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Australia’s east coast gas users are paying prices significantly above export parity prices, the ACCC’s latest gas report reveals.
The ACCC’s Gas Inquiry 2017-2025 Interim Report, released today, shows that prices offered to domestic gas users in late 2019 and early 2020 ranged from $8 to $11/GJ.
While this was down slightly from the $9 to $12/GJ range observed earlier in 2019, this price decline was not in line with the significant and sustained drop in LNG netback prices, which were for 2021 delivery below $6/GJ by early 2020 and have been below $5.50 since May.
“The ACCC is very concerned with the widening gap between domestic and export parity prices, which will have an inevitable impact on Australia’s industrial sector during what is already a difficult economic period,” ACCC Chair Rod Sims said.
“Queensland LNG producers sold 18 LNG spot cargoes into international markets in late 2019 and early 2020, equivalent to more than 10 per cent of annual domestic east coast demand. This gas was sold at prices substantially below domestic gas price offers, showing the importance of our continuing work to understand the drivers behind the price levels we are seeing across the domestic market.”
“It is also clear that recent Australian contract gas prices do not reflect overseas forward prices.”
“I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets.”
“When we have lower gas prices around the world, and the Australian market linked to world gas markets, it is vital that Australian gas users get the benefit.”
Recommendations to address price concerns
The ACCC recommends the extension of the existing Commonwealth Government’s Heads of Agreement with LNG producers, due to expire at the end of 2020, because of the demonstrated capacity of LNG producers to supply additional gas into the domestic market when needed.
“As well as extending this Heads of Agreement, we think the government should consider strengthening the agreement’s price commitments,” Mr Sims said.
“For example, reference could be made to LNG netback price expectations and the prices LNG exporters could expect to receive for uncontracted gas in overseas markets over the relevant period.”
“Extending the Heads of Agreement is one measure that can be adopted now. Further measures are also needed to ensure adequate supply of appropriately priced gas over the longer term,” Mr Sims said.
With the southern states facing the greatest risk of shortfall in the future, the ability of market participants to transport gas from Queensland into southern markets remains critical.
The ACCC therefore recommends governments consider whether further measures are needed to see timely investment in north-south transportation infrastructure particularly, or import terminals on the east coast.
The ACCC also recommends that governments seek to increase the diversity of suppliers when granting new tenements, as greater competition between suppliers would be more likely to bring down domestic prices. Measures such as active tenement management should also be used to ensure producers bring gas to market in a timely manner.
Gas supply for 2021 and COVID-19 impacts
Australia’s east coast gas market is expected to have sufficient supply in 2021, with the LNG producers in particular having surplus gas, but the risk of a shortfall in the southern states in the medium term has increased, the ACCC’s report finds.
More than 20 per cent of southern states’ production in 2021 is expected to come from undeveloped ‘2P’, or proven and probable, reserves. At the same time last year, only eight per cent of southern supply had been forecast to come from undeveloped 2P reserves in 2020.
“The impacts of COVID-19 and the collapse in oil prices are being felt at all levels of the gas supply chain, and they have highlighted key areas of dysfunction in the market,” Mr Sims said.
“The cumulative effect on gas users is significant and exacerbates the difficulties being experienced by many commercial and industrial users.”
The report is available at <a href="https://www.accc.gov.au/regulated-infrastructure/energy/gas-inquiry-2017-2025/july-2020-interim-report" target="_blank">Gas Inquiry</a>
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j.ballantyne1990-6AQqhLzZaK

Domestic gas users paying too much: ACCC

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EXPERT OBSERVATION
So worried is the government about the meagre income it is getting from gas during the middle of Australia’s biggest gas export boom that it asked an independent advisor to chair a review and is getting the treasury to run the ruler over his recommendations.
Australia gets paid for gas mined from under its waters by the “<a href="https://www.ato.gov.au/Business/Petroleum-resource-rent-tax/PRRT-concepts/" target="_blank">petroleum resource rent tax</a>” set up by the Hawke government in 1988.
