Access to LNG infrastructure and a demand side response will limit price rises.
We disagree with the premise that east coast gas prices must rise to international pricing equivalence. In our view the theoretical arbitrage opportunity for 3rd party gas seller to achieve LNG netback pricing will not eventuate. The three CSG-to-LNG projects currently under construction have sufficient reserves to meet their combined export requirements, suggesting no net additional supplies are needed from 3rd parties. In addition, we believe there will be a demand side response to rising gas prices, led by the power generation sector which currently represents c.30% of gas demand on the east coast. Higher gas prices imply power stations move up the cost curve and generate less, acting as a natural release valve to rising prices.
The impacts on the Australian economy are negative but manageable
Higher gas prices will inevitably lead to higher input costs for end consumers. However if prices increase to $6-7/GJ as we expect, there are no stocks within Deutsche Bank’s Australian coverage universe facing double digit earnings downside. In addition, mitigation opportunities led by increased energy efficiency and fuel switching could see earnings impacts further reduced. We do not subscribe to the thesis of looming irrevocable damage to the Australian economy from higher energy costs.
Eoin Treacy's view As Australia’s natural gas export capacity ramps up it is likely to offer a useful template for the USA where the debate continues on how committed the country should be to exports.
At present, the Queensland and Western Australian fields are set up for exports and to a certain extent are stranded from domestic markets. This may insulate the domestic market from equalisation with the global market for LNG. However, if these two separate sources of supply become fungible, through pipelines, domestic Australian natural gas prices are likely to rise to the marginal cost of substitution with coal and other fuels.