconcernsbut

foundnoevidencethatthisisoccurringThereishoweverevidencethat

• primarycapacityholdersarenotcompetingwithtransportserviceoeringsonkeyroutes

betweenQueenslandandthesouthernstatesandintheWallumbillacompoundforthe

provisionofhubservices

• somepipelineoperatorsarechargingexcessivepricesforasavailableandinterruptible

transportationservicesontheseroutesandforhubservicesatWallumbilla

TheInquiryhasalsofoundevidenceofsomespeciﬁcsecondarycapacityrelatedaccessissues

onregionalpipelines

 Alternativetransportationoptionsexistoncontract

carriagepipelines

Therearedierentoptionsavailabletotransportgasoncontractcarriagepipelinesthe

suitabilityofwhichforapurchaserwilldependinpartontheﬁrmness(orﬂexibility)ofthe

servicerequired



alongwiththepriceTheseoptionsincludepurchasingprimaryorsecondary

capacityfrompipelineoperatorspurchasingsecondarycapacityfromprimarycapacity

holdersorenteringintoaswapputordeliveredpricecontractwithanothermarketparticipant

(seeboxformoredetail)Pipelinecapacityiscurrentlybeingmarketedonpipeline

websites



andontheWallumbillaGasSupplyHubExchange



buttheInquiryhasfoundthat

 Thetermhubservicesisusedheretodescribethecompressionandredirectionservicesthatarerequiredtotransfergas

betweenthearrayofinterconnectedpipelinesintheWallumbillacompound

 Economicwithholdingisdeﬁnedheretomeannotusingorsellingcapacitywhenitwouldbeeconomicallybeneﬁcialto

doso

 ForexamplearetailerservicingresidentialdemandinSydneymaywanttoenteraﬁrmGTAwhereasapeakinggasﬁred

generatormaypreferaninterruptibletransportationserviceFirmGTA’stypicallyrequirepaymentsforthetransportation

regardlessofuse(thatiscapacitypayments)whereasinterruptibleservicesarechargedonthebasisofgasactually

transported

 AccesstoJemena’scapacitytradingwebsiteisavailableathttpjemenacomauindustrypipelinescapacity-trading

asatAprilJemenaasthepipelineownerwaslistingshort-termcapacityontheEGPandQGPforpurchasefora

monthlyperiod—noshipperswerelistingcapacitytobuyorsell

AccesstoAPA’scapacitytradingwebsiteisavailableathttpcapacitytradingapacomaucapacitytradingaspxasat

AprilAPAasthepipelineownerwaslistingshort-termcapacityonvariouspipelinesforpurchaseforweeklyperiods

noshipperswerelistingcapacitytobuyorsell

 AccesstothesecapacitylistingsisavailableathttpwwwgasbbcomauCapacitypercentListingaspxasatApril

therewasnocapacitylistedInadditionasdiscussedatsectionAEMOproposesintofacilitatethelistingof

compressionservicesatWallumbillafortrade



Inquiry into the east coast gas market—April 2016

mostcapacitysalesareoccurringbilaterallyoutsideofplatformsThislimitsthetransparencyof

capacitysaleinformationforbothprimaryandsecondarysales

Box OptionstotransportgasfromWallumbillatoSydney

ApartywishingtotransportgasfromWallumbillatoSydneyinFebruaryhadthe

followingoptions

• EnterintooneofthefollowingtypesofGTAswithAPAastheowneroftheSWQP

andMSP

– alonger-termGTAforspareﬁrmcapacity(totheextentitisavailable)ontheSWQP

andtheMSP

– ashorter-termGTAforuncontractedﬁrmcapacityontheSWQPandMSPwhichcould

beobtainedfromAPA’scapacitytradingwebsite



– aGTAthatprovidesanasavailableorinterruptibleserviceontheSWQPandtheMSP

• NegotiatewithanexistingcapacityholderforsecondarycapacityontheSWQP

andMSPoradeliveredgassupplycontracttoSydney(thatiscommodityplus

transportation(seebox))

• EnterintoagasswapwithanothershipperForexampleassumePartyAhasgasat

WallumbillaanddemandinSydneyandPartyBhasgasattheGippslandBasinand

demandinGladstoneUnderaswapAcouldsendgastoB’sdemandinGladstoneand

BcouldsendgastoA’sdemandinSydney



• EnteringintoaputarrangementwithanexistingcapacityholderontheSWQPandMSP

ForexampleassumePartyAhasgasatWallumbillaPartyBhassparecapacityonthe

SWQPandMSPanddemandinSydneyIfPartyAentersintoaputarrangementwith

PartyBandexercisesitsoptionthenPartyBwouldberequiredtotakePartyA’sgasat

WallumbillaandputitontheSWQPtoSydney



 Pipelineoperatorssellbothprimaryandsecondarycapacity

Somepipelineoperatorspublish‘referencetaris’ontheirwebsiteswhichtheyuseasastarting

pointtonegotiatebilaterallyontariswithshippersOverthelasttwoyearssomepipeline

operatorshavebegunlistingspeciﬁcshorter-termﬁrmcapacityforsalethatisforaweek

(APA)orforamonth(Jemena)onwebsitesbuttherehasbeenlimitedtake-upoftheseservices

todate



Twopipelineoperatorsdonotpublishanyreferencepricesfortransportationon

websites(forshort-orlong-termcapacity)preferringtonegotiatebilaterallywithshippers

Pipelineoperatorsalsosell‘secondarycapacity’Asavailableandinterruptibletransportation

servicesaretypicallysoldbypipelineoperatorsascapacitywhichasthenamessuggesthas

lowerschedulingprioritythanaﬁrmserviceThesearrangementsaretypicallyenteredintofora

numberofyearsandoftenasanadd-ontoaﬁrmgastransportationserviceTheseservicestend

tobepaidforonausagebasisoccasionallywitharelativelysmallminimumbillandassuch

canbecharacterisedasfacilitatingshort-termcapacityusageTheprevalenceoftheseservices

isquitehighonsomepipelinesInparticularontheSWQPalargenumberofcontractsthat

provideforinterruptibleserviceshavebeenenteredintooverthelastcoupleofyearswhereasno

secondarysalesofcapacitybyprimarycapacityholdershaveoccurredThismayreﬂectrising

demandforcapacityonthispipelinewhichisincreasinglybeingusedtotransportgastoand

fromWallumbillaalthoughasnotedbelowdemandfortransportinparticularfromWallumbilla

maynotbeashighasitotherwisemightbebecauseofpricing

 OnAprilAPAwaslistingcapacitytotransportgasfromWallumbilla(acrosstheSWQPandMSP)toSydneyforone

weekforTJdayatGJ

 TheInquiryidentiﬁedswapswherenorthernandsoutherncommoditygashasbeenswappedbetweenpartieswith

apparentcounteractingrequirementsforextrasupplytoservicedemandinthesouthandthenorthThesearrangements

canreducetransportationcosts

 AandBcouldagreecommercialtermssuchasBpaysAtheSydneySTTMpriceminusa‘put’fee

 AsatAprilsomecapacityhasbeentradedontheRBPandmorerecentlyontheSEAGaspipelinetheidentiﬁcation

ofthepartiesincludingthenumberofpartieswhohaveenteredintotradeisnotpublishedseehttpcapacitytradingapa

comaucapacitytradingaspx



Inquiry into the east coast gas market—April 2016

 SecondarysalesofcapacitybyShippersarecommon

Once‘shippers’obtaincapacityfrompipelineoperatorstheInquiryhasfoundthattherearevery

fewrestrictionsinthetermsofpipelinecontractswhichpreventthemon-sellingthatcapacity

TheInquiryhasfoundthatsomesellingofsecondarycapacitydoesoccurandidentiﬁed

approximatelycapacitytrading‘arrangements’



thatwereinplaceinacrossmostmajor

pipelineswithdurationsrangingfromthreemonthstoyearsbuttypicallybetweentwotoﬁve

yearsTwocontractsareverylargelong-termtradesofﬁrmcapacityontheSWQPOnother

pipelinestheInquiryidentiﬁedapproximatelyTJofdailyﬁrmcapacityheldundersecondary

trades(andTJofasavailablecapacity)Someinterestingpointstonoteaboutthesetrades

arethat

• anumberhavebeenenteredintobetweenlargeretailersandalsoproducers(includingafew

salesofasavailabletransportation)

