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ACCC chief Rod Sims advises gas producers to 'think carefully' on pricing

Angela Macdonald-Smith
Angela Macdonald-SmithSenior resources writer
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Competition czar Rod Sims has suggested east coast gas producers may need to offer discount prices to local manufacturers to avoid destroying demand as the antitrust watchdog pointed to signs that domestic tariffs could surge above $12 a gigajoule next year.

So-called "netback" prices for LNG, a representative price for export LNG before processing and shipping, have averaged $10.69 a gigajoule so far this year and look set to climb almost 16 per cent to $12.40 next year, according to the first publication by the Australian Competition and Consumer Commission of what has become a benchmark for domestic east coast prices.

Netbacks could peak about $15 a gigajoule in January-February, the ACCC said, based on forward LNG prices. On paper that would translate to a price of about $17/GJ for a small manufacturer in Victoria after pipeline costs.

Gas demand on the east coast will be eroded if producers try to maximise prices, Rod Sims says. 

Prices of over $12 a gigajoule would be about three or four times historical gas prices on the east coast, and about double the price that some gas-based manufacturers say they need to remain profitable.

Credit Suisse analyst Saul Kavonic said the ACCC's estimates appear to be "at the low end" of true netback prices after sunk costs and that actual prices paid could be even higher.

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"These price levels are well beyond what some industrial buyers can afford in our view, such as in the ethylene and fertiliser sectors," said Mr Kavonic, who doesn't rule out cheaper deals being struck by producers in response to government pressure.

"We believe that if we see these sectors continue to operate it could be a sign that below LNG netback price deals are being done behind the scenes by the LNG project proponents in response to government pressure, particularly as we head into an election," he said.

'Long-term view'

Mr Sims agreed the forecast prices for 2019 looked unaffordable for some manufacturers, risking plant closures and job losses. The ACCC reported gas prices of $8-$11 a gigajoule in an August report.

He said gas sellers "need to take a long-term view" and "think carefully" about trying to maximise the prices.

LNG netback prices are seen spiking to $15 a gigajoule in Jan-Feb.  ACCC

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"If they want buyers of their gas to be still around they've got to make sure that they don't put prices in the market that see firms close," Mr Sims told The Australian Financial Review.

"They might need to sell gas below that to prevent erosion of demand."

The decision last year to publish the prices was driven by a surge in contract prices to $20 a gigajoule or more in early 2017.

From now netback prices will be published every month and a year-ahead price every fortnight, signalling to buyers the absolute maximum they should be paying.

Santos, a major producer of both domestic and export gas, welcomed the move.

"The more transparency there is in the market, the better that is for consumers, producers and all market participants," a spokeswoman said.

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Mr Sims said that only additional supply coming onstream in the eastern states would offer the possibility of prices below the export-equivalent.

"Political choices need to be made," he added, pointing to the onshore gas ban in Victoria.

When domestic prices soared early last year, the federal government last year stepped in to ensure supply was available for local users. A deal on guaranteeing local supply was renewed with the Queensland LNG producers on Sunday.

'Reputations have suffered'

But now local prices are mostly below the export equivalent, leaving little scope for further measures.

"These prices are still two-and-a-half times what they once were," Mr Sims said. "Now there's no going back to those prices but it's still very, very difficult for a lot of gas users."

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Netback prices averaged $7.27 a gigajoule last year, less than half of prices offered by some retailers such as AGL Energy in early 2017.

Mr Sims said those "ridiculous" prices reflected companies taking full advantage of a shortage of gas and a dearth of sellers.

"Their reputations have suffered accordingly," he said. "When you take advantage of these things in such a cruel way then these things do come back to get you."

Mr Sims said that while the forecast netback for 2019 is higher, he was hopeful of prices easing thanks to rising global supply of LNG. Proposed LNG import terminals won't bring down local prices, rather they would cement in place international parity prices for gas, he added.

Angela Macdonald-Smith writes on the resources industry with a focus on energy, including gas, oil, electricity and renewables. Connect with Angela on Twitter. Email Angela at amacdonald-smith@afr.com

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