Phillip Barresi James Benjamin EUAA Kinetic Economics

East Coast Gas Outlook 2013 Conference October 2013

Energy Users Association of Australia

EUAA members include Australia’s biggest retailers, manufacturers, mining and resource companies.

Peak national body

advocating,

informing,

educating,

network opportunities.

EUAA’s Charter

“To be the trusted and relentless voice within the energy sector seeking a competitive, reliable and sustainable energy

supply for all energy users.”

Are Users Concerns Justified?

A few long-term gas contracts available depending on who you talk to (for post 2015).

Prices will be higher before they stabilise. New contracts to link gas price changes with oil prices.

Conventional supply is declining and 85% of current 2P reserves are CSG based.

CSG will be used by the current LNG projects.

75% of supply is unavailable to the domestic market (assuming current projects continue)

Wholesale gas prices in the $7/GJ to $12/GJ price range.

Prices skyrocketed from $2/GJ to over $6/GJ in WA when LNG exports commenced. ($7-$9 range) LNG is an international market so international forces will determine gas prices.

Domestic users are likely to face international competition for supply.

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What are Gas Users Facing?

The issue not about existing pipeline capacity but whether there will be gas to transport.

Increase capacity likely at a higher price making it attractive for Vic suppliers and producers.

Gas prices will be significantly higher.

Likely shorter-term contracts with greater price movements due to oil price linkage.

Continued development of alternative supply sources at risk from government policy.

Likely stronger regulations for CSG developers which will increase costs and flow to users.

An LNG developer will supply NSW with gas to make up for supply shortfall.

All users will pay similar high prices as LNG contracts take up most of the supply.

Little left for domestic users.

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GAS SUPPLY COMMITTEE

Large Energy Users with Significant Exposure to Gas Prices and Supply Issues

Two Commissioned Research Reports

BREE/DRET Inquiry - Alternative Gas Policies for Australia

First Principles review of the impact of high gas costs on industry leading to possible major modelling study.

Woodmac, Core Energy and Credit Suisse

LNG Project Reserves and Resources

0

5,000

10,000

15,000

20,000

25,000

GLNG(7.8 mtpa)

QCLNG(8.5 mtpa)

APLNG(9.0 mtpa)

Arrow(Bowen)

Arrow(Surat)

2P 3rd Party 3P 2C

Energy Quest, Company Data and Credit Suisse estimates

Eastern Australia Gas Use

Source: BREE

Impact on Electricity Generation

3-5 years the NEM likely to have little gas powered generation (GPG) from rising wholesale gas prices.

200 PJ of GPG in 2013; forecast of 75 PJ in 2020.

Potential resurgence of coal generation with repeal of carbon tax; however new fossil fuel generation is unnecessary

Existing CCGT plant likely to switch to peaking operation only.

Cogeneration plants could shut.

Demand growth likely to be met by new wind entry from Renewable Energy Target (LRET)

ACIL Tasman, Marsden Jacob Associates

Examine policy responses adopted by overseas jurisdictions facing similar

challenges.

Balance competing demands of domestic gas users and export markets.

Outside scope - gas market design and commercial opportunities (e.g. joint procurement strategies).

Project Objectives and Scope

Production – ramp up for LNG commitments

Prices – limited availability of long-term contracts at competitive prices (see AIG survey)

Pricing dichotomy – increasing costs of production

Origin and BHP/Exxon deal estimated at $7/GJ and linked to oil prices)

Current Market Conditions

Production limits - as per permitting.

Taxes – PRRT 40% of net revenues (onshore and offshore).

Royalties – State based arrangements applicable to onshore projects. Generally holiday and ramp-up to 10% of net wellhead value of prod.

No export licensing conditions - exploration permit applications focus on tech capability.

No economic assessment - domestic v export gas use.

Quantify cost of gas supply shortages.

Current eastern-Australia Policy

USA, Canada, UK, Netherlands., Norway, (& WA).

Commonality

Overseas markets are liberalised, market prices determined, open access etc.

Differences

Netherlands transitioning to net energy importer.

UK a net gas importer since 2004.

Norway low domestic gas penetration & export orientated policy.

Canada & USA residential reliance on gas.

Overseas Experience

Liberalise upstream markets [UK]

UK policy aimed to increase upstream competition for industry privatisation and price de-reg. Benefited domestic users through increased production.

Reservation policy (quarantine volume or acreage) for domestic use.

WA new offshore fields, fixed volume, up to 15% subject to commercial viability.

Fixed volume reserved negotiated.

Commercial viability is not well defined.

Lacks transparency, impacts investment/production/prices [PC Review 2009].

Mandatory field development - ‘use it or lose it’ provisions [Netherlands.]

Increase production for domestic use but limiting optionality may decrease value of exploration permit.

National Tests [USA & Canada]

Jurisdictional Policy Responses

Dept of Energy (DOE) regulates natural gas exports through licenses.

Conditional on ‘public interest’.

No binding objective/explicit criteria.

Implicit economic assessment.

Broadly criteria includes. domestic need for the natural gas [demand]

adequacy of domestic natural gas supply [reserves]

impacts on consumers and industry (including on domestic natural gas prices)

Only 4 of 21 non-FTA export license applications approved.

USA – Public Interest Test

Gas export licensing system.

Independent federal regulator - the National Energy Board (NEB).

Explicit assessment criteria - quantity of gas to be exported is surplus to Canadian needs, having regard to projected domestic gas reserves.

Licenses subject to revocation.

Experience – competitive upstream market.

In approving LNG facilities, NEB notes these projects develop otherwise undeveloped reserves, supporting domestic supply.

Canada – Market Based Procedure

Findings for Australia

Role for mandatory provisions (Netherlands, DRET/Nexus, WA/Woodside

If the Government considered greater policy response warranted, then a

market based economic approach would look like the following:

National Economic Benefits Test (NEBT)

New gas developments and expansions.

Economic activity from domestic gas consumption vs PRRT and royalties (if gas exported).

Positive result means total economic welfare maximised in preserving gas for domestic use.

National Gas Assessment Board (NGAB)

Independent advisory body, consultative process, with public findings and

recommendations.

Issues for Consideration

Governance (decision-maker – Commonwealthth, State governments

or Standing Council Energy Resources-SCER?)

Appeals procedure (review mechanism)

Modelling approach and assumptions

Trade agreements and countervailing duties

Disclaimer

The EUAA (including the directors and employees) make any representation or warranty as to the accuracy

or completeness of this report. Nor shall they have any liability (whether arising from negligence or

otherwise) for any representations (express or implied) or information contained in, or for any omissions

from, the report or any written or oral communications transmitted in the course of the project.