Australia looks to create gas trading hub in wider push for 'gas-led recovery'

Sydney — Australia's coalition government is backing the development of a natural gas trading hub, which will be modelled on the US' Henry Hub, in a move aimed at increasing market transparency, Prime Minister Scott Morrison said Sept. 15.

The announcement was part of a raft of measures in the Liberal-National government's planned "gas-led recovery" from the coronavirus pandemic that included incentives for unlocking gas basins and extending agreements to protect domestic markets.

Morrison's "long-term goal" for an Australian gas hub at the existing hub at Wallumbilla in Queensland state will borrow from the "international gold standard" Henry Hub -- the natural gas trading hub for the US and the delivery point for the Nymex natural gas futures contract.

He did not give details on whether the Australian gas hub would be linked to a financial instrument or exchange-traded contract.

Queensland's three LNG plants began exporting from Gladstone port over 2015-16 under controversial circumstances, and they were accused of contributing to a supply and pricing crisis in the region, resulting in government intervention through gas export controls and an inquiry by the competition watchdog.

LNG producers and domestic consumers have been at loggerheads over the cost of gas, with the Australian Competition and Consumer Commission saying domestic users were paying substantially higher prices than international buyers. It has repeatedly called for more measures to prioritize local markets.

Opening up basins

Morrison's plan for an Australian trading hub is a three-pronged approach which includes investment in gas transportation infrastructure to alleviate bottlenecks that caused price spikes, greater price transparency and additional gas production by opening up exploration.

"Firstly, we've got to get the gas," he said.

The government plans to take a carrot and stick approach by setting new supply targets, with states and territories and enforce potential "use-it or lose-it" requirements on gas licenses. It will also aid in "unlocking five key gas basins starting with the Beetaloo in the Northern Territory and the North Bowen and Galilee Basin in Queensland" at a cost of A$28.3 million ($20.8 million).

Another A$10.9 million will be set aside to identify priority pipelines and critical infrastructure that will "highlight where the government will step in if the private sector doesn't invest." An industry-led negotiating "code of conduct" between producers and consumers is also to be delivered by February next year.

The Australian gas industry welcomed the news. Santos CEO Kevin Gallagher said the plan would help address missing pipeline links to connect new projects.

Credit Suisse analyst Saul Kavonic said Morrison's announcements "could become a self-fulfilling prophecy for the gas infrastructure sector, as industry may now sit back and wait to receive government funds to do what they might have done anyway."

Kavonic also threw cold water on the idea of either industry or government spending on pipeline infrastructure, saying the business case looked poor and the basins were still too immature to justify the spend.

"We also doubt a 'Henry Hub' like hub can be achieved in Australia absent a government mandate, given market depth and structural constraints," he said, adding that it was doubtful whether a 'hub' would achieve any material benefit beyond price transparency -- which isn't really the core issue for buyers.

Renewables versus fossil fuels

Morrison's plan has also drawn anger as critics see the traditionally free-market government choosing to support the gas industry while taking a more laissez-faire approach to clean energies.

"For two decades, the Coalition has said we should 'let the market decide', while coal and gas companies said we shouldn't be 'picking winners' with the Renewable Energy Target," the Australasian Centre for Corporate Responsibility said in a statement.

Morrison has long been a vocal advocate of the fossil fuel industries. In 2017, he went so far as to bring a chunk of coal into parliament to taunt the opposition, telling them not to fear it.

To boost its "clean" credentials the government plans to throw its weight behind a gas-fired power plant if the industry does not replace the Liddell coal power station before it closes down in 2023.

"If industry steps up, we'll step back," Morrison said.

The government has set a target for the private sector to deliver 1 GW of new energy by April next year. A requirement has been given for a final investment decision with commitment for generation in time for the Australian summer of 2023-24.

"Snowy Hydro is developing options to build a gas generator in the Hunter Valley at Kurri Kurri should the market not deliver," a statement from the prime minister said. The government is the sole shareholder in the company.