The Edge – 2016 Energy Market Review by Joshua Stabler (12 January 2017)

Contents LNG Market Review .............................................................................................................. 1

Gas Market Review ............................................................................................................... 4

Electricity Market Review ...................................................................................................... 6

Coal Market Review ............................................................................................................ 11

LNG Market Review During 2016, the final three of the six LNG trains at Curtis Island, Gladstone were successfully commissioned, increasing the nameplate capacity of the region to 25.4mtpa, and close to ~30.0mtpa when run in overload. This milestone temporarily places Queensland with the second largest global LNG liquefaction capacity after the 77mtpa at Qatar although Western Australia is still expected to overtake Queensland during 2017 with the ramp up of 16mtpa Gorgon and 8.9mtpa Wheatstone facilities.

Table 1 shows that during 2016, Curtis Island exports totaled 17.9mt of LNG across 267 LNG cargoes with Shell’s QCLNG contributing 46.5% of the export volumes (8.3mt). GLNG exports increased around 30% with the startup of train 2. APLNG saw continuous growth throughout the year increasing about 300kt per quarter.

Table 1 - LNG Exports (in kt of LNG) for each Facility aggregated by Quarter and Calendar Year 2016

QCLNG GLNG APLNG Curtis Island

LNG Export (kt) LNG Export (kt) LNG Export (kt) LNG Export (kt)

Q1/2016 2,202 1,018 741 3,961

Q2/2016 2,142 1,047 1,077 4,266

Q3/2016 1,959 1,331 1,270 4,545

Q4/2016 2,034 1,357 1,734 5,125

Cal 2016 8,338 4,753 4,822 17,913

LNG Vessels 120 74 73 267

Figure 1 (below) also shows the daily volumes by site (QCLNG Orange, GLNG Blue and APLNG Red) and a few of the milestones during the year which included:

APLNG Train 1 commencing commissioning on 2 Jan 2016 with the normal commissioning variability which lasted until June 2016;

GLNG Train 2 commissioning which commenced in May 2016 but full aggregate capacity of both trains is still yet to be achieved; and

APLNG Train 2 commissioning in October which was disruptive to the LNG production at both GLNG and QCLNG.

Figure 1 –LNG Facility Daily Gas Consumption (TJ/d) [GMAT Permalink: LNG Timeline]

Oil Price Review Figure 2 shows that the calendar year 2016 commenced with the oil price reaching the lowest point since Nov 2003 on 21 January 2016 at USD$27.9 per barrel but by the end of the year, the market had recovered to USD$56.8 per barrel with OPEC agreeing in December to reduce supply.

Long term LNG sales contracts remain linked to the oil price and the $A GLNG FOB price is shown in orange in Figure 2. It should be noted that this is a pure sales price, and does not take account of the cost of liquefaction if trying to compare with a domestic gas price.

Figure 2 - Brent Oil Price (USD $/BBL) (Source: Quandl, Energy Edge)

Upstream Drilling Program In terms of the upstream side of the LNG projects, the three participants added a total of 618 bore holes in south west Queensland during 2016 which was in line with the 643 in 2015 but significantly down on 1,238 and 1,334 boreholes in 2014 and 2013 respectively.

The three graphics (QCLNG in Figure 3, APLNG in Figure 4 and GLNG in Figure 5) show the drilling program (in terms of number of wells per week) in Queensland for each of the represented LNG participants based on the facilities they operate (as opposed to equity ownership).

Figure 3 – QCLNG Upstream Drilling Program (Source: Energy Edge GMAT)

Figure 4 – APLNG Upstream Drilling Program (Source: Energy Edge GMAT)

Figure 5 – GLNG Upstream Drilling Program (Source: Energy Edge GMAT)

QCLNG drilling (2012- 2016)

APLNG drilling (2012-2016)

GLNG drilling (2012-2016)

2016

2016

2016

Gas Market Review Gas Market Volumes Since the beginning of 2015 gas exports from Gladstone as LNG have resulted an unprecedented growth in demand and impact on the east coast gas market, with total demand up 200% from 1,500TJ/d in 2014 to 4,600TJ/d in 2016 as seen in the stacked graphic by sector (Figure 6). In particular, while the peak gas demand to date was during the Winter 2016 Gas Squeeze, the total demand has not fallen significantly despite the large seasonal fall in residential and domestic demand since that time primarily due to the APLNG train 2 commissioning schedule.