• fourlonger-termtradeswerebetweenlargeenergyretailersandindustrialcustomers

• twolonger-termtradeswerebetweenlargeenergyretailersandsmallerplayersinthe

electricitygenerationretailmarket

• onlytwolonger-termtradeswereidentiﬁedbetweenlargerenergyretailersandsmallgas

retailers—thisisnotunexpectedasmanysmallgasretailersonlyoperateinVictoriawhere

contractedpipelinecapacityisnotrequired

• anumberofmaster‘spot’agreementsfacilitatingshort-termcapacitytradeswereidentiﬁed

inQueenslandandSouthAustralia

Forallkindsofcapacitytradesincludingundermaster‘spot’agreementscapacityisoften

beingsoldwithcommoditygasas‘deliveredgas’Deliveredgassalesmaybeviewedasaform

ofcapacitytrade(asopposedtojustbeingthesaleofgastoacustomer)ifthegasissoldwith

rightsfortheusertotradethisgasinadownstreammarket(seebox)thatisthebuyer

receivesthecapacitywhichitcanthennominateintothedownstreammarketatadailypriceit

chooses



 Thisisanapproximatenumberbasedonevidencefromlargershippersonmajorpipelineswhichdoesnottherefore

accountforalllikelytrades—howeverimportantlyitestablishestradeisoccurringFurthermoreforoneshippertherewere

arrangementstofacilitatetradewithmultiplebuyersinplacebuttheexactnumberofbuyerswasnotquantiﬁedandsowas

countedasonearrangement

 UnderPartoftheNationalGasRulesthesubmissionofanoertotheSTTMsmustbesupportedbypipelinecapacity

andtradingrightsForexampleapartywishingtosendgastotheSydneySTTMviatheMoombaSydneyPipeline(MSP)

musthavetradingrightsontheMSPbackedbyrightstocapacityThesecapacityrightsareassignedaspartofthe

deliveredgassale



Inquiry into the east coast gas market—April 2016

Box Prevalenceandformofsecondaryshippertrades

• Capacitytrades(transportationonly)Thisformoftradeoccursbetweentheprimary

capacityholderandthecounterpartyandentitlesthecounterpartytoutilisetheprimary

capacityholder’scapacity(oraportionthereof)andcantakeanumberofforms

includingabaretransfer



operationaltransfer



ornovation



Thiskindofcapacity

transferwasobservedbetweenretailersGPGsandLNGprojectsAllcapacitytradeswith

atermofﬁveyearsormoreinvolvedtransportationonlyBaretransferswerethemost

commonwayofacquiringﬁrmtransportationcapacityoveroperationaltransfersand

novationwithninelong-termbaretransfersonfootinAlthoughAPAandJemena

havebothintroducedweb-basedplatformstofacilitateoperationaltransfersonlytwo

tradeshavereportedlyoccurredonAPA’splatformoverthatperiodwhichsuggestsa

slowtakeupofthistypeoftrade

• Deliveredgas(commodityandtransportation)Thisformoftradeprovidesforthe

‘bundled’supplyofgasandtransportationservicesbytheprimarycapacityholderto

thecounterpartyThesecontractsweremostprevalentamongretailersandindustrial

customersalthoughthereareexamplesofproducersenteringintothesetypesoftrades

Therewereﬁveexamplesoftradesthatprovideforthesupplyofgastoentrypoints

oftradingmarketsNotablytwoindustrialcustomersparticipatingintheSTTMshave

reportedcostreductionsfromaccessinggasmarketsusingthesecontracts



Onelarge

energyretailernotedtotheinquirythatittendstotradedeliveredgastosmallergas

usersbecauseuserswantgaswheretheyneedit

TheInquiryreceivedevidencethatshorter-termcapacityisalsobeingtradedex-poston

pipelinesasameanstoreduceeitherpipelineimbalancepaymentsorSTTMmarketpenalties

Thatisanindustrialusermaytakemoregas(andusemorepipelinecapacity)thanusualonone

daybutisabletoswapthisgasandcapacityusewithanotherindustrialuserwiththeopposite

positionex-posttolowerimbalancechargespayabletothepipelineoperatorThiskindoftrade

isoccurringonpipelinesgenerallybutalsohasparticularapplicationonpipelinesconnected

totheAdelaideBrisbaneandSydneySTTMsOnSTTMconnectedpipelinesimbalancetrades

allowparticipantstolowermarket‘penalties’associatedwithsupplyingconsumingmoreorless

gasthanscheduledDatasuppliedbytheAERindicatesthatthesetradesareoccurringonmost

daysbetweenSTTMparticipants(thatisenergyretailersandindustrialusers)

Whileshort-termtradesoccursomemarketparticipantsnotedthatthetimelycoordination

ofthedeliveryofgasfromthenorthtothesouthcanbedicultbecausethesetypesoftrade

involvemultipleassetsorassetownersandormultipleshippersandadelayincommunicating

withonepartymightmeanadealisnotconcludedAnumberofmarketparticipants

providedevidenceofwaystoovercomesearchandtransactioncostsonsingleroutesthrough

agreementscommonlyreferredtoasmasterormasterspotagreementsTheseagreements

facilitatedquickon-the-daytradesTheagreementscoverstandardor‘boilerplate’terms



and

allowtradestobedoneviaemailorevenagreedtooverthephoneTheoutcomesaretypically

reﬂectedinashorttransactionnoticesettingoutkeyagreedon-the-daytermssuchasthedaily

orhourlycapacityandprice

 Abaretransferprovidesforthetemporarytransferoftheprimarycapacityholder’srightstothecounterpartybutthe

primarycapacityholderremainsresponsibleforalltheotherobligationsunderthecontract(forexamplesubmitting

nominations)

 Anoperationaltransferprovidesforthetemporarytransferofboththeprimarycapacityholder’soperationalrightsand

obligationstothecounterparty

 Anovationprovidesforthepermanenttransferoftheprimarycapacityholder’soperationalrightsandobligationstothe

counterpartywherebytheassigneemustenterintoanewGTAwiththepipelineoperator

 Seewwwaemcgovau—EastCoastGasMarketReview—ABCementSubmissiontotheStageDiscussionPaper(p)

andQenos’submissiontotheStageDraftReport(p)

 Forexampleoperationaltermsandconditionsrelatingtogasspeciﬁcationwarrantiesliabilitiesandindemnities



Inquiry into the east coast gas market—April 2016

 Thereareissuesthatmayaectthetake-upofsecondarycapacity

InresponsetosomeoftheconcernsthathavebeenraisedinthecontextoftheAEMC’sEast

CoastGasMarketReviewtheInquiryexamined

• pipelineutilisationbyholdersofprimarycapacitytotestwhetherthereisanyevidenceof

economicwithholdingofcapacity

• thepricingofasavailableandinterruptibleservicesbypipelineoperatorsparticularlyonthe

keyroutesfromthesouthtothenorth

 Withholdingofcapacitybyshippersisnotaproblemexceptonsomeregional

pipelines

Concernsastoutilisationofandaccesstopipelinecapacitywereinvestigatedinbythe

COAGEnergyCouncil



withtheassistanceofNERAEconomicConsultingInshortNERA

foundnoevidencethatwouldsupportaconclusionthatshipperswerewithholdingcapacityfor

thepurposeofachievingacompetitiveadvantageinarelatedmarket



Inasimilarmannerto

NERAtheInquiryhasfoundnoevidenceofeconomicwithholdingofcapacitybyshipperson

majorarterialpipelinesTheInquirydidhoweveridentifysomeissueswithregionalpipelines

whicharediscussedinsection

InrelationtotheSWQP(andotherconnectedpipelines)oneLNGprojectinformedtheInquiry

thatanareaofitsstrategicfocusforgastradingfromwastoseeksalesopportunities

tosouthernordomesticmarketsindicatingthatuntilnowithadprioritisedrealisingsteady

stateproductionatitsLNGproductionfacilitiesThissuggeststhatdemandfromshippersfor

transportwestandsouthfromWallumbillamaybematerialisingnow

AssertionsweremadetotheInquiryofhighpricedcapacityoersbeingmadeontheSWQP

byincumbentshippers(oralternativelylow-pricedoerstopurchasegas)howevershippers

respondedin-turnthattheyhadnotreceivedanysuchrequestsTheInquiryconsidersitmost

likelythatlimitedrequestsweremadetoshippersaccountingforthetake-upwithAPAofas

availableandinterruptiblecontractsontheSWQPItwasapparentshippershadnotbeen

activelymarketingcapacityhoweveritwasalsoapparentsomewereusingclosetotheir

maximumdailycapacityonanumberofdays

ApotentialsourceofconfusionforshippersseekingcapacityisthatAPAcurrentlydoesnot

publisheasternandwestern-haulinformation(thatiscapacitynominationsandactualﬂow

information)separatelyfortheSWQPThismaybeleadingtosomeuncertaintyinthemarket

becausesomeusersmayconsiderthereislessormoreunutilisedcapacitythanactuallyexists

westwards



APAisunderstoodtobeprogressingchangestopublisheasternandwestern-haul

capacityandﬂowinformationwhichshouldassistusers

InrelationtounutilisedcapacityontheMSPandEGPmajorshippersrespondedthatthey

acquirecapacitytofullycoverthehighestpotentialdemandforthecontractedperiodWinter

heatingdemandandGPGappeartobethemaindriversofthesedecisionsForlowdemand

periodsoutsideofwinterthereissparepipelinecapacityavailablehoweverthisisnotactively

marketedbecausethereisnodemandforitDuringtheperiodinquestiononlyonemajor

shipperwasapproachedbyapartyseekinglong-termcontractedcapacityandwasableto

accommodatethisrequestwhilstothersdidnotreportdirectapproaches

 AtthetimethiswascarriedouttheCOAGEnergyCouncilwasreferredtoastheStandingCouncilonEnergyand

ResourcesStandingCouncilonEnergyandResourcesRegulatoryImpactStatement(RIS)GasTransmissionPipeline

CapacityTradingDecisionPaperDecemberpThisreportisavailableathttpsscergovspacegovau

workstreamsenergy-market-reformgas-market-developmentgtpct

 ibidp

 SeehttpcapacitytradingapacomaucapacitytradingaspxasatAprilSWQPwasreportedbyAPAtobeper

centutilisedhoweverthisisunderstoodtobetheutilisationofeastwardcapacityandwouldnotinformusersofcapacity

availableinawesterlydirection



Inquiry into the east coast gas market—April 2016

ShippersalsoidentiﬁedthatrecentdemanddropoontheRBPwasleadingtopotentialexcess

capacityAnumberofparticipantsindicatedthattherewaslittledemandforanysparecapacity

