Australia Gas Price Cap Boosts LNG Import Terminal Plans but Adds risk

Australia's plan to control domestic natural gas prices, which producers say will deter the development of new supply, is expected to boost the prospects for proposed LNG import terminals but potentially defeat the government's aim to cut energy bills.

Parliament is set to pass legislation on Thursday to cap gas prices at A$12 per gigajoule (GJ) for a year and then require a "reasonable price" for domestic sales after the cap expires.

Industry players say the plan, which surprised producers, will hurt investment in new supply as the "reasonable" price based on cost of production plus an agreed return on capital would fail to reflect exploration and development risks - which in turn would open a window of opportunity for LNG imports.

"We feel as though it actually supports our project better," said Kym Winter-Dewhirst, managing director of Venice Energy, referring to his company's planned A$250 million ($170 million) LNG import terminal off Adelaide in South Australia.

If the price cap results in less new local supply, "then additional gas will be required for a period. So anyone with an LNG terminal will be able to fill that gap more than previously thought", he added.

Australia, despite being among the world's top two liquefied natural gas (LNG) exporters, faces gas shortfalls from 2026 in its most populous states, New South Wales and Victoria, as supply is drying up in the offshore fields that have long supplied them. 

Those states are far from the country's remaining key gas producing regions. New fields are not being developed fast enough to fill the gap amid community opposition and resistance from lenders. The government's market intervention has just added a new hurdle.

"If the new Bill is passed in its current form, we expect it to turn a short-term gas supply crisis into something considerably worse as soon as winter 2024," Jarden analyst Nik Burns said in a report.

PRICE IMPACT

LNG supply, potentially from Western Australia, Papua New Guinea or the United States, for example, would, however, raise energy prices as LNG is more expensive, analysts cautioned.

"Imported LNG would have to compete with domestic supply ...  under the reasonable price regime. Why would you buy A$30 imported gas when the government has said you can get a regulated contract at A$12?" Credit Suisse analyst Saul Kavonic said. 

Asian spot LNG  is currently around $37 per million British thermal units.

Squadron Energy, which has yet to line up gas buyers for an LNG import terminal it is building south of Sydney, said it expects to complete construction at the end of 2023. 

It declined to comment on the government's policy.

Viva Energy, awaiting state approval for an LNG import terminal in Victoria, "remains positive" about its project as forecasts point to the need for imports later this decade, a spokesperson said.

There are five proposed LNG import terminals in Australia, all together worth about A$1.25 billion.

However, analysts question whether companies will be willing to spend hundreds of millions of dollars to build terminals amid uncertainty over what the government might do next to rein in energy bills.

"As a result, progress towards final investment decisions at (LNG import) developments could stall in the short term, delaying first LNG imports," said Lucy Cullen, a research director at energy consultants Wood Mackenzie. 

 ($1 = 1.4654 Australian dollars)

 (Reporting by Sonali Paul; Editing by Himani Sarkar)