Figure 6 – Stacked Gas consumption (TJ/d) by Sector (Source: Energy Edge Gas Market Analysis Tool)

In terms of the domestic market, the primary region for the consumption of gas remains Victoria due to both the weather and the usage of gas for Melbourne’s residential heating. This has been illustrated in Figure 7 which shows the volume of gas demand through the four domestic markets (Brisbane, Sydney, Adelaide and Melbourne).

Figure 7 - Regional Retail Demands (TJ/d) - STTM ex ante and DWGM 6am

LNG

Retail and Industry

Gas Generation

Melbourne

Adelaide

Sydney

Brisbane

2016

Gas Market Prices In terms of the domestic gas market, 2016 produced record high sustained gas prices due to a number of factors that are discussed below. Figure 8 presents this on a daily granularity and Figure 9 provides a seven-day rolling average view.

The biggest driver of Winter 2016 Gas Squeeze prices was the continued growth in LNG consumption at Curtis Island through the redirection of both physical quantities of gas from Moomba (physically via flows on the South West Queensland Pipeline between Moomba and Wallumbilla) and notional quantities at Longford (notionally via increased Longford production displacing flows on the Moomba to Sydney pipeline) to the LNG facilities.

Another critical component in the South Eastern gas network, the Iona Storage facility had a relatively low storage level in the lead up to winter due to the combination of LNG gas consumption and:

Failure of Basslink in late December 2015 which saw increased gas-fired generation at Tamar Valley and Bell Bay power stations until May 2016;

Exit of the coal-fired Northern Power Station which resulted in increased gas-fired generation in South Australia; and

Lower production from the Otway Basin which has been falling consistently since 2014.

Figure 8 - Regional Gas Market Prices ($/GJ) - STTM ex ante and DWGM 6am (Daily) (Source: GMAT)

Figure 9 - Regional Gas Market Prices ($/GJ) - STTM ex ante and DWGM 6am (Rolling 7-Day) (Source: GMAT)

Electricity Market Review Electricity Forward Curve Movement In alignment with (and related to) the gas market uplift, the electricity market produced significant upward price movements during 2016 in both the spot and forward market due to a number of major events in the market including:

Disconnection of the Basslink transmission line between Victoria and Tasmania in December 2015 with delayed return to service of June 2016;

Exit of the coal-fired Northern Power Station in South Australia in April 2016;

Gas tightness in July 2016 with gas prices reaching $43/GJ in Melbourne;

Reduced dam levels affecting the ability of hydro generators to generate due to a combination of drought;

Speculation and subsequent announcement of the exit of the coal-fired Hazelwood Power Station in Victoria during October and November;

Extreme weather events and subsequent blackouts in South Australia; and

Commissioning of three LNG trains into the market during 2016.

In the traded forward electricity markets for Calendar Year 2017, Table 2 and Figure 10 illustrate the rapid increase in market prices over a 12-month period.

Table 2 - Forward Market Contract Price for Cal-2017 (Jan-Dec 2017)

Region 1 Jan 2016 ($/MWh)

1 Jan 2017 ($/MWh)

Change (%)

Queensland $55.62 $77.19 +52%

New South Wales $46.65 $70.74 +39%

Victoria $41.07 $67.39 +64%

South Australia $86.34 113.25 +31%

Figure 10 – Electricity Market Cal 2017 Forward Curve during 2016 (Source: Energy Edge, ASX Energy)

Electricity Price Distribution Analysis The following analysis investigates the changing price distribution of the physical spot electricity market outcomes in the four connected but diverse market regions; Queensland New South Wales, Victoria and South Australia. Each region has experienced unique market conditions during the last twelve months.

Queensland With the completion of the six LNG trains at Curtis Island, the Queensland electricity market has been substantially shifted through the combination of significant new gas production

facilities, LNG gas consumption and increased upstream electrified gas compression. The result of the above has seen a change in the distribution of spot market outcomes with averages which have matched or exceeded periods covering the Clean Energy Act in 2012 - 2014 and drought conditions of 2007.

Figure 11 – Cal 2016 Queensland Spot Price Weekly Distribution (<$60, $60-$300 and >$300/MWh)

Figure 12 – 2000-2016 Queensland Spot Price Quarterly Distribution (<$60, $60-$300 and >$300/MWh)

While the underlying energy constraints on the market remain dominated by LNG consumption which has raised the price duration curve across the lower 90% of the time, the availability of gas above international LNG prices has continued to broadly limit electricity market volatility (greater than $300/MWh) outside of a number of hours in February 2016.

Figure 13 - Queensland Price Duration Curve (Cal 2016 vs Long Term)

2016 Median

2016 Lowest

New South Wales With Australia’s highest population, energy consumption, generation capacity and interconnection, New South Wales electricity market outcomes are moderated and motivated by Queensland and Victorian conditions.