InresponsetoconcernsraisedwiththeInquiryOriginprovidedanexplanationofaGJ

oertosellasmallamountofcapacityontheRBPadvertisedontheGasBulletinBoardnoting

thepricereﬂectedthepotentialopportunitycostofsellingcapacitywhichmayberequiredto

manageOrigin’sexposuretoelectricitypoolprices





 Pipelinepricing(includingsecondarypricing)mayaecttheecientutilisation

ofpipelines

ParticipantshistoricallyhavesoldsomeexcessgasatWallumbillatowesternandsouthern

marketsduringthe‘rampgas’phasebeforeLNGtraincommissioningHoweverincreasingly

southerngasisﬂowingnorthtomeettheLNGprojects’shippingschedulesnowLNGplantsare

operationalThisischangingthedirectionofnetﬂowsontheSWQPChartshowsthatuntil

DecembergasﬂowswerepredominantlysouthfromQueensland(positiveﬂows)through

theSWQP(QSN)tosouthernmarketsbutfromDecemberﬂowsswitchedtothenorth

(negativeﬂows)reﬂectingthetimingofnewLNGplantscomingonlineatGladstone



Chart GasﬂowsfromQueenslandtoNewSouthWalesandBrisbanespotprices

TJ/day

$/GJ

–400

–300

–200

–100

100

200

300

Dec 14

Jan 15

Feb 15

Mar 15

Apr 15

May 15

Jun 15

Jul 15

Aug 15

Sep 15

Oct 15

Nov 15

Dec 15

Jan 16

Feb 16

Brisbane price (RHS)

QSN Link ﬂows south (LHS) QSN Link ﬂows north (LHS)

Source AEMOGasMarketdataandGasBulletinBoarddata(wwwaemocomauwwwgasbbcomau)

LargelythroughtheinﬂuenceofLNGdemandtheSWQPandotherpipelines(suchasthe

MAPSandMSP)arenowincreasinglyacceptinggasnominationsinbothdirectionsandearning

‘bi-directional’revenueThepricingofforwardhaulversusbackhaul(bothﬁrmandsecondary

servicepricing)isinﬂuencingopportunitiestobringgasfromsupplysourcestomarketsand

betweenmarketsAnumberofeastcoastgasmarketparticipantsraisedconcernstotheInquiry

astothecurrentﬁrmandsecondarypricingonanumberofrouteswithbi-directionalﬂows

forexamplefromMtIsatoBallera(onCGP)WallumbillatoMoomba(onSWQP)Moombato

Sydney(onMSP)andtowardsMoomba(MAPS)

AsnotedinsectiontheInquiryfoundexamplesofpricingofasavailableandinterruptible

services(secondaryservices)ofpercentpercentandpercentoftheﬁrmrateson

pipelinesformingroutesfromWallumbillaAPAhasnotedtotheInquirythatinstructuringits

pricingofsecondaryservicesincludinghubservices(seesection)itisconcernedthattaris

notbelowerthantheﬁrmservicetarionacomparativeGJusagebasisaccountingfor

actualutilisationbyﬁrmserviceholdersHavingreviewedutilisationdatatheInquiryconsiders

 ThisoerwasavailableathttpwwwgasbbcomauCapacitypercentListingaspxonFebruaryNotablythis

priceiswellinexcessofthepipelineoperatorAPA’spublishedtarisof–GJ

 GLNGprojectshippedﬁrstgasonOctobershippingitsthcargoinJanuary

Seehttpwwwlngworldnewscomsantos-ships-th-glng-cargo

APLNGshippeditsﬁrstcargoonJanuaryhttpwwwaplngcomaunewsroommedia-releases



Inquiry into the east coast gas market—April 2016

APA’spricingexceedsinsomecasesthisstatedAPApricingbasisandasnotedinbox

exceedsapricethatmightbesetbythepricingprinciplesadoptedintheEUandUS

ItwasnotedintheprevioussectionthatLNGprojectswithgastoselldomesticallymayonlybe

beginningtotargetgasdomesticsalesnowInMarchadealbetweenQGC(aLNGproject

operator)tosellgasfromﬁeldsnearWallumbillatoIncitecPivotnearMtIsawasannounced

ReportedlyIncitechaspurchaseditsowntransportationfromAPAtosendthegaswestand

northontheSWQPandCGPpipelines



Pipelinepricing(includingsecondarypricing)willbe

acriticalfactorintheabilityofproducers(includingLNGprojects)tosellgasfromWallumbilla

todomesticmarketsforexampleMtIsabutalsomarketsfurthersouthforexampleSydney

ImportantlytheInquiryconsiderssecondarypricingtosouthernmarketsoftenextractsmore

thanthepricedierentialsbetweenforexampleshort-termcommoditypricesatBrisbane

andmarketsfurtherdownstreamThispricingislikelytolimittheutilisationofthesepipelines

andinhibitthemovementofgastoarbitragepricesbetweentheSTTMs



Southernroute

pricingisalsolikelytoimpactonwhethergasgoestodomesticusersorinternationalbuyers

(seebox)

AswasalsodiscussedinsectiontheinquiryconsidersifpricingonSWQPMSPwas

reduced(orpricingreducedthroughanauctionprocess)moregaswouldbesolddomestically

thatisgaswouldpotentiallybedivertedtodomesticusersoverLNGspotsalesatlowerLNG

spotpricesInregardtothistheInquiryhasfoundthatﬁrmpricesinprimarycapacityholders’

GTAsarenotaectedbymost-favourednation(MFN)clauses



astheseprovisionswouldnot

betriggeredbylowerasavailablepricingThatisanyexistingMFNclausesdonotrestrictas

availablepricingfrombeingreducedtobelowﬁrmpricing

TheInquirynotesthattherehasbeenahightake-upofsecondarycontractswithAPAon

theSWQP(asdistinctfromutilisation)Thismaysuggestthatshippersarenotconcerned

bythepricesoeredHowevershippershaveexpressedtheoppositetotheInquirynoting

thatpricingisinﬂuencingtheirﬂowsontheSWQPorMSPThissuggeststhatshippershave

agreementstotransportgaswhichtheyarenotutilisingbecausethepriceistoohighAt

thesametimeshipperswithprimarycapacityareunlikelytobeabletocompeteeectively

withAPAtosellthesameservicesAPAappearsbetterpositionedtooerprospectiveusers

amixofservicesincludingtheuseofdierentpipeline‘legs’parkandloanservicesand

hubcompressionAPAcanalsoaggregatesparesecondarycapacityforsaleacrossprimary

capacityholdersIncontrastshippersontheSWQPmayhavelesscertainsparecapacity(after

peakuse)maynotbeabletosellmultiplelegsandinanyeventmaybeseekingtheirown

arbitrageopportunities

 Articleathttpwwwnorthweststarcomaustoryincitec-pivot-signs-deal-with-qgc-to-deliver-gas-to-

phosphate-hillviewedApril

 Notingsecondaryserviceholdersarenotrequiredtopaycapacitypaymentsandthereforhaveastrongerchoiceasservices

arepaidforonathroughputbasis

 Theseclausesgivethecapacityholderarighttoreceivethesamepriceasinanycheaperequivalentservice



Inquiry into the east coast gas market—April 2016

Box Transportationcostsandarbitrageopportunitiesbetweenmarkets

Betweendomesticmarkets

OverthereweredayswherethepriceforgasintheSydneySTTMexceededthe

priceforgasintheBrisbaneSTTManddayswherethepriceforgasintheAdelaide

STTMexceededthepriceforgasintheBrisbaneSTTMThisiscategorisedbythemagnitude

ofpricedierencebelow

Pricedierence DaysSYDpriceBRIprice DaysADLpriceBRIprice

Countofx  

Countofx  

Countofx  

Countofx  

Countof  

TakingpotentialsalesfromWallumbillaintoSydneyasanexampletheInquirynotesthe

currentpricingofasavailableservicestoSydneyviatheSWQPandMSPtobeinexcessof

GJ



comparedtoaboutGJtoBrisbaneTheSTTMpricedierentialsappearsto

limitanyincentivestore-directshort-termgastotheSydneySTTMunlessthemarketprice

dierenceisoverGJ(seeoccurrencesandmagnitudeofpricingdierencesbetween

regionsinthetableabove)



TheSWQPisacommonroutetoboththeAdelaideand

SydneySTTMhoweverbecauseMAPSpricesarelowerthanMSPthepricedierence

requiredtodivertgastotheAdelaideSTTMislikelytobelowerataboutGJ

Betweendomesticandexportmarkets

TheamountofgasnominatedforLNGusagethatisfromtheQueenslandCSGﬁeldswas

overTJdasattheendofMarch



ThisquantityismuchlargerthanBrisbane

marketdemand(underTJdin)



Itislikelytherewillbetimeswherethechoice

forsellerswillbebetweenexportinggasatLNGspotpricesorsellingtousersotherthan

inBrisbane(whichcanonlysupportacertainquantityofgas)Southernroutescosts

(forexampleoverGJtoSydney)willbecriticaltowhetherdomesticorinternational

usersultimatelyreceivethatgasAtlowertransportpricesmoregaswouldbedivertedto

domesticusers

TheseobservationareofrelevancetotheAEMCproposedreformsrelatingtotheauctioning

ofcapacity(discussedinsection)andinparticulartheapplicationofthatauctionto

servicesindierentdirectionsonbi-directionalpipelinesLowerpricingoftransportationby

thepipelineoperators(orbyshipperswithcapacitytosell)couldleadtomoregasﬂowingto

southernstates

 Pipelinecapacityandgasﬂowscanbefurtherunlocked

CapacityincludingsecondarycapacityservicesisbeingboughtandsoldHoweverinformation

transparencysearchandtransactioncostsandalsothepricingoftransportationarebarriersto

furthercapacityutilisationandgasﬂows

AsshowninBoxtheAEMCEastCoastGasMarketReviewhasproposedanumberof

reformsdesignedtoencouragethedevelopmentofaliquidmarketforthesecondarytradeof

pipelinecapacity

 BycomparisonAPAhasbeenlistingaﬁrmtransportationserviceviatheSWQP(andMSP)toSydneyofTJforrolling

weeklyperiodsviaitswebsiteatGJThatisweunderstandpayableeverydayregardlessofuseFortheRBPAPA’s

publishedtariiscentsGJ

 ThepublishedtarifortransportationonRBPisGJandasavailableservicesareamultipleofthat

