The birth of the LNG export industry in Gladstone is trebling demand for gas sourced from the east coast, but the energy is being shipped to Asia while local deliveries are coming under pressure, especially as access to onshore gas is restricted in states such as Victoria.

Supply challenge

Gas will also have to be used more for power generation to meet emissions reductions targets, pointing to "the greatest supply challenge" between 2018 and 2024, the Australian Energy Market Operator says. Consultancy EnergyQuest estimates a supply shortfall reaching 172 petajoules in 2020 growing to 205PJ five years later.

Reforms are under way to increase transparency in the east coast gas market and improve pipeline regulation but the fundamental problem of inadequate supplies has not been solved. Meanwhile, AGL Energy's radical plan to examine the potential to import LNG into the eastern states is also only a longer-term option given the $200 million-$300 million plant would only start up in 2021 at the earliest.

Industrial buyers complain of a lack of choice on gas supplies that leaves them over a barrel when it comes to pricing.

David Ritchie, general manager at Victoria Wool Processors in Laverton North in Melbourne's west, said that when he sought to replace a contract from EnergyAustralia expiring at the end of 2016, three out of four retailers could not even make a supply offer.

"There was only one who could offer: it's not negotiations – you take this or you don't get any gas at all," Mr Ritchie said.

Victoria Wool Processors has been forced to accept a doubling in price for its 100,000 gigajoules a year of gas in a new contract signed last month with Origin Energy. But the cost increase will have to be passed on to customers, potentially impacting sales volumes and placing the company in a dilemma because much of the contract is on a take-or-pay basis, meaning it has to pay for gas even if it isn't used.


"We are not sure what increasing pricing is going to do to our volume and therefore gas usage, because we can't absorb this increase," Mr Ritchie said.

EnergyAustralia, the country's third biggest power and gas retailer, said its priority was to help customers find sources of gas in an industry that has been hampered by drilling and regulatory restrictions.

"Today there is less gas available in the market, despite Australia's abundant natural resources, and it has been a challenge to secure supply on behalf of some customers," an EA spokesman said, adding that the company had been able to "provide options" to all customers with contracts expiring this year.

EA's plan to produce at least some of its own gas has been stymied by the stalling of its minority-owned Narrabri coal seam gas project in NSW, while other gas producers have cut back spending on drilling and development since the oil price collapse.

"We've been particularly concerned by the decision of some governments to ban onshore gas exploration and development," the EA spokesman said. "The Australian Competition and Consumer Commission was clear in its recent inquiry into east coast gas markets that consumers in NSW and Victoria face significantly higher prices without opportunities to develop new gas supplies."

Restricting access

Oil and gas industry spokesman Malcolm Roberts said the risk for manufacturers was more around prices and long-term contracts given uncertainty about future gas supplies because production of conventional gas is peaking in Australia, while gas bans are restricting access to unconventional resources.

"I think they've got reason to be concerned," said Dr Roberts, head of the Australian Petroleum Production & Exploration Association. "The manufacturers looking for contracts that will take them into the next decade are running up against a problem for the producers about the tremendous uncertainty of being able to develop onshore gas."


Dr Roberts said that while APPEA supported the reforms taking place in the east coast market, the essential ingredient for the market was gas itself.

"All the things that people are concerned about in the market would be eased by higher volumes," he said, adding it was "simplistic" to put the blame on the Queensland LNG export industry.

Still, Mr Ritchie said rising energy costs had taken away one of the historical advantages Australian manufacturers had enjoyed.

"Now Australia has some of the most expensive energy in the world, the most expensive water in the world as well as over parity in wages, and you've got distance against you as well," he said. "How is a manufacturing exporter supposed to survive?"