Australian gas producers diversify LNG netback pricing beyond Asian spot markets

Singapore — Australia's gas producers are increasingly referencing a range of contracted LNG prices to calculate netback LNG prices for marginal gas sales, including LNG strips, short-medium term contracts and oil-linked long-term LNG contracts, according to the country's competition watchdog.

These price references are in addition to the usual netback prices based on Asian spot LNG prices -- the S&P Global Platts Japan Korea Marker or Platts JKM, which assesses spot LNG cargoes delivered into North Asia.

The diversification of netback pricing was one of the key findings of the Australian Competition and Consumer Commission that had asked gas market participants to submit pricing strategy documents for review, following concerns that declines in international LNG prices had not led to a drop in domestic gas prices in Queensland and southern states.

The assumption so far had been that netback prices would determine the opportunity cost at which gas producers in Queensland, where three major LNG export terminals are located at Gladstone port, can sell gas into the domestic market.

These LNG producers currently produce gas in excess of their long-term LNG contractual volumes, which is sold into the domestic market. This makes them marginal suppliers of gas into the populous east coast gas market, and the opportunity cost influences local prices, according to the ACCC.

The incentive to supply excess gas to the domestic market comes when the domestic price is competitive with LNG export prices, after accounting for transportation and shipping costs.

However, LNG producers have been accounting for netback prices that are at a premium to spot LNG prices and not reflective of a fully functioning competitive landscape, the ACCC said in its latest Gas Enquiry 2017-2025 report issued Feb 16, adding that it would now review its own netback pricing indicators in 2021.

LNG strips, long-term contract prices

As LNG producers entered into more short- to medium-term LNG contracts over the past two years, it has fed into their domestic gas price assumptions, partly due to the fact that strip sales achieved a premium above JKM netback prices, according to the report.

The ACCC said one producer had "routinely based its pricing assumptions for uncontracted gas supply on oil-linked prices for longer-term LNG contracts" and another said that "while JKM netback was more relevant for domestic spot prices and 1-2 year GSAs, long-term LNG contract prices were more relevant for multi-year domestic GSAs." A Gas Sales Agreement or GSA governs the terms at which a producer sells gas to a domestic retailer.

Some Queensland LNG producers appear to have also considered prices under their long-term sales and purchase agreements or SPAs with foundation buyers when assessing domestic prices, the ACCC said, adding that "expected prices under LNG SPAs have been significantly higher than Asian LNG spot prices over recent years, and have also been materially higher than expectations of short/medium term LNG prices."

"The ACCC would be concerned if LNG producers have offered excess gas to the domestic market at SPA price levels rather than these alternatives, which are more appropriate reference prices for the sale of gas above LNG contractual commitments," the ACCC said.

Additionally, these wider references for contract prices have also led to global oil prices having a greater influence on Australian domestic gas pricing.

"With LNG contract prices typically linked to oil, expected oil prices appear to have played an important role in domestic pricing. Several major suppliers also appear to have forecast Asian LNG spot prices using oil," the report said.

One key finding of the regulator was that in Queensland, spot market-based LNG netback prices were seen as more of a price floor rather than a price around which domestic prices would be expected to converge, with producers expecting domestic prices to be "at a premium or equivalent" to LNG spot netback prices.

Other factors increasingly being considered in domestic gas pricing were re-contacting activity with southern producers as long-term legacy supply contracts expired, and some suppliers starting to incorporate LNG import pricing and supply dynamics into pricing strategies and assumptions for southern markets, the report said.