6 July 2015

Gas producers accused of profiteering, hoarding in ACCC gas inquiry

Gas producers such as Origin Energy and Santos have been accused of profiteering and hoarding capacity on pipelines, as industrial users seek more open access to scarce supplies at competitive prices.

The accusations came in submissions made to the Australian Competition and Consumer Commission regulator in its inquiry into gas supply on the east coast, which chairman Rod Sims has warned would trigger tough measures should any anti-competitive practices be unearthed.

As part of the inquiry, gas buyers including Incitec Pivot and Australian Paper, made confidential appearances before the competition watchdog to report on their experiences in commercial negotiations for energy supplies.

The ACCC is aiming to get to the bottom of conflicting claims between gas producers and buyers over the availability of long-term supplies in a market where demand is set to triple in the next two years because of the start-up of LNG export plants in Queensland. The surge in demand has combined with delays in the development of NSW coal seam gas resources to drive up prices well beyond historical levels of $3 to $4 a gigajoule.

The regulator's inquiry overlaps with a separate examination of Royal Dutch Shell's proposed $90 billion takeover of BG Group.

Some industrial gas users fear the deal would further restrict supplies and force prices even higher. Shell owns 50 per cent of the Arrow coal seam gas resource in Queensland, while BG's QGC subsidiary holds another large chunk of Queensland gas reserves.

Incitec Pivot managing director James Fazzino has vowed to voice his concerns over the Shell-BG deal to the ACCC, saying the industry "doesn't need more consolidation".

Increase in costs
Gas producers told the ACCC buyers needed to appreciate the increase in costs that have driven prices higher, even without the Queensland LNG plants.

"Unfortunately expectations of certain industrial gas users appear to be anchored in historical price structures that are no longer realistic," Shell said in its submission on the gas inquiry, released late on Friday. It rejected claims that the integration of domestic gas producers with LNG export projects affects the incentive to supply gas to domestic users.

Santos, in its submission, noted that finding and development costs for the oil and gas industry had increased six-fold over the past decade. It said the emergence of the Queensland LNG export industry had diminished the bargaining power of local industrial buyers, "who now compete against overseas buyers willing to pay more than the historic domestic gas price".

Santos said it was "willing to supply gas to domestic customers when it has available, uncontracted gas and available transport capacity" and noted that it was "actively negotiating" deals with large industrial customers after quoting more than 10 potential gas sales agreements to domestic customers in the past 12 months.

But the "Reserve Our Gas" campaign group formed by the Australian Workers Union and backed by Alcoa told the ACCC that gas producers were deliberating restricting supply to local customers in anticipation of future price increases, with "profound" implications for businesses reliant on gas.

"Gas companies are taking advantage of the looming price increases to engage in supply-side profiteering," the group said, pointing to comments by Origin Energy managing director Grant King at the recent annual shareholders meeting that the company would "reduce its call on production from its upstream business and bank contracted gas this year and call for that gas in the following years when it is more valuable".

It said that "makes a mockery" of producers' arguments that price increases could be avoided by increasing gas production.

Origin has yet to lodge its submission to the ACCC.

Challenging environment
Meanwhile, AGL Energy, which is a buyer and seller of gas, described the environment for negotiating new gas supply agreements as "challenging", citing "changing market dynamics and the need for producers, on-sellers and consumers to adjust their expectations".

AGL said the market was not "broken" but "in a transition phase" to a new equilibrium point.

The ACCC's inquiry will consider whether joint venture gas producers should have to compete against each other for customers to improve competition. AGL told the regulatory body that joint marketing had "served its purpose" and that breaking up marketing ventures should lead to benefits to domestic gas consumers.

But Exxon, operator of the large Bass Strait venture with BHP Billiton, said joint marketing was critical to align partners on investment decisions and because the east coast market was "shallow", with "lumpy" demand.

The peak oil and gas industry body APPEA pointed to regulatory hurdles in Victoria and NSW as the key problem, and rejected claims by some buyers that long-term gas supplies were not available or that competition was not working.

"It is vitally important that the inquiry, and the government's response to it, focus on the development of eastern Australia's upstream oil and gas industry and not be distracted by calls for inappropriate, inefficient and protectionist interventions in the domestic gas market," APPEA said.

The Major Energy Users group pointed to instances of a gas pipeline owner exercising "monopoly power" in pricing for transportation and gas producers hoarding capacity on pipelines to prevent access by other shippers as problems for the market.