 AERGasWeekliesRomaproductionhttpwwwaergovauwholesale-marketsmarket-performance

 ibid



Inquiry into the east coast gas market—April 2016

Box AEMC’sdraftrecommendationsonsecondarytrading



InitsStageDraftReportontheEastCoastWholesaleGasMarketandPipelineFrameworks

ReviewtheAEMCrecommendedthefollowinginitiativestoencouragethedevelopmentofa

liquidmarketforthesecondarytradeofpipelinecapacitytrade

 Aday-aheadauctionofcontractedbutun-nominatedpipelinecapacity



whichwill

beconductedshortlyafternominationcut-oandbesubjecttoaregulatedreserve

pricethatwillbedeterminedperiodicallybytheAERTheAEMCnotedthatthereserve

priceshouldenableanyincrementalcostsincurredintheprovisionofthecapacitytobe

recoveredandincertaincircumstancescouldbebasedontheshortrunmarginalcost

UndertheAEMC’sproposalpipelineoperatorswillretaintheauctionproceedsandbe

requiredtopublishtheauctionresults

 Themandatorycreationofacapacitytradingplatformbyeachpipelineoperatororjointly

bypipelineoperatorswhichwillbeusedto

– facilitatecapacitysalesbyprimarycapacityholdersaheadofthenomination

cut-otimebyenablingshipperstoanonymouslylistsparecapacityorinterestsin

acquiringcapacity

– publishkeyinformationonallsecondarycapacitytrades(forexamplepricecapacity

tradeddurationoftradeandothertermsandconditionsthatmayaectprice)

irrespectiveofwhetherornotthetradeoccursviathetradingplatform

TofacilitatetradethroughtheplatformtheAEMChasalsorecommendedthatindustry

developstandardisedcapacityproducts

Togethertheseinitiativesareexpectedto

• reducesearchandtransactioncosts

• reduceinformationalgapsandenablemoreinformeddecisionstobemade

aboutcapacity

• enableprospectiveshipperstoaccesscompetitivelypricedsecondarycapacityona

non-discriminatorybasisandforcapacitytobeallocatedtothosethatvalueitmost

• improvetheincentivesprimarycapacityholdershavetotradecapacity

FurtherinsightintotheAEMC’srationalefortheseinitiativescanbefoundinthe

followingextract

“Astheonlysellerofcapacitybeyondthenominationcut-otimethepipelineowner

hastheabilityandincentivetopricecontractedbutun-nominatedcapacityabovelevels

expectedinaworkablycompetitivemarket…highpricesforsuchcapacityincombination

withtheshippers’limitedincentivestotrademayberesultingininecientoutcomesthat

therecommendedauctionmightaddress(atpage)”



Inquiry into the east coast gas market—April 2016

TheAEMCwentontoaddthattheauctionshouldprovideprimarycapacityholderswitha

greaterincentivetosellsparecapacitypriortothenominationcut-otimebecause

• theauctionwillineectmeanprimarycapacityholderscan’tblocka

potentialcompetitor

• revenuefromsalespriortothecut-otimewillbecapturedbyprimarycapacityholders

ratherthanthepipelineoperator

Whilesomeconsiderationwasgiventoalong-term‘useitorloseit’mechanismtheAEMC

decidednottorecommendthisoptionbutnotedthatfurtherconsiderationmaybegivento

itiftheauctionresultsininsucientlevelsoftrade

TheInquiryconsidersthereismeritintheseproposalsThefollowingﬁndingsarenotedas

particularlyrelevanttotheAEMC’sassessmentofthecostsandbeneﬁtsassociatedwith

theseproposals

• asthereisnoevidenceofeconomicwithholdingofcapacityonmajorpipelines(asdistinct

fromregionalpipelines)alonger-term‘useitorloseit’typepolicymaynotleadtosigniﬁcant

beneﬁtswhichmayneverthelessbeaddressedbytheAEMC’sday-aheadauctionproposal

• pricingofasavailableandinterruptibleservicesonpipelineslinkingthenorthtothesouth

mayaecttheecientutilisationofcapacityinthelongtermsuggestingpotentialbeneﬁts

fromtheAEMC’sday-aheadauctionproposal

• theevidencepresentedofthedicultiesinachievingshort-termdealstocoordinate

deliveryofgasovermultiplepipelinelegsfromthenorthtothesouthsuggestsbeneﬁtsfrom

centralisingtheplacewherecapacity(andcommodity)canbetraded

• theevidenceofshort-termtradesbeingfacilitatedthroughmasteragreementsbetween

partieswithhistoricalarrangementssuggestslikelybeneﬁtsfromreformstostandardise

gastransportationagreementtermsirrespectiveofwhetherornottheauctionproposal

proceedsthatistolowerbarrierstoentryfornewparticipants

 Searchandtransactioncostsremainhigh

SearchandtransactioncostswereidentiﬁedasbeinghighbytheCOAGEnergyCouncilin

whenparticipantsindicatedasixmonthcontracttermmayberequiredtoovercomethese

costs



ThisisinturnsupportedbytheInquiry’sﬁndingsthatatypicalcontracttransferring

capacitylastsmorethanayear

Thisdoesnotentirelyexplainhoweverwhymoremasteragreementshavenotbeenstruckto

datetofacilitatethepossibilityoftradesatshortnotice—themostlikelyreasonisthatdemand

forsuchagreementshasbeenlowForexamplecompetitionintheAdelaideandSydneyretail

marketsisstillemergingwithretailmarketsharesstilldominatedbyAGLOriginandEnergy

AustraliaInparticularthereislimitedtradethroughtheAdelaideandSydneySTTMsanda

continuedrelianceonlong-termcontracts





TheInquiryconsidersthatthedevelopmentofstandardisedGTAscouldfurtherassistwith

reducingsearchandtransactioncostsandmaybeofparticularusetonewentrantsinthe

marketAsdescribedtotheInquirywithsuchagreementsinplacecoveringstandardtermsand

conditionstradescanbedoneveryquicklyforexamplebyemailwherethedailyandorhourly

capacityrequirementsareexpressedandthepriceagreedandaccepted

 AEMCStageDraftReportEastCoastWholesaleGasMarketandPipelineFrameworksReviewDecember

pp–

 Thistypeofcapacityiscurrentlysoldbypipelineoperatorsas‘interruptible’or‘asavailable’capacity

 TheAEMCnotedthatiftheauctionisrequiredonpipelinesthathavealowproportionofcontractedcapacitypipeline

operatorsmaynotbeabletorecovertheircapitalcostsTheAEMChasthereforenotedthepotentialtoexemptpipelineson

acasebycasebasisortosettheauctionreservepriceabovetheshortrunmarginalcostonthesepipelinesTheAEMCalso

notedtheremaybelittlevalueinrequiringanauctiononcertainsingleshipperpipelines

 NERAAnalysisofPolicyOptionstofacilitateenhancedgastransmissioncapacitytradingAreportfortheStandingCouncil

onEnergyandResources(November)p

 Asnotedabovehoweverafter-the-dayimbalancesarebeingtradedatshortnoticetoavoidmarketdeviationpenalties



Inquiry into the east coast gas market—April 2016

Ultimatelythe‘fungibility’oftradeofanystandardisedsecondaryGTAwillinpartdependon

thedegreetowhichitinteractswith‘bespoke’primaryGTAsandinturnhowprimarycapacity

holdersareimpactedbythetermsinthesecondaryGTATheseissuesarebeingconsidered

withintheAEMCprocesses



OneparticipantspeciﬁcallynotedtotheInquirythedicultiesinnegotiatingcapacityforthe

nextdayindicatingthatsmalldelaysmayresultinatradenotoccurringespeciallyifmultiple

pipelinelegsarerequiredOtherparticipantsnotedmorebroadlythedicultyincoordinating

commodityandtransportationdealsacrossmultiplepipelines

Thisindicatesthatthegreatestbeneﬁtsfromastandardisedplatformforcapacitytrading

andtheday-aheadauctioningofcapacityarelikelytoberealisedthroughaplatformwhich

allowsparticipantseasilytotransactacomplete‘package’oftransportation(andpotentially

commodity)requirementsTheInquiryrecommendstheAEMCconsiderrequiringthe

introductionofacentralisedcapacitytradingplatformPotentiallytheWallumbillaGSHoperated

byAEMOcouldincorporatethisfunctionalityfacilitatingshorter-termcommodityandcapacity

tradesbeingavailableinonecentralisedplace





 Day-aheadauctioningofcapacitymayreduceshort-termpricesandincrease

gasﬂows

TheInquirynotesthatinterruptibleandasavailablepricesonsomekeypipelinesjoining

Queenslandandthesouthernstatesarecurrentlypricedsuchthattheyoftenextractmorethan

thepricedierencebetweendomesticmarketsApotentialbeneﬁtoftheauctionproposalmay

betolowerthepriceofshort-termcapacityandfacilitatemoreutilisationandincreasedgas

ﬂowssouthandbetweenSTTMs



Theauction’simpactwilldependonitsapplicationforexampletoallpipelinesorjust‘fully

contracted’pipelinesTheInquiryunderstandsforexamplethatthepipelineindustrybody

APGAisconsideringwithitsmemberswhethertheauctionshouldapplyonpipelinesthat

aresomewherebetweenpercentandpercentcontractedItsmembersarebalancing

concernsoffosteringgreaterutilisationagainstconcernstheauctionmayundermineﬁrm

investmentsinpipelineswhichitarguessupportstheirlong-termsustainability



Asnoted

abovetwocriticalpipelineroutestosouthernmarketsaretheSWQP(west)andMSP(south)

