oakley greenwood snow ecc2014 - amazon s3 · prices will mitigate back to something like cost plus...

Private and Confidential

National Energy Efficiency ConferenceNational Energy Efficiency ConferenceNational Energy Efficiency ConferenceNational Energy Efficiency Conference

November 2014November 2014November 2014November 2014

Jim Snow, DirectorJim Snow, DirectorJim Snow, DirectorJim Snow, Director

[email protected]@[email protected]@oakleygreenwood.com.au

Gas Pricing?


Pricing – Underlying Messages for Today

• Gas use is ELASTIC

– This means that as prices go up then sales volumes come down (yep just like bananas), and

– Over time more volume may eventuate – until we get to a new equilibrium in the “market” price

– This means PRICE BUBBLES are common when we have excess demand

• The key GROWTH IN DEMAND IS LNG – an internationally traded commodity with links to other markets (Oil, US Gas Markets) - risky maybe for producers?

– The only other “growth” market would be Gas Power Generation – but it is in serious decline

– Price being driven currently by LNG netback and potential costs of new supply

• To get an upsurge in INDUSTRIAL GROWTH WILL REQUIRE MAJOR PRICE REDUCTIONS as we have seen in the US

– Long term contracts to underpin investments

– Need a high excess of gas for this/poor price alternatives – if this occurs prices will drop quickly to cost of supply - or lower

– For Australia - infrastructure costs must also be highly efficient

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Concern about massive changes in gas supply and demand – LNG demand driving up prices

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Ref: Santos – A Balanced Energy Solution for NSW, April 2013


Henry Hub – One of My Favourite Benchmarks for Elasticity

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Australian Domestic Gas Outlook 2013 - Santos


Domestic Electricity Demand – case in point

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Gas is probably far more elastic than electricity – and look where that has gone in recent years...and beware the network price effects from losing demand –someone has to pay...

On the margins gas in NSW can be a lot more expensive for customers for heating that reverse cycle air-conditioning - - and the change is typically just one switch left on and another turned on – almost zero switching costs (economists love this) – new winter peaks for power?


The big loss has been Gas Power Generation demand

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This chart looks like the message it is conveying –mind the step – the impact at the investment level behind this is spectacular – and policy – more RET anyone?


The perfect storm of higher gas prices and dropping GPG demand –2011 this was forecast to be 600 PJ/year+ in 10 years

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Private and Confidential7


Gas Price Forecast – Sydney ($2013)(Last Years Work for NSW Infrastructure)

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Scenario assumes a cap on prices after 2022 set by LNG alternative use for gas - and production costs

Wholesale prices – not retail – probably a bit lower as this is based on 18 month old forecasts (with Carbon)


Others around the same mark – depending on scenarios and when forecast – trend is up – to circa $7 to $10+/GJ wholesale

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Assumed Gas Prices for New Entrant CCGT – AEMO – NERA, Projections of Energy Costs (Appendix A) – A Report for the Australian Energy Market Commission: Review of Retail Electricity Price Trends 2013 (September 2013)

Australian Domestic Gas Outlook 2013 - ACIL


But have to say forecasting is failing in both electricity and gas – not granular enough and econometric based – needs to be market research and logging based –

astounding market failure really – many still using end use data from the 1990’s….or simply abandoned that approach due to lack of data?

• AEMO looking to improve – but still top down…….really – how will this pick up consumer shifts?

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Preparing a National Gas Forecasting Report (NGFR)

This annual publication will support efficient investment in the gas market by providing greater transparency of gas demand assumptions and more granular analysis of gas consumption data. Industry consultation is currently underway and the NGFR will be published by 31 December 2014.


So where to for gas pricing – the crystal ball question

• We have for some time been convinced that we will see price bubbles and have stressed the logical flows behind that thinking (too detailed to present here but scenario based)

• This has been vindicated with real experience in recent times in WA – which has been one of our key analogues for the East Coast – gas prices dropped when supply tipped into excess

• Economics also says clearly that when you have a price spike in a market this is a message to buyers to curb demand and for sellers to find more supply – to create new clearing prices at lower levels than the bubbles

• The Henry Hub and Oil Price case showed how dramatic this could be – and we have an eye to the NT in terms of potential for gas with condensates – maybe a lot of gas trying to find a home….

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• Look at oil prices now – 30% drop in price in just 2 months - flow on affect from US shale gas – oil price war in US by Saudis – while the Henry Hub price rose (decoupled a long time ago from oil – linked again to domestic demand) – oil linked gas prices not looking so hot maybe?

• For many years we have urged gas producers to put part of their production linked to other markets – like electricity, industrial commodities – but this is always a hard sell – they prefer the commodity trading/economic (panic) approach – clear oversupply with cheap pricing…..

• Our view remains we will see a price bubble effect for gas on the east coast –prices will mitigate back to something like cost plus in this coming 5 to 10 years – we have postulated wholesale $6.50 to $7.50 (in $2014) will be the target

• And we are not the only ones now with this view of price bubbles which is very reassuring (ACIL Allen also down this track for example – May 2014, Santos chart?)

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• And finally loss of domestic demand may well spook the gas supply industry as oil prices soften – we have not seen this play out just yet

• Once demand goes it may not return unless there is a major drop in gas prices (like we saw in the US) – and need longer term underpinning contracts – and may well be very different industries that remerge

• And the only growth prospects are likely to be industrial end use as domestic will shrink and GPG will need way to low a price to compete (probably below production costs)

• Producers take note – once you have climbed the LNG hill there may be a very a major rollercoaster on the other side….maybe do some hedging now?

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Private and Confidential14

Jim Snow, DirectorJim Snow, DirectorJim Snow, DirectorJim Snow, DirectorOakley Greenwood Pty Ltd

214C Maundrell Terrace, AspleyQueensland 4034

+61 (0) 417775893

[email protected]@[email protected]@oakleygreenwood.com.au

www.oakleygreenwood.com.auwww.oakleygreenwood.com.auwww.oakleygreenwood.com.auwww.oakleygreenwood.com.au

oakley greenwood snow ecc2014 - amazon s3 · prices will mitigate back to something like cost plus...

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