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1.1 The eastern Australian gas market is changing

The eastern Australian gas market is currently undergoing a period of rapid growth and transformation as it becomes the last of Australia’s three geographically distinct gas markets to become linked to international markets. For the first time, domestic gas users on the east coast will be exposed to the influences of dynamics and prices in the Asia–Pacific market.

An increase in proven and probable reserves of gas, primarily derived from coal seams, has been a catalyst for the development of export capacity in the eastern Australian gas market. In the past decade, the proven and probable gas reserves in the Surat-Bowen basins in Queensland — where exploration for coal seam gas began in the 1980s — have grown roughly tenfold (DNRM 2015a). The liquefied natural gas (LNG) projects coming online in Gladstone, Queensland are the first to rely mainly on coal seam gas.

In turn, the structural adjustment associated with changes in the eastern Australian gas market currently underway has created, or exacerbated, a number of issues within the eastern Australian market.

These issues include: the implications, for domestic users, of the opening of export markets; the economic, environmental and social effects of gas production (especially from coal seams); and concerns about investment in and allocation of gas transmission pipeline capacity.

There has been a lot of recent commentary on the above issues, but some of the debate and the policy responses so far have not been framed in an economic context.

In this research project, the Commission has sought to provide an economic perspective on selected policy issues. The project focuses on the eastern Australian gas market but, as is the approach for all its work, the Commission examined the issues and evaluated policy proposals on the basis of whether they would be expected to improve the wellbeing of the community as a whole.

1.2 Analytical approach

In this report, the Commission has examined issues relating to different stages of the gas supply chain in the eastern Australian gas market, against the backdrop of integration with the Asia–Pacific market. The stages of the supply chain considered include exploration,

26 EXAMINING BARRIERS TO MORE EFFICIENT GAS MARKETS

production, processing and transmission (figure 1.1). The Commission’s analysis has also considered the role of government in the market, and examined whether there are barriers to efficiency that would be amenable to policy reform.

Figure 1.1 Selected stages of the gas supply chaina

a _{Storage can occur either after transmission or prior to transmission.}

One of the key aspects of the economic efficiency framework is the consideration of what barriers are preventing the efficient allocation of resources in gas markets. The other critical element of the economic efficiency framework is the application of cost-benefit principles. These principles apply to policy and market changes alike — a market change that makes some groups worse off, but others better off is a more efficient allocation of resources provided the gains exceed the losses.

The Commission’s model of the eastern Australian gas market

As part of the project, the Commission has developed a partial equilibrium economic model of the eastern Australian gas market (box 1.1). The model was used to complement the Commission’s analysis through illustrative examples of hypothetical policy scenarios. The model structure, data, assumptions and details of the policy scenarios are documented in appendix B (available online).

1.3 Conduct of the project

This research project was initiated by the Commission in September 2014. Following the commencement of the project, the Commission undertook consultation with a range of organisations and individuals, including representatives from gas companies, energy users, regulators, and government departments and agencies (appendix A).

The consultation process included a modelling workshop, held in Melbourne on 4 February 2015, to enable the Commission to receive feedback from stakeholders on

ABOUT THIS REPORT 27 aspects of its model of the eastern Australian gas market. A separate meeting with gas users was held on the same day.

The report was released on 31 March 2015.

Box 1.1 Commission modelling of the eastern Australian gas market

The Commission has developed a partial equilibrium model that seeks to capture the underlying economic fundamentals of the eastern Australian gas market. The model is used to examine the effects of linking with the Asia–Pacific market, as well as selected policy issues, such as CSG moratoria and the effects of a domestic gas reservation policy. To test the sensitivity of model results, three different scenarios were estimated based on different estimates for LNG prices: a ‘low LNG price’ scenario, a ‘central LNG price’ scenario and a ‘high LNG price’ scenario.

The supply and demand sides of the market were represented in the model. Gas production, processing, transmission, storage and LNG conversion were modelled as separate activities in the supply chain. Demand for gas was disaggregated into demand from electricity generators, industry and mass market users. Exploration, distribution and retail were not explicitly modelled. The geographical detail of the model captured key transmission pipelines linking major supply basins and demand centres in the eastern Australian gas market. Supply basins and demand centres were represented by ‘nodes’ in the model. Each supply basin contained up to ten fields, with production from each field limited by estimated gas reserves recoverable from that field. The model was not designed to forecast prices, does not capture the full engineering detail of the gas market, and makes a number of simplifying assumptions about the structure of the market. Nevertheless, it provides a useful illustration of some of the mechanisms at play.

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