Why Natural Gas Prices in Australia Are Unsustainable
Home » Why Natural Gas Prices in Australia Are Unsustainable
Natural gas prices in Australia make little sense. Australia is the world’s largest exporter of liquefied natural gas (LNG). Yet, domestic gas prices have risen from around AUD $4 per gigajoule (GJ) to almost AUD $30 per GJ since LNG exports at Gladstone, Queensland began in 2015. In the years that followed, east coast gas users also paid prices significantly higher than export parity prices.
This unsustainable situation is damaging both Australia’s industry and its communities. It is also damaging the environment. The methane emissions from gas traps up to 84 times as much heat as carbon dioxide (CO2) in the short term. Some gas plants are even as polluting as coal plants.
How to replace the current gas supply
Australia needs to move away from this dirty fossil fuel. It should turn to renewable sources for its energy needs. This will make prices more sustainable for consumers. It will also make energy production more sustainable for the planet.
What are the natural gas prices in Australia?
In mid-2020, gas prices in Australia’s eastern states stood at AUD $6-$8 per GJ. This was a decrease from prices of AUD $8-$14 per GJ in the second half of 2019. The reason natural gas prices in Australia fell between 2019 and 2020 was due to COVID-19. This reduced demand for fuel, and the price decreased. Then, in 2022, the global energy crisis sparked by Russia’s invasion of Ukraine drove prices to reach unprecedented levels of almost AUD $30 per GJ.
The price decline for domestic users was not in line with the drop in LNG netback prices. For example, prices in early 2019 were between AUD $9 and $12 per GJ. They decreased to between AUD $8 and $11 per GJ in late 2019 and early 2020. Yet, netback prices were below AUD $6 per GJ by early 2020, and they have been below AUD $5.50 since May 2020. However, in 2022 netback prices also soared, averaging almost AUD $45 per GJ for the year.
GlobalPetrolPrices.com ranked Australian gas for households as the 23rd most expensive out of 46 countries in December 2021. So in a country with abundant natural gas reserves, why is this the case?
Why are natural gas prices in Australia so high?
Natural gas prices in Australia are steep because LNG exports are so high. LNG exporters enter into long-term contracts to provide set amounts of gas to overseas markets. If the Australian gas fields produce insufficient gas to meet these requirements, gas for the domestic market is sold internationally. As the amount of gas kept for Australian gas users decreases, its value and, therefore, price increases.
As a result, there is a direct correlation between the amount of LNG sold abroad and the price of domestic gas. For instance, gas prices in eastern Australia rose sharply in 2017. Historic levels had been between AUD $4 and $6 per GJ. The price inflated to above AUD $10 per gigajoule, which coincided with a decision to sell Australian LNG overseas.
Gas producers have the option to either export LNG abroad or sell it domestically. They generally make domestic buyers offers in line with expected LNG netback prices. However, moving natural gas from Queensland or Western Australia to the southern states means that consumers must cover transportation costs. It is typically one or two Australian dollars per gigajoule. This is added to the LNG netback price and resulted in higher domestic gas prices than export rates.
Natural gas facility
The gas market in Australia’s future
The price of producing gas has also risen. The cost of supply has therefore increased, as cheap sources have depleted. It was once possible to provide gas for AUD $4 per GJ or less. Now, eastern Australia’s gas fields rarely supply gas for less than AUD $8 per GJ. It is doubtful that this situation will change. Gas is therefore not a solution to Australia’s future energy needs.
How can this problem be resolved?
Reduce the domestic price of gas
To reduce the price of natural gas in Australia, the Australian Competition and Consumer Commission could set fair pricing benchmarks. A domestic board could also be set up to monitor prices. They could limit exports when they exceed the pricing thresholds and ensure gas from the export market is returned to the domestic market.
Australia could also introduce a national gas reservation policy. This would ensure sufficient gas is kept for the domestic market. A policy like this has been in place in Western Australia for a decade. 15 per cent of their LNG gas is taken from the export market and reserved for domestic users. As a result, the state’s domestic gas prices have been much lower than national prices.
Ditch the gas market and switch to renewables
Clean energy sources, unlike natural gas, do not contribute to climate change. As their name suggests, renewable energies, like solar, wind and hydropower, will never run out. Prices for renewable electricity are also increasingly cheaper than fossil fuels.
These factors make renewables a more attractive power source and investment than natural gas. Gas plants have a lifespan averaging 40 years. As production prices for natural gas increase and emission limits on gas are introduced, the gas market risks becoming a stranded asset for financial markets.
Australia must accelerate renewable energy deployment
Renewables vs. the gas market today
Renewables collectively account for over 30 per cent of Australia’s total electricity generation, after wind and solar enjoyed a record year in 2021. And their share is set to grow.
At the end of the year, the wind and solar industries had committed to – or were already building – 66 large-scale projects. These represent seven gigawatts of capacity for clean electricity, as well as 19,000 new jobs in these industries.
Resolving unsustainable natural gas prices in Australia
The writing is on the wall for natural gas in Australia. Gas prices have tripled in recent years. The country’s manufacturing industry is suffering as a result. For instance, Dow chemical plant in Melbourne’s west shut down in 2019, and RemaPak went into administration the same year.
This expensive and dirty power source is highly unlikely to return to the days of AUD $4 per gigajoule. On the other hand, renewable energy sources are becoming cheaper and more available. Adding new renewables to as much as 90 per cent of the grid will be more affordable than non-renewable options by 2030. Alongside this transition, phasing out gas and electrifying heating and transportation must also be prioritised.
An unsustainable situation cannot continue. Only when Australia acknowledges its future lies with renewables will gas consumers’ suffering end.
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