TheinquiryconsidersthatcontractsinplaceacrossalternateroutesonpipelinesegtheSWQP

eastandwestarerelevanttoany‘investmentrisk’andastheSWQPisfullycontractedeastthere

islittlereasonnottoapplytheauctiontotheSWQP(west)too

HowevertheInquiryconsidersinregardtotheday-aheadauctioningofcapacitythattheAEMC

shouldcarefullyconsidertheeectthattheauctionmayhaveontheﬂexibilitythatshippers

suchasGPGs



currentlyhavetomanagevariationsindemandaspartofabroadercosts-

beneﬁtassessmentoftheauctionEvidencetotheinquiryhasbeenthatGPGareincreasingly

seekingmoreinterruptibleservicesgiventhechangesunderwayintheNationalElectricity

Marketandthattheabilitytorenominateaspartofacontractualrightisbecomingofincreasing

importanceTheInquiryunderstandsthattheAEMCisconsideringthisissueandotherissues

raisedbyparticipantsinregardstotheworkabilityofanauctionprocess

 Publishinginformationonsecondary(andprimary)capacitytrades

TheInquiryhasfoundthatsecondarytradesareoccurringalongwithprimarycapacitytrades

Asnotedintableanti-competitivepricediscriminationbypipelinesappearsnottobe

occurringbutshippersmayrequiremoreinformationonthecostsincurredbypipelinesto

determinewhetherornotthepricesoeredbythepipelineoperatorarecostreﬂectiveandto

negotiatemoreeectivelywithpipelineoperatorsTheInquiry’srecommendationinsection

 SubmissionstotheAEMCStageDraftReport(December)raisedthisissue

 IfthisisnotsuitablegivenitscurrentfocusontheWallumbillaconnectedpipelinesonlythentheBulletinBoardmightbe

anotheroption

 Itisnotedthatthecurrentproposalisthatthereservepricefortheauctionwillbesetatashort-runmarginalcost

 AustralianDomesticGasOutlookSteveDaviespresentationAustralianPipelineGasAssociation(APGA)March

 SubmissionstotheAEMCStageDraftReport(December)havespeciﬁcallyraisedtheseissueforexampleSantos

Stanwellpublicsubmissions(February)availableatwwwaemcgovau



Inquiry into the east coast gas market—April 2016

torequiregreaterdisclosureofthistypeofinformationbypipelinesshouldbeconsideredbythe

COAGEnergyCouncilalongsidemeasurestoreportsecondaryandparticularlyprimarycapacity

tradeinformationBroadlyallthesemeasuresﬁtintothecategoryofpricetransparency

 Therearesomeproblemsonregionalpipelines

Inregionalareasusersareoftensuppliedbymuchsmallertransmissionpipelinesorlateralso

majorarterialpipelines(jointlyreferredtohereasregionalpipelines)Thecapacityonregional

pipelinesisoftencontrolledbyasingleretailerthathascontractedallofthecapacityora

signiﬁcantproportionofthepipelinecapacityOftenduetothesizeofthecapacityheldby

theincumbentretailerotherretailersarenotinapositiontooeraﬁrmdeliveredgasproduct

withoutacquiringsomecapacityfromtheincumbentretailerﬁrstThisisapointofdierence

tomajorpipelineswherebynosingleretailercontrolsallorhasadominantproportionoftotal

capacitytomajorcitiesorindustrialhubssuchasMtIsa(CGP)andGladstone(QGP)Notably

theAEMC’sRetailCompetitionReviewhighlightedthatretailersmayavoidregionalpipeline

customerswherecapacityisfullycontractedbyasmallnumberofretailersandifthesizeofthe

customerbaseistoosmalltomakeentryviablegivenﬁxedcosts



 Limitationsonaccesstocapacityandchoiceofsupplierareinhibiting

competitioninregionalareas

TheInquiryheardevidencefromsomeregionalgasusersthatretailersonregionalpipelines

mayhavebeenmakingitharderforuserstoobtainoracceptcommoditygasoersfromother

retailersorforothersupplierstomakeoersincludingby

• notbeingwillingtooerstand-alonetransportcapacitywhensoughtbyauser

• oeringpricesforstand-alonetransportcapacitythataremuchhigherthanthetransport

pricesimpliedbytheshipper’sbundledcommodityandtransportpricingoers

Thisconductmayhavehadtheimpactofmakingalternativecommodityoersunavailableorof

makingthoseoerslessattractivetouserswhencomparedtotheshipper’sownbundledoers

ThematerialgatheredthroughtheInquiryalsoshowedthat

• insomecasestheonlytransportcapacityoeredtoindustrialusersonregionalpipelineshas

beenasavailablecapacitywhichisnotsuitableforthoseusersthatrequireﬁrmcontinuous

gassupply

• inconsistentinformationissometimesprovidedbyregionalpipelineoperatorsandshippers

tousersleadingtoalackoftransparencyinregardtounusedcapacityonregionalpipelines

UndersoftheCCAasupplierthathasasubstantialdegreeofmarketpowerinamarket

mustnottakeadvantageofthatmarketpowerforaproscribedpurposeincludingthe

purposeofdeterringorpreventinganotherpersonfromengagingincompetitiveconductin

anymarketUndersoftheCCAasuppliermustnotengageinexclusivedealing(suchas

byoeringtosupplygoodsorservicestoacustomerincludingataparticularpriceorata

discountonconditionthatthecustomerdoesnotobtaingoodsorservicesgasfromanother

supplier)wherethatconducthasthepurposeoreectorlikelyeectofsubstantiallylessening

competitioninamarket

 AEMCFinalreportretailcompetitionreviewavailableathttpwwwaemcgovauMarkets-Reviews-Advice-

Retail-Competition-ReviewTheACCChasalsoperiodicallyreceivedinquiriesthroughitsInfocentrefromusersseeking

oersonregionalpipelinesinSouthAustraliaandVictoriabyconsumerswhohavebeentoldbyotherretailerstheycannot

supplythem



Inquiry into the east coast gas market—April 2016

TheACCCwillconsiderwhethertheavailabilityorpricingofcapacityonregionalpipelines

raisesanyconcernsasapossiblecontraventionofthemisuseofmarketpowerprovisionsorthe

exclusivedealingprovisionsoftheCCAGiventheconcernsthathavebeenexpressedduring

theInquiryandtheinformationreceivedaboutstand-alonetransportcapacitytheACCCwillbe

undertakingreviewsofspeciﬁccasesandmaytakefurtheractionTheACCC’sassessmentof

anyparticularconductwilldependonthespeciﬁcnatureoftheconductthecircumstancesin

whichittookplaceandthecharacteristicsofthemarketinwhichtheconductoccurred

 Newmeasureswouldassistregionalpipelineusers

WhiletheACCCwillbeconductinginquiriestodeterminetheextentofissuesonregional

pipelinesthereareanumberofotherpotentialpolicyresponsesoroutcomestheInquiry

considerscouldassistregionalpipelineusers

• Regulation—capitalworksonregionalpipelineshavenotgenerallybeenundertakentothe

sameextentasonmajorarterialpipelines(forexampleQGPCGP)Someindustrialusers

seekingtoincreaseproductioninregionalareashavebeenunabletoaccesscapacityand

haveinvestigatedoptionstoaugmentregionalpipelinesTheseindustrialusershavebeen

requiredtofundthefront-endengineeringstudiestoscopeaugmentationprojectsandto

contributetowardsthecostofcapitalworksSomeindustrialusershaveeveninvestigated

optionstobuildanentirelynewpipelinebuthavenotundertakentheseworksgiven

excessivecostsRegulationofthesepipelinesmaybeasolutionbecauseitcanoerastable

andequitablepathforpipelinechargesandgreatercertaintyabouttherateofreturnfor

augmentationsThiscouldencouragethenecessarydevelopmentofregionalpipelinesand

promoteeconomicgrowthforlocaleconomiessurroundingindustrialcustomersseekingto

expandoperations

• Capacitysurrender—afurthermechanismtoconstrainregionalpricingcouldtaketheform

ofacapacitysurrenderprovisionwhichcouldbeinvokedwhereitisdemonstratedthat

contractualcongestionexists



andthatstand-alonetransportationisnotbeingmade

availablebyashipperwithallormostcapacityatcompetitiveprices



TheAEMChas

previouslyconsideredlong-term‘useitorloseit’requirementsmightaddresssubstantive

capacitywithholdingissueshoweveronregionalpipelinestheissueisnotonlyoneof

non-utilisationbutalsoofbarrierstoauserde-linkingfromanincumbentretailer

• Transparency—regionalpipelinecapacityisnotwidelyadvertisedandutilisationdatais

notreportedontheGasBulletinBoardAssuchindustrialusersarethereforeunableto

accuratelyassesshowmuchunusedpipelinecapacityisavailabletomeettheirsupply

requirementsThiscreatesanasymmetryofinformationandpotentiallydisadvantages

industrialusersinnegotiationsReportingofregionalpipelinecapacityontheGasBulletin

BoardhasbeenidentiﬁedasasolutionbytheAEMC





 FurtherimprovementsintheWallumbillaGSHcouldresultin

moretrade

AEMOoperatestheWallumbillaGSHwhichallowsforthewholesaleshorttermtrading

ofnaturalgasviaanelectronicplatformintheQueenslandRomaregion(centredaround

Wallumbilla)TheWallumbillaGSHisbasedaroundtheAPA-ownedWallumbilla‘Compound’

asmallareawherepipelineintersectionhasdevelopedovertime—beginningwiththeconnection

oftheRBPtotheQGPandthenbothofthesepipelinestotheSWQPMorerecentlyanumber

ofotherpipelinesasshownintheillustrativediagrambelowhaveconnected(seeﬁgure)

