ACCC Gas Inquiry – A Triple Whammy

ACCC Gas Inquiry – A Triple Whammy

We’ve previously warned of a perfect storm developing in Australia’s LNG market (see here and here).  The ACCC’s investigation of this opaque sector is due next month, but its preliminary observations suggest it will be difficult to stop this storm from upending the market.

When the resource “super-cycle” was in full swing a number of large scale natural gas projects were approved in Australia on the expectation there would be sufficient domestic supply and necessary infrastructure to support an export market.

The ACCC has shed some light on the current market landscape, and unfortunately for the consumer, it seems that decisions made long ago are resulting in higher domestic gas prices and existing inefficiencies will take significant time and resources to resolve.

• The ACCC has observed that inefficiencies exist in Australia’s gas market between buyers, producers and distributors.
• This distortion was aided by an element of hubris when large scale investments were decided, based on an acceptance that the existing market structure would cope with the added supply and that CSG would meet the LNG requirements to supply the domestic market.
• Domestic gas supply is likely to decline over time without significant exploration.
• Exploration has been hampered by weak oil prices and regulatory uncertainty.
• New gas production will be complicated by relatively high barriers to entry, geological risk, large upfront capital costs and long development timeframes.
• Current market dynamics have concentrated market power on the distributors of gas, with less than 20 per cent of pipelines in the east coast subject to any form of economic regulation.
• The threat of regulation is not acting as an effective deterrent to monopoly pricing, and alternative forms of regulation are required to address this issue.

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.