But payments peaked at around <a href="https://treasury.gov.au/review/review-of-the-petroleum-resource-rent-tax/final-report" target="_blank">A$2.5 billion</a> in 2000-01. They are now less than half that, and much lower still as a share of the economy and as a share of gas exported.
The government’s December budget update predicts petroleum resource rent tax revenue of just <a href="https://budget.gov.au/2019-20/content/myefo/index.htm" target="_blank">$1.15 billion</a> this financial year, revised down from the $1.4 billion expected in the May budget.
It has pencilled in only $1.15 billion for each of the next three years.
Qatar, which exports the <a href="https://www.smh.com.au/business/the-economy/australia-tops-qatar-as-world-s-biggest-lng-exporter-20200106-p53p5h" target="_blank">about the same amount</a> of gas as Australia, is said to have got <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2019-04-01/tax-credits-for-oil-and-gas-giants-rise-to-324-billion/10959236" target="_blank">more than A$20 billion</a> in 2018.
Our tax is good in theory
The weak performance of the petroleum resource rent tax is all the odder because it has been held up as the gold standard for resource taxation.
The 2009 Henry Tax Review wanted to apply the model to iron ore and other minerals, which the Rudd government attempted to, announcing a <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201011/TaxationRSPTax" target="_blank">resource super profit tax</a> in 2010.
The Gillard government cleaved it to what became the milder <a href="https://www.urban.com.au/property-observer" target="_blank">minerals resource rent tax</a>, before it was abolished by the Abbott government in <a href="https://www.allens.com.au/insights-news/insights/2014/09/repeal-of-the-minerals-resource-rent-tax/" target="_blank">2014</a>.
The petroleum resource rent tax collects a share of the profit made from mining gas instead of charging a fixed royalty of the kind imposed by state governments for other minerals.
But the “profit” depends on the choice of the price at which the gas is “sold” from one part of the entity that mines it to another before it is processed and turned into liquid for export.
<h2>It’s not as good in practice</h2>
There is a regulated method to calculate the true “transfer price” for the purpose of determining the tax payable. If it produces too low a result (as it seems to have) too little profit will be recorded and too little tax will be charged.
The Turnbull government was concerned enough about what was being charged to set up a petroleum resource rent tax review headed by former treasury official <a href="https://treasury.gov.au/review/review-of-the-petroleum-resource-rent-tax" target="_blank">Mike Callighan</a> in 2016.
<img src="https://images.theconversation.com/files/315167/original/file-20200213-41656-19iriq0.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" alt="">
<a class="source" href="https://www.theaustralian.com.au/nation/politics/tax-hike-on-gas-and-oil-on-cards-to-save-surplus/news-story/80728e8d4e4ee0c0b425cd543b770d84" target="_blank">The Australian , Saturday February 8, 2020</a>
Callahan identified <a href="https://treasury.gov.au/review/review-of-the-petroleum-resource-rent-tax" target="_blank">four reasons</a> for dwindling reported profits at a time of record production: declining oil and gas prices, declining production from older projects, the massive expenses involved in setting up new mega projects, and transfers of spending between projects for accounting purposes.
He also recommended an examination of the transfer pricing formula.
In 2018 Treasurer Josh Frydenberg <a href="https://treasury.gov.au/sites/default/files/2019-03/p2018-t339508-govt-response-PRRT.pdf" target="_blank">tightened</a> some of the provisions and asked the treasury to lead a <a href="https://treasury.gov.au/publication/p2015-t339508" target="_blank">review</a> of the formula that is due to report mid-year.
So large are the potential revenue gains that <a href="https://www.theaustralian.com.au/nation/politics/tax-hike-on-gas-and-oil-on-cards-to-save-surplus/news-story/80728e8d4e4ee0c0b425cd543b770d84" target="_blank">The Australian</a> newspaper has reported that they could keep the budget in surplus.
We calculate the price of gas strangely
To determine the transfer price at which gas from Commonwealth waters is transferred from the part of the entity that extracts it to the rest of the entity, the Australian government uses a method used nowhere else in the world, and certainly not by Australian states in the calculation of their royalties on minerals.
