Price is the Elephant in Australia's LNG, Domestic Gas Conundrum

Australia's threat to curb exports of liquefied natural gas (LNG) in order to ensure domestic supplies is another unwelcome pressure on a tight global market for the super-chilled fuel.

But it's not an immediate threat, and it may also not materialize at all, depending on how the various players in Australia react to the government's planned action.

What needs to be addressed effectively is the elephant in the room, namely the price at which natural gas is made available to domestic consumers relative to the price the gas companies can receive for their LNG on the global market.

Australia vies with the United States and Qatar as the largest exporter of LNG, so the problem is not that there isn't enough natural gas in the country.

The issue is simply that the gas companies, no matter what public relations spin they may put on it, want to sell their fuel at the highest possible price.

If domestic consumers are prepared to pay the equivalent of international LNG prices, it's likely that the gas companies would be fairly agnostic as to who they sell to.

The problem is that domestic buyers will almost certainly say natural gas at a price close to export LNG parity is unaffordable, and will render businesses such as glass-making and other industrial manufacturing uncompetitive against imports.

Residential consumers, also facing massive increases in energy bills, are likely to baulk at export-parity pricing, and put pressure on politicians to ensure both gas and electricity become cheaper.

Throw in extensive media reporting on the relatively small amounts of tax paid by the major oil and gas companies, especially relative to their revenue, and you have a fairly toxic domestic situation where emotion often gets the better of common sense.

The oil and gas lobby group, the Australian Petroleum Production and Exploration Association (APPEA), makes the point that there is plenty of natural gas available to be contracted in the domestic market next year.

This is somewhat at odds with a report by the government's consumer watchdog, the Australian Competition and Consumer Commission (ACCC), that a domestic shortfall and price spikes are possible next year.

The ACCC report has prompted the government of Prime Minister Anthony Albanese, whose Labor Party won office in May replacing a conservative Liberal-National coalition, to consider invoking the Australian Domestic Gas Security Mechanism (ADGSM).

The mechanism allows the government to restrict LNG exports from the three plants on Australia's east coast and re-direct supplies to the domestic market.

The problem with the mechanism isn't that it will ensure sufficient supply, it's that it will only do so at a price that is described as internationally competitive.

With spot LNG prices in Asia reaching near record levels last week of $42.50 per million British thermal units (mmBtu), it's likely that gas made available to the domestic market under the ADGSM would be unaffordable for many consumers.

June quarter price spike 
A taste of the problem was seen in the second quarter, when domestic spot gas prices spiked higher as gas-fired power generation jumped amid outages at coal-fired power plants and strong power demand amid a colder beginning to winter.

While APPEA points out that the domestic price in Australia was still lower than the Asian spot LNG price, the point is that for several weeks electricity producers, and ultimately consumers, were forced to pay extremely high prices.

What is needed in addition to a commitment to supply the domestic market, is a system of price capping that ensures that local consumers don't face unexpected jumps in energy bills.

The gas industry is unlikely to support such a move, but the new government may be tempted as it will be popular with consumers, both business and retail.

APPEA argues that the government should be careful to avoid damaging Australia's reputation as a good place to invest, but ensuring domestic supplies at a price that allows industries to remain competitive is unlikely to dissuade much foreign investment.

The industry group has a stronger point to make that boosting supply by opening new natural gas basins and building infrastructure would help alleviate price pressures.

But again, this would only be the case if the new supply was guaranteed to reach the market at a regulated price that prevents surges, as seen in the second quarter.

Overall, the government will be forced to tread a narrow path between meeting the needs of domestic consumers and preventing price spikes, as well as ensuring the LNG export industry remains viable.

(Reuters - Editing by Robert Birsel)