Shell’s BG takeover to reshape gas market

Shell’s BG takeover to reshape gas market

The Australian Competition and Consumer Commission’s decision not to intervene in Shell’s $US70 billion acquisition of BG Group means the east coast gas market will be allowed to shape itself rather than conform to the structure that a very sophisticated lobby group of new-style protectionists were seeking to have imposed on it.

The arguments against the unconditional approval of the mega-deal that the ACCC has granted were centred on the fate of the largest reserves of uncommitted gas in eastern Australia, the coal seam gas reserves in Queensland within the Shell/PetroChina Arrow Energy joint venture.

Large industrial gas consumers on the east coast were and are concerned that Shell’s acquisition of BG Group, which owns one of the three giant LNG export projects that have started operations at Gladstone in Queensland, would see Arrow’s reserves devoted to supply that project.

Those three projects, all of which are now up and running and shipping LNG, have for the first time opened a door for east coast gas into the international gas market, exposing the domestic market to international gas prices and fluctuations in the supply/demand equation for gas.

They’ve also sucked most of the previously uncommitted east coast gas reserves north, leaving industrial customers exposed to a combination of shortages of contracted supply and/or big prices increases.

The stability of the east coast gas market hasn’t been helped by the politically-driven blanket moratoria on onshore gas exploitation (apparently, regardless of whether it is conventional or unconventional gas) in NSW and Victoria. There are, of course, a lot of unconventional gas resources in NSW, which face the biggest question marks over access to supply and the cost of that access.

The ACCC was lobbied hard by big east coast gas customers to at least force an undertaking from Shell that, the Arrow gas (or at least some of it) should be reserved for the domestic market. To its credit, the commission resisted those urgings.

Arrow, as the ACCC’s Rod Sims said today, is not an existing supplier to domestic customers and was unlikely to be one in future. The logical customers for Arrow’s gas are the three LNG projects. Given Shell’s interest in Arrow and its prospective ownership of BG and its project, the most obvious alignment is with the BG facility.

If Arrow doesn’t compete to supply gas into the domestic market today and is most unlikely to do so in future, there isn’t much of a case to say that Shell’s acquisition of BG is likely to lead to a substantial lessening of competition in the east coast gas market.

As Sims said in a KGB Interview earlier this month and reiterated today, at this moment there is a lot of uncertainty about the longer-term impacts of the three export LNG projects on the gas market and how it might develop. When $US60bn-plus of LNG plant begins operating virtually at the same time it would, as Sims said in the interview, “put pressure on any business system”.

The ACCC has been commissioned by the Federal Government to conduct an inquiry into the east coast gas market to try to work through what the longer-term implications might be. That inquiry is due to report to government next April and should provide a better and more informed framework for discussions about the impact of the plants on domestic supplies.

The framework is, of course, continuously changing. Only this week the NT Government announced the Chinese-controlled Jemena Group had won a tender to build a gas pipeline that will create an interconnect between the NT and its onshore and offshore gas reserves and the Queensland grid.

There has been some criticism of the choice of the privately-funded and cheaper northern pipeline over an alternative but significantly more expensive option that would have seen the pipeline take a more southerly route to Moomba where Santos gas processing and storage facilities would potentially have made the gas more easily and cheaply available to the NSW market.

The most significant implication of the go-ahead for the pipeline, however, is that it will allow transmission of NT gas, whether offshore or onshore, into the east coast gas grid.

To the extent that the gas doesn’t flow directly into NSW, it ought to displace gas that might otherwise have flowed north to Gladstone, freeing it up for domestic consumption.

The planned pipeline is an example of a response to the changing structure of the sector and of the new incentives and responses that it is creating.

There is a lot of gas off the northern coasts of Australia, as well as a lot of undeveloped gas (conventional as well as unconventional) on the east coast itself. There is also a major interconnector between Victoria’s Bass Strait and NSW.

How much undeveloped gas is ultimately developed, and how much gas flows from the NT and Victoria towards NSW, has a political dimension to it but will also be driven by the economics.

In theory, the domestic price  previously low because there was a lot of gas but a purely domestic market for it  will be influenced primarily by regional LNG prices once liquefaction and transport costs are back out.

With the collapse in the oil price and lower growth rates in China and Asia more broadly, the oil-linked LNG spot price has also plummeted.

What that might mean for the long-term contracts that underpin the Gladstone plants and for their need for additional gas resources to underpin any future expansions is most unclear at this early stage, and within the midst of the collision between OPEC and the US shale oil sector as OPEC tries to reassert its leadership role in the oil market.

What is obvious, however, is that having poured more than $US60bn into facilities for exporting gas, and having 20-year contracts with offshore customers, the three LNG plants will attract most of the existing reserves in Queensland and South Australia. There will be flow-on effects and new price signals within the east coast market that the gas production and transmission industries, domestic customers and maybe even governments will have to adapt to.

The ACCC’s decision not to try to prejudge those flow-on effects, or intervene to shape them to protect parties from the effects of the opening up of east coast gas to a far bigger and deeper market, means those pleading for protection will now have to do what some big industrial customers have already done and devise measures to protect or insulate themselves from future supply imbalances.

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