It adopted the method on the recommendation of accounting firm <a href="https://treasury.gov.au/sites/default/files/2019-04/c2019-t364690-attachment.doc" target="_blank">Arthur Anderson</a> in 1998, a few years before it was disgraced in the <a href="https://en.wikipedia.org/wiki/Arthur_Andersen" target="_blank">Enron scandal</a> in the United States and stopped using that name.
The method averages two prices – the “net-back” price, which is used elsewhere, and a bespoke “cost-plus price” which is used nowhere else and purports to be a measure of the cost of mining the gas, but which oddly excludes both the cost of exploring for the gas and the cost of the gas itself.
The more commonly-used (and usually larger) net-back price is calculated by working backwards from the price at which the product is sold to the end-user, subtracting the costs involved in getting it to that point.
Modelling I have conducted for a article co-authored with Machiel Mulder and Peter Perey in the <a href="http://www.unswlawjournal.unsw.edu.au/wp-content/uploads/2020/02/Kraal-et-al-Taxation-and-Pricing-of-Natural-Gas.pdf" target="_blank">UNSW Law Journal</a> finds that if the net-back price alone was used (as it is elsewhere) the big gas exporters would pay the government A$15.5 billion over the years between now and 2030, instead of the presently-expected $5.5 billion.
We shouldn’t value gas at zero
There is no obvious reason for the Australian government to value the gas itself at zero. The idea that its only value comes from the equipment, labour and technical know-how used to extract it wouldn’t be accepted in the United States or in any other place that charges for resources extracted and demands payment promptly upon extraction.
Fortunately, the government of Queensland continues with royalties for onshore gas and the government of Western Australia continues with royalties for North West Shelf gas.
If the treasury’s review of gas transfer pricing results in only fine-tuning the existing regulations it will miss the chance to get us a proper return on our resources. We own them and they are worth something.
Australians have a right to be paid what their resources are worth and to use that money to build government services or a budget surplus.
Listen to Dr Kraal discuss petroleum resource rent tax at Monash ‘<a href="https://www2.monash.edu/impact/podcasts/thought-capital/why-we-need-to-pay-attention-to-energy-justice/" target="_blank">Thought Capital</a>’
<a href="https://theconversation.com/profiles/diane-kraal-14610" target="_blank">Diane Kraal</a>, Senior Lecturer, Business Law and Taxation Dept, Monash Business School, <a href="https://theconversation.com/institutions/monash-university-1065" target="_blank">Monash University</a>
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/in-the-midst-of-an-lng-export-boom-why-are-we-getting-so-little-for-our-gas-131461" target="_blank">original article</a>.
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In the midst of an LNG export boom, why are we getting so little for our gas?

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GUEST OBSERVATION
Cold weather has arrived in eastern Australia, to the glee of those who enjoy skiing. But you don’t have to venture onto the slopes for cold to be a danger. With gas prices rising, many in the community are shivering while contemplating how big their next gas bill will be.
Eastern Australia’s gas market is rapidly changing, driven by the first exports of liquefied natural gas (LNG) from Queensland. And this is affecting the whole supply chain, from gas producers, to the way we use gas in our homes.
Gas was cheap, for decades
In Victoria, South Australia, and through to New South Wales, Queensland and Tasmania, gas has long been viewed as the preferred fuel for many applications - from industrial uses right down to warming our lounge rooms. Since the discovery of the massive Bass Strait oil and gas deposits off Victoria in the late 1960s, gas consumption across eastern Australia grew, decade after decade.
But despite these discoveries and growing production, the resource companies involved were often frustrated. While global crude oil prices went up and up, eastern Australian gas prices were stuck in the 1970s. Gas consumers enjoyed access to some of the cheapest gas in the developed world.
On the other hand, gas producers dared not complain too loudly. They often considered this gas nearly a waste product – interfering as it did with the speed at which the far more valuable crude oil and LPG could be drawn from the ground. If eastern Australia had been another jurisdiction such as Nigeria or North Dakota, this nuisance gas could have been quickly disposed of by flaring or venting. However, with some foresight, Australian industry regulators have generally discouraged such wasteful and environmentally damaging practices.
