Alert not alarmed

The media is full of stories about worsening petrol and diesel shortages, as you would expect during a war that has closed a vital sea trade route for oil and gas — the Strait of Hormuz.

But gas — which still plays a vital role in heating homes in the southeastern states in winter and in firming wind and solar energy during those months — has received much less attention.

That may be because domestic prices have remained pretty benign — they’ve declined about 20% in recent weeks even as the Asian and European benchmarks for seaborne LNG have spiked 50% or more since the US and Israel commenced their bombing of Iran.

The first chart — supplied by EnergyQuest CEO Rick Wilkinson — illustrates the point.

The Wallumbilla hub price — a domestic price — fell from about $12 a gigajoule in late February to below $8/GJ two weeks later while the Asian (JKM) and European (TTF) LNG benchmarks and Brent crude jumped 50% or more. The Walumbillia price has since popped back up to $10/GJ.

In other words, there's no sign in these prices that the East Coast gas market is facing war-induced shortages.

Why is it so?

One reason is the Australian Energy Market Operator, which runs the Eastern states National Electricity Market and the East Coast domestic gas market, has pushed out its expectations for "structural shortages" in the East Coast gas market by a few years to 2029.

The next chart is from last year's Gas Statement of Opportunities and will be updated in the 2026 GSOO due to be published shortly.

"In the short term, we've almost certainly got enough physical gas for winter. There's no supply shortfall that that is suggesting itself," says Matthew Rennie, executive director at Rennie Advisory.

The reason we feel short is because at least twice as much gas flows into LNG exports via Gladstone, which consume 1300-1400 petajoules a year including surplus southern production, as we consume domestically.

"Every winter the East Coast gas market tightens because of rising demand," Rennie says. "But that tightening normally doesn't create shortages. We normally see that in some slightly higher spot prices.

"Iran only matters if LNG stays expensive and if we start to move from a risk premium situation to a supply shortage. But if LNG settles again in a few weeks, then the winter outlook doesn't change at all."

To illustrate, gas exporter APLNG last month offered 31PJs of gas to the domestic market, on LinkedIn of all places, but got no takers, and is now offering 6.7GJs. .

Still, very cold winter days during wind and solar droughts stretch daily supplies to the limit, because of storage and pipeline constraints.

There are fears that if the war on Iran is prolonged and persists into winter, and LNG export facilities in the Gulf of Arabia get damaged, things could get tougher in the domestic gas market and the National Electricity Market.

But this hasn't yet shown up in NEM futures trading on the ASX. The next chart was cobbled together from recent quarterly wholesale prices for the mainland NEM states, with ASX baseload futures prices tacked on to show what energy traders expect to happen this year.

If anything, expected price outcomes this winter are so far more restrained than last winter or the one before that, and nowhere near the Ukraine war-induced NEM crisis of 2022.

One reason for this could be that southern storages are all pretty full. The largest, Iona near Port Campbell in Western Victoria, is 90% full at 22,068 terajoules, while the smaller storages at Newcastle and Dandenong are 81% and 93% full at 1260TJs and 631TJs respectively. (1000TJs equal a PJ.)

Queensland’s storages at Roma and Silver Springs hold just under 26,000TJs and are only 22%-30% full. They service the LNG processing plants at Gladstone, but can send gas south if need be, subject to pipeline capacity.

Iona has been working harder as Bass Strait production has declined and a processing plant in Gippsland has been shut down, trimming capacity from more than 1000 TJs a day to less than 700TJs/day, Wilkinson says.

The next chart shows just how hard.

Last year Iona was filled to its current capacity — at the top of the range for the previous five years — while gas was cheap and plentiful over the summer, discharged faster than usual over the winter, and slowly but steadily refilled over the spring.

During the summer just concluded it has been refilled even faster than the previous summer in readiness for another winter and has just nudged above the average level for this time of the year after starting a good way behind.

Another reason for the benign outlook is that year by year and quarter against quarter, gas plays a smaller role in setting NEM prices as wind, solar and — especially — batteries increase their capacity.

The next three charts show which energy sources set NEM prices, how often and at what level over the last three quarters compared with the previous corresponding quarters. They are reproduced from the Australian Energy Market Operator’s Quarterly Energy Dynamics reports.

Elbowed aside

The charts show that gas power is setting prices in the NEM less often — and at lower levels — as renewables and batteries grow. The trend is less pronounced in the June and September quarters when the weather gets cold, wind and solar go missing for days at a time and gas is required to fill the gap in NEM generation and heat houses.

Finally, the link between domestic gas prices and LNG exports may be less than popularly thought, says Wilkinson. The next chart shows the Wallumbilla spot price plotted against the JKM Asian netback LNG spot price, the Brent crude-indexed netback price and LNG export volumes over the last six years.

These prices don't always move in lockstep. When Wallumbilla spiked in winter 2022 due to coal and transmission outages, LNG exports eased — possibly thanks to government pressure to ease the domestic shortfall — while JKM spiked ahead of the first northern winter after Russia's invasion of Ukraine.

Even so, domestic gas prices are structurally higher since Queensland LNG exports began about a dozen years ago, and the punters that have the ear of government are hardly going to be dissuaded from the popular view during a cost of living crisis.

Think big (stick)

That means the pressure on governments to make sure Australian gas gets to Aussies first isn't about to relent. The government is mulling an East Coast reservation scheme for domestic use. But Rennie says Australia needs to stop playing the victim and act like the energy superpower it is.

We have a fifth of the global LNG market and two-fifths of the Asian market. As one of the world's three largest LNG exporters, the federal government should be willing to use its powers under the Australian Domestic Gas Security Mechanism as a last resort to ensure there are sufficient gas supplies on the East Coast to avoid punitive prices.

"The 'worst case scenario' is entirely in our own hands," Rennie says. Japan's plea for more LNG from Australia two days ago reinforces the point. It's part of a wider conversation Australia should have about how best to exploit our energy riches as a "strategic national asset", he says.

"It's not this 'will it be coal, or will it be renewables?' It's 'we need 200 gigawatts by 2040' —  if the last three gigawatts is coal or the last four gigawatts is nuclear, it doesn't matter. We have to start thinking of energy as a national security issue and start building what we need, because if we don't, we're not even going to be in the game.

"Data centres won't come here. We won't be able to meet the demand from global industrial customers that need to use less gas to meet new overseas climate targets. We've just got to get on the front foot a bit and just own the assets that we've got."