OvertimeAPAandthepreviousownersEpichaveprogressivelyaddedmorecompressor

stationsinsidethecompound



 Contractualcongestionheremeansthatacustomerisunabletosecuresucientﬁrmtransportationfrommorethanone

shipper

 Anysurrenderwouldrelatetothecapacityrequiredbytheuserwishingtoleavetheretailernotothercapacity

 AEMCEastCoastwholesalegasmarketandpipelineframeworksreviewStagedraftreportDecemberpp–

 AEMOHubServicesforaSingleWallumbillaMarket(November)p



Inquiry into the east coast gas market—April 2016

Figure DiagramofpipelinesintersectingwiththeAPAWallumbillacompound

QGP

BWP

RBP

SWQP

DDP

Fairview

(SWQP)

CRWP

SGP

Wall.

Notional

(SWQP)

Low-medium

pressure header

High pressure

header

Redirection

service

Compression

service

Compressor

station

Medium pressure

header

Source AEMOHubServicesforaSingleWallumbillaMarketNovemberp

ThecompressorstationswithintheWallumbillacompoundarefullycontractedtothree

foundationshipperswhohavefundedtheirinstallationoverthelastfewyearsAPAhasprovided

indicativerangesforinterruptiblecompressionpricinguptoapproximatelycentsperGJand

redirectionpricingofcentsperGJtoAEMOforuseofthesecompressors



Thisrepresents

asigniﬁcantpremium(~percent)tothepricetheInquiryhasfoundthatthreefoundation

shippersarepayingundertheircontractswithAPAWhileintheorythefoundationshippers

couldcompetewithAPAtoselltheseservicesthereisnoindicationthattheyaredoingso

atpresent

InanattempttosimplifytheexecutionofgastradesatthehubAEMOhasrecentlyproposed

enhancementstothehub‘services’providedatWallumbillawhichareexpectedtoallow

userstomovegasintooutofandwithinthehubmorefreelyandfacilitatethecreationof

oneWallumbillapricingpoint(theOptionalHubServicesmodel—seebox)Thechanges

proposedinvolveavoluntarymechanismforprimarycapacityholders(thatisthefoundation

customerswithcompressioninthecompound)totradecompressionservices

TheInquirynotesthattheauctionmodelcontemplatedbytheAEMC(seesection)could

beappliedtothe‘voluntary’optionalhubservicesbeingimplementedbyAEMOTheInquiry

considersthisislikelytointroducesomecompetitiveconstraintonthepriceAPAcancharge

fortheseservicesandprovidethethreeprimarycapacityholderswithagreaterincentiveto

tradetheircapacityTheInquiryrecommendsAEMCconsiderthebeneﬁtsofashort-term

auctionprocessforhubservicesifitdecidestoimplementtheday-aheadauctionprocessfor

pipelineservices

IndustryparticipantscommentedthatAPAandAEMOhavebeenworkingtogethertodevelop

theWallumbillaGSHincludinganyinformationtosupportitForexampleAPAinformedthe

Inquirythatitisdevelopingfurtherreportingtoaidtransparencyincluding‘net’ﬂowinformation

onpipelinesintoandoutoftheWallumbillacompoundaswellasreportingonSWQPﬂowswest

andeastDespiteawarenessofthesechangesmarketparticipantsstillmaintainedconcerns

astotheoveralltransparencyofserviceswithinthehubinparticularhowmuchcompression

wouldberequiredtodelivergasfromonepointtoanotherAsthehubdevelopsthesuciency

ofinformationreportingtoallowuserstomonitorhubservicesmayneedtobereviewedThe

InquiryiscautiousthatFERCintheUnitedStateshasinstigatedanumberofinvestigations

 AEMOHubServicesforaSingleWallumbillaMarket(November)pAPAnotedtotheInquirythattheinformation

oninterruptiblepricingitprovidedwasatthehigherendofitsinterruptiblepricing



Inquiry into the east coast gas market—April 2016

aroundoverrecoverybypipelineoperatorsoffuelgasforcompressionAsaresultFERCissued

revisedguidancetotheindustryin



Box HubservicesforasingleWallumbillamarket

FollowingonfromtheintroductionoftheWallumbillaGasSupplyHubinMarchthe

COAGEnergyCouncilaskedAEMOtoreviewhubservicesintoadvisetheCouncilon

whetherexistinghubservices(thatisintra-hubgastransferservicessuchascompression

andredirection)aresucienttosupportatransitiontoasingleWallumbillagasmarket

AEMO’sNovemberreportrecommendsimplementationofasingleWallumbillaproduct

throughtheOptionalHubServicesmodelbutalsonotestheimplementationofthemodelis

compatiblewithfuturemarketdevelopment(forexampleaSingleTradingZonemodel)





TheOptionalHubServicesModelhasbeendescribedbyAEMOasalowcostmodelthatcan

bebuiltwithintheexistingWallumbillaGasSupplyhubexchangeframeworkandincludes

(voluntary)secondarytradingofhubservices(compression)throughadditionstobe

implementedontheexchangeTherewillbeadefaultdeliverypointhoweverconsideration

isbeinggiventoparticipantsestablishingtheirownsubstitutedeliverypointsthrough

bilateralagreements



 Energybodiesandparticipantsareworkingtogethertofacilitate

theecientuseofpipelineandhubservices

TheInquirysupportstheworkthattheAEMCandAEMOaredoinginconjunctionwithindustry

andindustrybodiestoincreasetheecientuseofpipelinesandhubservicesItwasevident

throughouttheInquirythatparticipantshadbeenveryengagedwiththeAEMCprocesses

alongwiththeAEMOledWallumbillaGSHdevelopmentsTheﬁndingsaboveshouldassistin

thedevelopmentandprioritisationofoptionsarounddevelopmentofhubservicescapacity

tradingplatformsshort-termauctionsandmeasurestostandardisetransportationcontracts

ItisapparentthattherewillneedtobesomeconcessionsandwillingnesstoadaptForexample

fromthepipelineoperatorsifpipelinecapacitytradingistobesupportedalongsidecommodity

tradingandbyshippersandpipelinesinadaptingtoanyreformstointroduceshort-term

auctioningofcapacity

 FERChasconductedanumberofinvestigationsintoover-recoveryoffuelgasespeciallyinthelastﬁfteenyearsIn

FERCpassedanewﬁnancialreportingobligation—FERCOrderNo-CRevisionstoFormsStatementsandReporting

RequirementsforNaturalGasPipelines(issuedAugust)seehttpswwwfercgovdocs-ﬁlingformsform-

order-cpdf

 ibidAEMOnotedinthisreportthattheSingleTradingZonemodelcouldinvolveamandatorymarketforhubservices

whereahuboperatorisresponsiblefordeliveringalltransactionsandparticipantspayastandardtariforacentralised

service(underaregulatedmodel)AsAEMOnotesakeyconsiderationiswhetheranyfurtherinvestmentisrequiredto

achievethedesiredlevelofdeliverabilityforavirtualtradingpointatWallumbilla

 Withtheoptionalhubservicemodelinplacethefollowingserviceswillbeavailableatthehubcompoundthetransferof

gasfromoneinterconnectedpipelinetoanothercompressionservicesbetweenlowandhighpressurepointsredirection

servicesfromonefacilitytoanothergasownershiptransfersshort-termstorageandbalancingservices



Inquiry into the east coast gas market—April 2016

Acronyms

ACQ annualcontractquantity

CCA CompetitionandConsumerAct

CPI ConsumerPriceIndex

CSG coalseamgas

DES deliveredex-ship

DWGM DeclaredWholesaleGasMarket

FID ﬁnalinvestmentdecision

FOB freeonboard

GBJV GippslandBasinJointVenture

GPG gaspoweredgenerationgenerator

GSA gassupplyagreement

GSH GasSupplyHub

GSOO GasStatementofOpportunities

GTA gastransportationagreement

JCC JapaneseCustoms-ClearedCrude

JV jointventure

LNG liqueﬁednaturalgas

MDQ maximumdailyquantity

MFN mostfavourednation

MPH MoombaProcessingHub

NGL NationalGasLaw

NGO NationalGasObjective

NGR NationalGasRules

STTM shorttermtradingmarket

Organisations

ABS AustralianBureauofStatistics

ACCC AustralianCompetitionandConsumerCommission

AEMC AustralianEnergyMarketCommission

AEMO AustralianEnergyMarketOperator

AER AustralianEnergyRegulator

APPEA AustralianPetroleumProductionandExplorationAssociation

ASX AustralianStockExchange

COAG CouncilofAustralianGovernments

EIA EnergyInformationAgency(US)

FERC FederalEnergyRegulatoryCommission(US)

