Since liquified natural gas (LNG) exports started in Queensland ten years ago, eastern Australia’s domestic gas consumption has fallen by about 32%, while prices tripled. The largest drops in consumption were observed in the electricity and industrial sectors, which are typically more price-sensitive. While many factors influenced those declines, high gas prices are often cited as a factor when heavy gas users have ceased operation.
Although its LNG exports are much larger than Queensland’s, Western Australia (WA) has been mostly sheltered from these trends thanks to a domestic reservation policy. However, the market is facing growing issues, with the Australian Energy Market Operator (AEMO) forecasting large shortfalls in WA from as early as 2028. Prices have also increased materially since 2021, with average contract prices reaching about $7 per gigajoule (GJ) in 2024, compared with historical levels of around $3-5/GJ.
For eastern Australia, AEMO forecasts gas shortages from 2028, increasing sharply in the early 2030s as production from Victoria’s gas fields declines.
These issues can be surprising for a country that is one of the world’s largest LNG exporters. A lot of the gas market issues can be associated with the dominance of LNG exports over domestic gas use: Australia exports about 80% of the gas it produces. This has led to a linkage between domestic and international prices. In addition, there is a lack of competition in the eastern market, where a small group of LNG exporters effectively control 90% of 2P [proven and probable] gas reserves.
Finally, exporters have strong incentives to maximise their exports, and there are currently no mechanisms to ensure this doesn’t hurt domestic users. IEEFA has found LNG export facilities have maintained high levels of utilisation even in periods of relatively low international prices, with high volumes of spot sales (discretionary sales beyond contracted volumes) complementing long-term contracts. Some projects, like Santos’s GLNG project in Queensland, have even siphoned gas from the domestic market to fulfill their export commitments.
Redirecting gas from LNG exports could ease impending shortages
IEEFA has found that one of the best ways to address gas market tightness would be to redirect gas from LNG exports towards the domestic market. In the short term, there are more than enough spot sales to meet expected shortfalls. Spot sales made up about 25% of total exports in 2024, which is of a similar order of magnitude as Australia’s total domestic gas use, and multiple times the shortfalls expected on both sides of the country.
Expiring contracts present an opportunity to free up additional gas for larger longer-term forecast shortfalls, particularly in eastern Australia. The first contract to expire will be Santos’s GLNG contract with Kogas for nearly 200PJ (per annum) in 2031. This volume, combined with spot sales, would be more than enough to meet forecast shortfalls in the 2030s.
Redirecting gas from exports is likely to be a much faster, and lower-cost solution than developing new gas fields. Queensland gas is relatively low-cost, especially compared to new gas fields such as the Beetaloo, which would require billions in investment to bring the gas to the east coast.
Constraining LNG exports is unlikely to damage the energy security of our Asian consumers. Indeed, an unprecedented increase in LNG capacity in the coming years is expected to create an enormous supply glut in the late 2020s, which would last until at least 2040 according to the International Energy Agency. In addition, Japanese companies resell vast volumes of Australian LNG to other countries and could reduce their LNG purchases from Australia by a third without impacting Japan’s energy security.
This article was first published by Energy News Bulletin.
New mechanisms could ensure Australia’s energy security and reduce prices
The Australian government is currently reviewing what instruments are needed for securing domestic gas supply. In IEEFA’s opinion, a combination of mechanisms addressing long-term contracts and spot sales could help secure Australia’s energy security, decouple domestic and international prices, and maintain the flexibility required to adapt to changing market conditions.
We support the introduction of export licences for new long-term contracts and renewals. Licence decisions should be informed by the market outlook as well as producers’ past conduct and reserves availability to encourage good behaviour. This should for example deter producers from taking from the domestic market to meet export commitments. Queensland LNG exporter APLNG has come out in support of such a mechanism, to ensure “equitable domestic supply obligations” across all producers.
IEEFA’s view is that a licensing scheme for spot sales may not be sufficiently practical or flexible. It will be difficult to predict the exact volumes of gas the market will need in advance, given the influence of factors such as weather, power plant outages and many more. For spot sales, IEEFA believes an export tax, combined with the option of applying export caps when required, could help ensure sufficient supply.
An export tax would be simple to implement, incentivise domestic supply while maintaining investment incentives for gas producers, and have the additional benefit of decoupling domestic and international prices. Caps could be applied to spot sales to guarantee supply in exceptional circumstances, such as when an imminent shortage is forecast, when prices rise well above normal levels, or when exporters’ conduct creates unacceptable risks to domestic energy security.
Now is the time to reform Australia’s gas market settings, before shortages materialise and further industrial facilities close due to high gas prices.