Faced with this constraint, what were the resource companies to do? Unlike crude oil, gas is costly to ship to the more lucrative markets in Japan and Korea, first requiring liquefaction at temperatures as low as minus 160C. Creating new demand “sinks” for gas in-country was one strategy. Pipelines were built to connect up all of the eastern states. Still, this “domestic” gas languished at a sales price far below that of crude oil.
Coal seam gas arrives
Then in the first decade of this century came the realisation that coal seam gas (CSG), located mostly in Queensland but also in New South Wales, could be produced in quantities far exceeding the demands of the staid domestic market, by a factor of three or more.
Following the examples of Western Australia and the Northern Territory, the only option for gas companies was to invest billions of dollars in, at last, building the first liquefaction and export facilities on Australia’s east coast.
For legacy gas producers, even those not directly involved in the LNG-export decisions, this was the dream come true. After decades, a buyers’ market rapidly shifted to become a sellers’ market. Where previously buyers would remind producers they would be happy to take that “waste product” off their hands, producers could now inject into supply contract negotiations the spectres of “world-parity pricing” and “high CSG production costs”.
Nowhere in the world had it ever occurred where an established, reasonably large domestic market, serving customers ranging from large industry to millions of homeowners, was suddenly eclipsed by the mammoth export-focused LNG industry.
Eastern Australia gas demand peaked - three years ago
Even before the launch of the first LNG export cargo from Queensland late last year, major gas buyers raised concerns about future gas costs and contractual availability. The Australian Competition and Consumer Commission is examining transparency and barriers to competition in the gas industry.
When the New South Wales upper house held an inquiry into gas supplies earlier this year, it gave us, at the University of Melbourne Energy Institute, the opportunity to present our analysis of declining future gas demand in that state. Now Victoria’s upper house is likewise having an inquiry where we will present aspects of our extended research into gas supply and demand across all of eastern Australia.
The eastern Australian gas market has experienced significant upheaval and will continue to change over the next ten years. Data from the Australian Energy Market Operator indicates that the volume of gas used in eastern Australia peaked three years ago.
Gas demand will continue to decline across all sectors. In the electricity-generation sector, with rising gas prices, the abolition of the carbon price, and a surplus of coal-fired generation, gas will only be sparingly used. The Australian Energy Market Operator is also forecasting a steep drop in the amount of gas used by industry.
Do try this at home: fuel-switching from gas to electricity
The amount of gas used in buildings will also decline. As we shiver here in Melbourne, how would you like to reduce your heating costs by up to, say, 70%? If interested, you have to do two things: (1) turn your gas heater to “off” and (2) turn your reverse cycle air conditioner to “on” – on heating mode of course!
<a href="/images/2015/07/20/image-20150717-5067-1y3854o.jpeg" target="_blank">Click to enlarge</a>
<img src="/images/2015/07/20/image-20150717-5067-1y3854o.jpeg" alt=""> 
 
In my home we did that for the first time this winter. Our savings are remarkable, though not surprising nor different to what others in the community are reporting. As an example, during two particularly blustery days I found I could comfortably heat my house one day with gas at an energy-only cost of A$4.80 and then do it the next day with my air conditioner at a cost of just A$1.50. Our savings across the full heating season will add up to hundreds of dollars.
Results in other homes will depend on factors including what you pay for electricity and gas, the efficiencies of your gas heater and air conditioner, where your heat sources are located within your home, and individual comfort and convenience preferences. But it should not be long before word gets out to the 4.4 million Australian homes that already have at least one reverse-cycle air conditioner.
Previously I reported on the similarly large savings possible by using an efficient heat pump to heat water, especially if you have excess self-generated solar electricity. Add an induction cooktop and there is no economic need to connect gas to most Australian homes<a href="https://www.ata.org.au/news/are-we-still-cooking-with-gas">.</a> Businesses are springing up that offer “all-electric” home conversions” to people interested in making the switch.
Collectively, homes are large consumers of eastern Australian gas. This coming “second-era of Australian home electrification” will have a big impact on gas and electricity supply-demand dynamics over the next decade.
Tim Forcey is energy advisor for the Melbourne Energy Institute and also an author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/tim-forcey-104740" target="_blank">here</a>.
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