NCC NationalCompetitionCouncil

NOPTA NationalOshorePetroleumTitlesAdministrator



Inquiry into the east coast gas market—April 2016

RLMS ResourceandLandManagementServices

SEC SecuritiesandExchangeCommission(US)

SPE-PRMS SocietyofPetroleumEngineers-PetroleumResourcesManagementSystem

Pipelines

BWP BerwyndaletoWallumbillaPipeline

CGP CarpentariaGasPipeline

CRP CentralRangesPipeline

CRWPL CometRidgetoWallumbillaPipelineLoop

CWP CentralWestPipeline

DTS DeclaredTransmissionSystem

EGP EasternGasPipeline

MAPS MoombatoAdelaidePipelineSystem

MSP MoombatoSydneyPipeline

NGP NorthernGasPipeline

QSNLink QueenslandtoSouthAustraliaNewSouthWalesLink

RBP RomatoBrisbanePipeline

SEPS SouthEastPipelineSystem

SESA SouthEastSouthAustraliaPipeline

SWQP SouthWestQueenslandPipeline

TGP TasmanianGasPipeline



Inquiry into the east coast gas market—April 2016

Glossary

ConventionalgasUnconventionalgasConventionalgasmaybecharacterisedasnatural

gascontainedinsedimentaryrockssuchassandstoneandlimestone(referredtoasreservoir

rock)Thegasistrappedbyanimpermeablecaprockandmaybeassociatedwithliquid

hydrocarbonsThereservoirrockhasarelativelyhighporosity(percentageofspacebetween

rockgrains)andpermeability(therock’sporesarewellconnectedandthegasmaybeable

toﬂowtothegaswellwithoutadditionalinterventions)Gasisextractedbydrillingawell

throughthecaprockallowinggastoﬂowtothesurfaceDependingonthestructureofthe

rockcontainingthegas(amountoffaultingorcompartmentalisation)onlyafewwellsmaybe

requiredtoproducegasoverthelifeofthegasﬁeld

Unconventionalgasisabroadtermthatcoversnaturalgasfoundinarangeofsedimentary

rockswhichtypicallyhavelowpermeabilityandporosityTheInternationalEnergyAgency

categorisesthethreemajortypesofunconventionalgasas

• shalegasnaturalgascontainedwithinacommonlyoccurringrockclassiﬁedasshale

• coalseamgas(CSG)naturalgascontainedincoalbeds

• tightgasnaturalgasfoundinlowpermeabilityrockformations

Arangeoftechniquesmayberequiredtopromotegasﬂowincludingpumpingwaterfrom

therocktoreducepressureholdingthegasinplace(inthecaseofCSG)orhydraulicfracture

stimulation(fracking)toopenpathwaysforthegastoenterthewell(inthecaseofshalegas

tightgasandsomeCSG)Anunconventionalgasﬁeldmayrequirealargenumberofwellsto

bedrilled(inthethousandsforthelargeCSGLNGprojectsinQueensland)overitslifetoensure

consistentproduction

Deliveredex-shippriceThepriceofgasdeliveredbyshiptoadestinationportThistermis

typicallyusedforLNGprices

Freeon-boardpriceThepriceofgasloadedonashipataportconnectedtoanLNGplant

Liqueﬁednaturalgas(LNG)Naturalgasthathasbeenconvertedtoliquidformforeaseof

storageortransport

LNGnetbackpriceApricingconceptbasedonaneectivepricetotheproducerorsellerat

aspeciﬁclocationordeﬁnedpointcalculatedbytakingthedeliveredpricepaidforgasand

subtractingor‘nettingback’costsincurredbetweenthespeciﬁclocationandthedeliverypoint

ofthegasForexampleanLNGnetbackpriceatSydneyiscalculatedbytakingadeliveredLNG

priceatadestinationportandsubtractingasapplicablethecostoftransportingnaturalgas

fromSydneytotheliquefactionfacilitythecostofliquefactionandthecostofshippingLNG

fromGladstonetothedestinationport

LegacyGSAGassupplyagreementsexecutedpriortothatarestillineectandthathave

notbeensubjecttoapricereview

Pipelinetransportationservices

AsavailabletransportationserviceAservicethatallowsthetransportationofgasonan‘as

available’basissubjecttotheavailabilityofcapacityThisservicehasalowerprioritythanaﬁrm

transportationservice

FirmtransportationserviceAservicethatallowsthetransportationofgasona‘ﬁrm’basisup

toamaximumdailyquantityandmaximumhourlyquantityIthasthehighestpriorityofany

transportationservice

InterruptibletransportationserviceAservicethatallowsthetransportationofgasonan

‘interruptible’basisThepipelineoperatordoesnothaveanobligationtoguaranteecapacity

andhastherighttocurtailtheserviceifthepipelinebecomescapacityconstrainedorhigher

priorityservicesarerequiredThisservicehasalowerprioritythanﬁrmandasavailable

transportationservices



Inquiry into the east coast gas market—April 2016

Reservesandresources

ReservesQuantitiesofnaturalgasexpectedtobecommerciallyrecoverablefromagivendate

underdeﬁnedconditions

P(proved)reservesCommerciallyrecoverablereserveswithatleastapercentprobability

thatthequantitiesrecoveredwillequalorexceedtheestimatedamount

P(provedandprobable)reservesCommerciallyrecoverablereserveswithatleasta

percentprobabilitythatthequantitiesrecoveredwillequalorexceedtheestimatedamount

P(provedandprobableandpossible)reservesCommerciallyrecoverablereserveswith

atleastapercentprobabilitythatthequantitiesrecoveredwillequalorexceedthe

estimatedamount

ContingentresourcesContingentresourcesarequantitiesofnaturalgasestimatedtobe

potentiallyrecoverablefromknownaccumulationsbutarenotyetconsideredabletobe

developedcommerciallyduetooneormorecontingenciesContingentresourcesmayinclude

gasaccumulationsforwhichtherearecurrentlynoviablemarketswherecommercialrecovery

isdependentontechnologyunderdevelopmentorwhereevaluationoftheaccumulationis

insucienttoassessifitcanbeproducedcommerciallyCresourcesareclassiﬁedasabest

estimateoftheresource(CisthelowestimateandCisthehighestimate)

ProspectiveresourcesProspectiveresourcesareestimatedquantitiesassociatedwith

undiscoverednaturalgasTheserepresentquantitiesofgaswhichareestimatedasofa

givendatetobepotentiallyrecoverablefromgasdepositsidentiﬁedonthebasisofindirect

evidencebutwhichhavenotyetbeendrilledProspectiveresourcesrepresentahigherrisk

thancontingentresourcessincetheriskofdiscoveryisalsoaddedForprospectiveresources

tobecomeclassiﬁedascontingentresourceshydrocarbonsmustbediscoveredthegas

accumulationmustbefurtherevaluatedandanestimatemadeofquantitiesthatwouldbe

recoverableunderappropriatedevelopmentprojects

UnitsofEnergy

Joule—aunitofenergyintheInternationalSystemofUnits

Gigajoule(GJ)—abillion()joules

Terajoule(TJ)—atrillion()joules

Petajoule(PJ)—aquadrillion()joules

MillionBritishThermalUnits(MMBTU)—MMBTUGJ



Inquiry into the east coast gas market—April 2016

Appendix 1: Recent inquiries and reports

QueenslandGasMarket

Review()

QueenslandGovernment wwwdewsqldgovaudataassets

pdfﬁlegas-market-

review-pdf

GasMarketTaskforce

Report

(ReithReport)

VictorianGovernment wwwenergyandresourcesvicgovau

about-uspublicationsGas-Market-

Taskforce-report

EasternAustralian

DomesticGasMarket

Study()

AustralianGovernment

DepartmentofIndustryand

Science

wwwindustrygovauEnergy

EnergyMarketsDocuments

EasternAustralianDomesticGasMarket

Studypdf

ExaminingBarriers

toMoreEcientGas

Markets()

AustralianGovernment

ProductivityCommission

wwwpcgovauresearchcompleted

gas-markets

Supplyandcostofgas

andliquidfuelsinNSW

()

NSWLegislativeCouncil

SelectCommittee

wwwparliamentnswgovaugasinquiry

GasMarketReport

()

AustralianGovernment

DepartmentofIndustry

InnovationandScience

wwwindustrygovauOce-of-the-

Chief-EconomistPublicationsPages

Gas-market-reportaspx

GasPriceTrends

Review()

OakleyGreenwood

Commissionedbythe

AustralianGovernment

DepartmentofIndustry

InnovationandScience

wwwindustrygovauEnergyEnergy-

informationPagesGas-Price-Trends-

Reviewaspx

EastCoastWholesale

GasMarketand

PipelineFrameworks

Review(–)

(ongoing)

AustralianEnergyMarkets

Commission

wwwaemcgovauMarkets-Reviews-

AdviceEast-Coast-Wholesale-Gas-

Market-and-Pipeline-Frame



Inquiry into the east coast gas market—April 2016

Appendix 2: The Inquiry’s terms of reference



Inquiry into the east coast gas market—April 2016



Inquiry into the east coast gas market—April 2016

Appendix 3: Public submissions to the Inquiry

AdelaideBrightonCement

AGL

AlintaEnergy

APAGroup

AustralianAluminiumCouncil

AustralianPetroleumProductionandExplorationAssociation

AustralianPipelinesandGasAssociation

AustraliaPaciﬁcLNG

ArgusMedia

ArrowEnergy

BeachEnergy

BHPBilliton

BlueEnergy

BusinessCouncilofAustralia

CooperEnergy

CSR

EnergyandManagementServices

EnergyNetworksAssociation

EnergySupplyAssociationofAustralia

EssoAustraliaResources

GDFSuez

HydroTasmania

IncitecPivot

InnovativeEnergyConsulting

Jemena

MajorEnergyUsersInc

ManufacturingAustralia

OriginEnergy

PangaeaResources

Qenos

QGC

ReserveOurGasAlliance

Santos

ShellAustralia

Stanwell

StrikeEnergy



Inquiry into the east coast gas market—April 2016

Appendix 4: The regulatory status of transmission pipelines

TableA Theregulatorystatusoftransmissionpipelinesandhowithaschangedsincethegasaccessregimewasintroducedin

