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Gas buyers fear prices still unaffordable with LNG export controls

Gas buyers fear prices still unaffordable with LNG export controls

Queensland's LNG export boom is being blamed for hiking prices for local industry.

Industrial gas buyers have voiced worries that the planned Domestic Gas Security Mechanism will not rein in soaring prices on the east coast to an affordable level, despite assurances by the government.

Amid concern over the fall-out from the mechanism on domestic gas contracts, federal Industry Minister Arthur Sinodinos said the government's gas market and security reforms "will work together to ensure gas is available to Australians at reasonable prices".

"By providing additional supply as required and removing the prospect of physical gas shortfalls this will lower forward pricing expectations based on market tightness and assumed scarcity," Mr Sinodinos said.

"In addition the ADGSM will discourage LNG export projects from taking gas from the existing base of the domestic market. All of these factors should see prices on average move down to levels no higher than export parity and in some cases lower." But buyers such as Weston Aluminium, Qenos and others have expressed concern that the mechanism will do little to do bring down prices in the short term. Asking contract prices for gas have surged to $20 a gigajoule for some customers, more than double the level of expiring contracts.

Ben Eade, executive director of Manufacturing Australia, said the organisation welcomed the mechanism which should avoid the "worst-case scenario" of a physical shortage of gas in the system.

But he also voiced doubts whether it would have the desired effect of reducing prices to levels affordable for some manufacturers.

"It is predominantly a volume-based mechanism, the details of which are still being ironed out," he said.

"You might end with a situation where yes, the market is in balance, but you can only get gas at $25. If that's the case, that's an own goal."

The debate over the local impact of the mechanism, to be structured as LNG export controls, comes as Santos is locked in talks with the federal government over the structure of the mechanism, which is due to be in place by July 1.

The heavy reliance of Santos's GLNG venture on gas drawn from the east coast market has put the Adelaide-based player at the centre of the government's negotiations with industry on the measure, despite chief executive Kevin Gallagher saying that GLNG has been unfairly singled out.

Sources say that some of Santos's existing domestic gas customers, including steelmaker Arrium, are feeling side-effects from the talks because Santos has put potential increases in domestic sales contracts on the table as part of its negotiations with the government. Some of the customers are thought to be worried about speaking out for fear of imperilling their already fragile gas supply position.

Meanwhile one gas buyer said he was concerned the government had been convinced that a "reasonable" price that would suit both gas supplies and buyers was $8-$10 a gigajoule, a level higher than his company could bear.

"That's not any good for us, although some industrials might be able to wear it," he said. "For us, $6 to $8 would be reasonable.

"But even with the reservation mechanism it's not clear to us how prices will come down to that more reasonable level."

Credit Suisse analyst Mark Samter has calculated that an "export parity" price for GLNG would still mean a price of $12.40 a gigajoule at Gladstone, based on oil at $US65 a barrel. That would translate to prices of more than $14 in southern states.

Australian Financial Review

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