One of the main exceptions to that rule in 2016 was with the planned outage of the entire 2,640MW Eraring Power Station from 10th October until 19th November which saw a significant underlying uplift in price and a short period of extreme spot price volatility on 13th November.

Figure 14 - Cal2016 New South Wales Spot Price Distribution (<$60, $60-$300 and >$300/MWh)

Figure 15 - 2000-2016 New South Wales Spot Price Quarterly Distribution (<$60, $60-$300 and >$300/MWh)

Figure 16 – New South Wales Price Duration Curve (Cal 2016 vs Long Term)

2016 Median

Victoria In contrast to the northern states, the Victorian electricity market conditions are significantly different from Queensland with an underlying trend of reduced electricity consumption combined with the 1st December 500MW outage of the Portland smelter. These conditions contributed to the decision by Engie to close Hazelwood power station from April 2017. Despite all of these events and decisions, the underlying price and duration curve outcomes for 2016 remained significantly higher than historical outcomes.

Figure 17 – Victoria Spot Price Weekly Distribution (<$60, $60-$300 and >$300/MWh)

Figure 18 - 2016 Victorian Spot Price Quarterly Distribution (<$60, $60-$300 and >$300/MWh)

Figure 19 – Victorian Price Duration Curve (Cal 2016 vs Long Term)

2016 Median

South Australia In a final contrast of market events, South Australia saw four major events that shaped the outcomes of 2016 and as a bellweather state for the implementation of high renewable penetration, the possible future of the national electricity market.

1. Northern and Playford coal-fired power stations exited the South Australian market in April “due to a significant oversupply of power generation in South Australia as a result of falling electricity demand and significant growth in renewable energy in the state.”1

2. Gas tightness in the southern states in July disproportionally impacted South Australian electricity market conditions during the periods where wind generation was low and the Heywood interconnector was unavailable due to upgrade works.

3. South Australia saw the first ever System Black (full region without power) event in the NEM on 28 September 2016 at 16:18 when a severe weather event hit the Port Augusta region of the state, disabling 22 transmission lines which then triggered a combination of generation and interconnection trips and finally customer load shedding. As a result of the event, the South Australia electricity market was suspended for nearly three weeks.

4. On 13 November, AEMO determined that the South Australian system had been operating in an non-secure state and introduced2 a number of requirements of the thermal generators in the state to maintain security.

Figure 20 – South Australian Spot Price Weekly Distribution (<$60, $60-$300 and >$300/MWh)

Figure 21 – South Price Duration Curve (Cal2016 vs Long Term)

1 https://alintaenergy.com.au/about-us/power-generation/flinders-operations 2 http://www.aemo.com.au/-/media/Files/Media_Centre/2016/SA-System-Strength.pdf

2016 Median

$300 Scale

$300 Scale

Coal Market Review Newcastle Coal Index The Newcastle Coal index is one of the major world coal indices and is priced in USD per ton. It has been converted into a more comparable measure (A$/GJ) in Figure 22, which shows an interesting 1/20 rule of thumb under current foreign exchange conditions.

The chart shows that fuel costs for coal-fired generators reliant on spot cargoes have increased over the last 6 months, and at a heat rate of 10GJ/MWh, results in an increase in marginal cost from approximately $30/MWh towards $40 - $55/MWh in the back half of 2016.

Figure 22 – Newcastle Coal Index (Source: Qandl, Energy Edge)

New South Wales Coal Generation Figure 23 illustrates a dark spread3 comparison between the Newcastle Index and the New South Wales daily average spot prices (in $/MWh). This shows that the uplift in the coal price since July 2016 has theoretically reduced the dark spread margin in New South Wales.

Figure 23 – New South Wales Coal Daily Dark Spread (Source: Energy Edge)

3 Dark Spread is the difference between the unit revenue (in $/MWh) and the coal index cost (in $/MWh based on a 10GJ/MWh heat rate).

2016

2016

Gas Market Analysis Tool (GMAT) Energy Edge has developed a subscriber platform, the Gas Market Analysis Tool (GMAT) which is the premier gas analysis and visualisation software for the Australian gas market incorporating detailed impacts on the Electricity and LNG markets. Energy Edge provides trial access to the Gas Market Analysis Tool for new clients and can be organised by contacting Joshua Stabler below.

The Edge – Gas Market Update This report is part of Energy Edge’s fortnightly The Edge – Gas Market Update which looks at contemporary topics in the gas, electricity and LNG markets with detailed analysis and insights into the drivers behind the data and headlines.

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