State Pipeline Owner

RegulatoryStatus

Regulatorystatusin Whathashappenedsince

Currentstatus

NSW MoombatoSydney

Pipeline

APA

Deemedtobecovered

whentheGasCode

commenced

IntheCommonwealthMinisterforIndustryTourismandResourcesdecidedtorevoke

coveragebetweenMoombaandMarsdenbecausecriterion(b)wasfoundnottobesatisﬁed

onthispartofthepipelineTheremainderofthepipelinewasfoundtosatisfyallofthe

coveragecriteriaincludingcriterion(a)soremainedcoveredAtthetimethisdecisionwas

madeAGLhadapercentinterestinAPAandoneofthefactorsthattheCommonwealth

Ministerpointedtowhennotingthatcriterion(a)waslikelytobesatisﬁedinthiscasewas

the‘substantialriskofverticalleveragingdiscriminationinfavourofthewholesaleandretail

marketsgiventhecloserelationshipbetweenAGLEAPLandAustralianPipelineLimited’

FollowinganapplicationbyAPAtheNCCdecidedinthatthecoveredportionofthe

pipelineshouldbesubjecttolightregulation

Unregulated

MoombatoMarsden

Lightregulation

Remainder

CentralRanges

Pipeline

APA

BuiltaftertheGasCode

commenced

IntheCentralRangesPipelinebecameacoveredpipelinethroughacompetitivetender

processThecompetitivetenderprocessdidnotrequiretheapplicationofthecoverage

criteria

Fullregulation

CentralWest

Pipeline

APA

Deemedtobecovered

whentheGasCode

commenced

FollowinganapplicationbyAPAtheNCCdecidedinthattheCWPshouldbesubjectto

lightregulation

Lightregulation

EasternGasPipeline Jemena

BuiltaftertheGasCode

commenced

InAGLsubmittedacoverageapplicationtotheNCCWhiletheNCCandthe

CommonwealthMinisterforIndustryScienceandResourcesfoundthattheEGPsatisﬁedall

thecoveragecriteriaonappealtheAustralianCompetitionTribunalfoundthatcriterion(a)

wasnotsatisﬁedandconcludedthatthepipelineshouldnotbecovered

Unregulated



Inquiry into the east coast gas market—April 2016

State Pipeline Owner

RegulatoryStatus

Regulatorystatusin Whathashappenedsince

Currentstatus

SA Moombato

AdelaidePipeline

System

Epic

Deemedtobecovered

whentheGasCode

commenced

IntheSouthAustralianMinisterforEnergydecidedtorevokecoveragebecausecriteria

(a)and(d)werefoundnottobesatisﬁed

Unregulated

SEAGasPipeline RestAPA

BuiltaftertheGasCode

commenced

No-coverageapplicationhasbeenmadeforthesepipelines

Unregulated

SESAPipeline APA

RiverlandPipeline AGN

Deemedtobecovered

whentheGasCode

commenced

IntheSouthAustralianMinisterforMineralsandEnergydecidedtorevokecoverage

becausecriteria(a)and(d)werefoundnottobesatisﬁed

Unregulated

SouthEastPipeline

Systems

Epic

Deemedtobecovered

whentheGasCode

commenced

IntheSouthAustralianMinisterforMineralsandEnergydecidedtorevokecoverage

becausecriteria(a)and(d)werefoundnottobesatisﬁed

InKCAsubmittedacoverageapplicationtotheNCCbutboththeNCCandSouth

AustralianMinisterforMineralResourcesandEnergyfoundthatcriteria(a)and(d)werenot

satisﬁedsothecoveragestatuswasnotchanged

Unregulated

Tas TasmanianGas

Pipeline

Palisades

BuiltaftertheGasCode

commenced

No-coverageapplicationhasbeenmadeforthispipeline

Unregulated

Vic Declared

Transmission

System

APA

Deemedtobecovered

whentheGasCode

commenced

Norevocationofcoverageapplicationhasbeenmadeforthispipeline

Fullregulation

Vic–NSW

Interconnect

APA

BuiltaftertheGasCode

commenced

No-coverageapplicationshavebeenmadeforthesepipelines Unregulated

Carisbrookto

HorshamPipeline

GPV

SouthGippsland

Pipeline

Multinet

Qld RomatoBrisbane

Pipeline

APA

Deemedtobecovered

whentheGasCode

commenced

Norevocationofcoverageapplicationhasbeenmadeforthispipeline

Fullregulation

CarpentariaGas

Pipeline

APA

BuiltaftertheGasCode

commenced

ThispipelineoriginallybecamecoveredthroughQueenslandGovernmentlegislationbut

wassubjecttoaderogationwhichprecludedtheACCC(latertheAER)fromreviewingthe

referencetariuntilMayInthetransitiontotheNGLandNGRintheQueensland

Governmentdecidedtochangetheformofregulationtolightregulationandprohibit

changestotheregulatorystatusuntilMayThischangewasmadethroughNationalGas

(Queensland)Regulation

Lightregulation



Inquiry into the east coast gas market—April 2016

State Pipeline Owner

RegulatoryStatus

Regulatorystatusin Whathashappenedsince

Currentstatus

Qld

SouthWestQld

Pipeline

APA

Deemedtobecoveredbut

subjecttoaQueensland

Governmentderogation

whichprecludedtheACCC

(latertheAER)from

reviewingreferencetaris

until

InthetransitiontotheNGLandNGRintheQueenslandGovernmentrevokedcoverage

througharegulationratherthanthroughaformalassessmentofwhetherthepipeline

satisﬁedthecoveragecriteriaThischangewasmadethroughNationalGas(Queensland)

Regulation

Unregulated

QueenslandGas

Pipeline

Jemena

QSNLink APA

BuiltaftertheGasCode

commenced

No-coverageapplicationshavebeenmadeforthesepipelines Unregulated

Berwyndaleto

WallumbillaPipeline

APA

Wallumbillato

DarlingDowns

Pipeline

Origin

NorthQueensland

GasPipeline

VicFundsMgt

Corp

DawsonValley

Pipeline

MeridianJV

(Westsideand

Mitsui)

Deemedtobecovered

whentheGasCode

commenced

Thecoveragestatusofthispipelinehaschangedfourtimessincethegasaccessregimecame

intoeect

• WhentheGasCodewasintroducedtheDVPwasdeemedacoveredpipeline

• Inmid-coveragewasrevokedbytheCommonwealthMinisterforIndustryScience

andResourcesbecausecriterion(a)wasfoundnottobesatisﬁedInthiscasetheMinister

notedthatbecausetherewasonlyoneuserofthepipelinewithalong-termGSAandno

indicationofanyotherproducerseekingaccessorinterconnectiontothepipelineaccess

wasunlikelytopromotecompetitioninanyothermarket

• IncoveragewasreinstatedbytheCommonwealthMinisterforIndustryTourism

andResourcesbecauseallthecoveragecriteriawerefoundtobesatisﬁedInthiscase

theMinisterfoundthatbecausetheownerofthepipelinehadverticalinterestsingas

productionitwouldhave‘theabilityandincentivetoleverageitstransmissionmarket

powerintotheupstreammarketintheabsenceofcoverage’Itwasonthisbasisthat

theMinisterconcludedthataccesswouldpromoteamaterialincreaseincompetitionin

theupstreammarketbecauseitwouldconstrainthepipelineoperator’sabilitytocharge

monopolypricesfortransportationservices

• IncoveragewasrevokedbytheCommonwealthMinisterforIndustrybecause

criterion(a)and(b)werefoundnottobesatisﬁedCriterion(a)wasfoundnottobe

satisﬁedatthistimebecausetheownershadenteredintoa-yearGSAwithGLNG

whichmeantthattherewasunlikelytobeanysparecapacityavailableforthirdpartyuse

from

Unregulated



Inquiry into the east coast gas market—April 2016

State Pipeline Owner

RegulatoryStatus

Regulatorystatusin Whathashappenedsince

Currentstatus

Qld

Wallumbillato

GladstonePipeline

APA

BuiltaftertheGasCode

commenced

-yearno-coveragedeterminationgrantedbyCommonwealthMinisterforResourcesand

Energyinbecausecriteria(a)and(d)werefoundnottobesatisﬁed

-yearno-coverage

APLNGPipeline APLNG

-yearno-coveragedeterminationgrantedbyCommonwealthMinisterforEnergyand

Resourcesinbecausecriteria(a)(b)and(d)werefoundnottobesatisﬁed

GLNGPipeline GLNG

-yearno-coveragedeterminationgrantedbyCommonwealthMinisterforIndustryand

Resourcesnbecausecriteria(a)(b)and(d)werefoundnottobesatisﬁed

CometRidgeto

WallumbillaLoop

GLNG

-yearno-coveragedeterminationgrantedbyCommonwealthMinisterforIndustryand

Resourcesinbecausecriteria(a)(b)and(d)werefoundnottobesatisﬁed

Source NCCPastApplicationsRegisterhttpnccgovauapplications-pastpastapplications