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LNG-prices-surge-as-Asia-banks-on-Queensland-selling-surplus-gas-at-home

LNG-prices-surge-as-Asia-banks-on-Queensland-selling-surplus-gas-at-home

Asian LNG spot prices have spiked 35 per cent in the past month as the prospect that Queensland's LNG ventures will be selling all their surplus gas at home over the next two years bites.

Prime Minister Malcolm Turnbull and the three Queensland LNG ventures signed off on Tuesday on a deal that forces them to fill a shortfall in domestic east coast gas in 2018 and 2019 as LNG market watchers said the growing threat of controls on shipments from Queensland has been driving prices in Asia.

It has also had an impact at home, with spot prices of gas in Victoria and other states on the east coast softer than they have been since early this year, although contract offers are still much higher, sources said.

Over the past few weeks traders have been increasingly assuming they can count on little if any spot LNG reaching Asia from north-east Australia.

Even now that Canberra has backed away from triggering the export controls, Tuesday's deal is seen having a similar effect as Queensland's exports of gas will be essentially limited to long-term contracts.

Australia is the world's biggest LNG exporter and is set to be the biggest by 2020.

North Asian spot LNG prices rose to $US8.348 per million British thermal units this week, up from $US6.187 four weeks ago.

The current Asian spot price is roughly equivalent to $10.70 a gigajoule, well above spot prices in the eastern states on Tuesday, where Victoria was at just $5.01 and Sydney at $6.75, around their lowest since early January.

Under the "Heads of Agreement" signed in Canberra, the Queensland LNG exporters will offer enough gas to meet a forecast 54 petajoule shortfall on the east coast in 2018, and a 48 PJ gap in 2019. Roughly as much again of potential additional demand would also be covered.

The deal, which firms up last week's initial accord, also obliges the LNG ventures run by Shell, Santos and Origin Energy to offer any gas produced beyond their LNG sales contracts first to the domestic market on "competitive" terms before offering it overseas. No prices were mentioned, but the producers have volunteered to provide information on contract offers to the competition watchdog.

Mr Turnbull said the commitments "are vitally important to ensure Australian jobs and to ensure Australians have affordable and reliable energy", including electricity.

"That means we will not be required to place restrictions on exports," he declared.

The threat of forced limits on gas exports had alarmed the LNG producers and set the scene for some fraught discussions, reflected in the response to Mr Turnbull from Shell's head in Australia, Zoe Yujnovich.

"There have been some difficult and tense moments and we appreciate the challenge that you've given to us," Ms Yujnovich said.

"We hope that through the Heads of Agreement, indeed we can find a path forward to make sure that the domestic market is serviced and that indeed there is enough available gas for the market, which we stand behind and are committed to deliver."

But Opposition Leader Bill Shorten urged Mr Turnbull to pull the trigger on LNG export controls, claiming the threat is not enough to ensure the prices needed by Australian manufacturers to survive and flourish.

"Turnbull is afraid to use the legal powers he has got ... and in the meantime Australian businesses and the Australian households are the losers," Mr Shorten said.

Oil and gas industry spokesman Malcolm Roberts said the Queensland gas industry had effectively provided a reprieve to Victoria and NSW from the consequences of their policy failures in restricting access to onshore gas.

Dr Roberts, head of the APPEA organisation, said Victoria's ban on onshore gas in the face of its forecast 116 petajoule supply gap in 2018 is "policy madness" and said more supply was the only sustainable way to meet long-term demand and rein in prices.

Warwick King, the head of Origin's APLNG venture, said it is "absolutely vital" Australia adopted a "whole of market solution" to resolve new gas supply, including reforms to improve the domestic gas market and the responsible development of resources near the demand centres of Sydney and Melbourne.

He said that "where operationally possible", APLNG had always tried to see if the domestic market could take gas before exporting it.

Ms Yujnovich said that since the first meeting with the Prime Minister on the east coast gas squeeze, Shell's QGC operation in Queensland had sold all the gas produced above contracted levels to east coast customers.

Santos, whose GLNG venture already limits exports to gas needed for long-term contracts, said it had always argued that any east coast shortfall required a response across the industry rather than singling out its project.

"Let's not forget that without the LNG projects this gas would still be in the ground and not available to help address the current domestic supply issue on the east coast," a spokeswoman said.

The rise in LNG spot prices weakens the argument of buyers in the eastern states that rivals in Asia are paying less for Australian gas than they are.

Contract prices for both Asian LNG and domestic gas are higher, however. One east coast gas buyer pointed to offered firm contracts at $11-$12 a gigajoule, with only high-quality, larger buyers getting closer to $10.

Strong LNG demand in China and South Korea, and concerns about exports from Louisiana's Sabine Pass terminal after Hurricane Harvey are also driving Asia's price gains.

JPMorgan's Mark Busuttil pointed to feedback from the market that political pressure on the Queensland LNG exporters to keep their gas at home had helped. A delay in the start-up of Chevron's Wheatstone LNG venture in Western Australia, expected in August, may also be contributing.

Wood Mackenzie's Saul Kavonic said he saw seasonal variations in demand as the biggest driver, with north Asian and Chinese buyers stockpiling in the lead-up to winter.

"Uncertainty on Wheatstone ramp-up and competing domestic gas demand from Queensland also factors into a tightening LNG market," he said.

Australian Financial Review

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