In a post-QCLNG world, how will the market respond?

Paul Balfe, Executive Director, ACIL Allen Consulting

Paul Balfe, Executive Director, ACIL Allen Consulting

This article focuses on market responses to the ramp-up of coal seam gas (CSG) production in Queensland following the commencement of shipments from the Queensland Curtis LNG (QCLNG) project, and the anticipated start-up of the Gladstone LNG (GLNG) and Australia Pacific LNG (APLNG) projects later this year.

The article reviews recent trends in the oil market following the dramatic collapse of global oil prices through the second half of 2014, and the flow-through to US Henry Hub gas prices, LNG prices and US drilling activity.

Figure 1 shows the movements in average monthly gas prices in each of the domestic spot and short-term trading markets in eastern Australia (the Victorian wholesale gas market; the short-term trading markets in Sydney, Adelaide and Brisbane; and the Wallumbilla Gas Supply Hub) from January 2014 to April 2015.

Over the first 11 months of 2014, spot gas prices in eastern Australia fell, with the prices at Brisbane and Wallumbilla markets in particular dropping to very low levels. December and January saw a sharp rebound coinciding with shipment of the first cargo from QCLNG. Again, the Brisbane STTM and Wallumbilla Hub prices showed the sharpest response.

The Brisbane price, which fell to historic lows averaging only $0.31/GJ in November, rebounded to average $4.73/GJ in January, peaking at around $8/GJ. A similar story played out at the Wallumbilla hub, where prices rose on average from $0.79/GJ to $5.87/GJ over the same period. Since January, however, the Queensland prices have retreated, with April prices falling to $2.24/GJ in Brisbane and $2.57/GJ at Wallumbilla.

The probable explanation is that we are now seeing the effects of ramp-up gas suppressing market prices in advance of the start-up of production at GLNG and APLNG. Given that QCLNG is already in production and is able to take ramp-up gas from the other projects under short-term swap arrangements, we do not expect prices to fall to the extent seen during the second half of 2014.

Prices in the Sydney market have fallen by around 20 per cent from their January highs, but in the Melbourne and Adelaide markets spot prices have continued to climb and are now at levels last seen in mid-2014.

The ramp-up of CSG production volumes is now clearly evident in production data published by the Australian Energy Market Operator on the National Gas Market Bulletin Board (Figure 2). Queensland CSG production in April exceeded 37 PJ – an annualised rate of almost 450 PJ/a – with eight new production facilities having come on line over the past 12 months.

Shale oil and gas wells typically exhibit high initial rates of decline after being brought into production.

The results from the AEMO-operated Wallumbilla Gas Trading Hub (which commenced operations in March 2014) are shown in Figure 3.

The Wallumbilla Hub provides a market in which buyers and sellers can trade gas on a short-term basis across three transmission pipeline systems: the Roma–Brisbane Pipeline (RBP), the South West Queensland Pipeline (SWQP) and the Queensland Gas Pipeline (Wallumbilla to Gladstone and Rockhampton, QGP). The RBP continues to be the most actively traded location at the Wallumbilla Hub. As shown in Figure 3, prices at Wallumbilla (RBP) fell to less than $1.00/GJ in November and early December before rising sharply, reaching $8.00/GJ at the beginning of January. By April 2015 the Wallumbilla (RBP) price dropped again, trading in a range between $2.00 and $4.00/GJ.

Along with the softening of prices over the past three months, the volume of gas being traded through the Wallumbilla Hub has also fallen, from an average of 13.3 TJ/day in January to 4.5 TJ/day in April. However, volumes did pick up toward the end of the month.

The data seems to point to the re-emergence of a temporary over-supply situation in the lead-up to commissioning of the GLNG and QCLNG facilities. This is likely to lead to a period of price weakness over the next quarter, with increased short-term price and volume volatility reflecting fluctuations in the supply–demand balance.

INTERNATIONAL PRICES

After dropping sharply through the second half of 2014, global oil prices have stabilised over the past few months. Indeed, there has been a modest recovery from the lows of January 2015, when Brent crude averaged around US$48 per barrel, with the April price averaging about US$59 per barrel.

The fall in oil prices has seen an equally dramatic collapse in drilling activity in the US shale oil and gas sector.

As shown in Figure 4, US Henry Hub gas prices have softened significantly over recent months and have now given up most of the gains achieved during calendar 2012 and 2013. Japan LNG prices under oil-linked long-term contracts have continued to decline, but not as sharply as oil prices. However, the fall in spot LNG prices has been much more severe. Data published by the Japanese Ministry of Economy, Trade and Industry shows that prices for spot LNG cargoes contracted for delivery to Japan fell from US$15.30/MMbtu in October 2014 to US$8/MMbtu in March 2015.

The fall in oil prices has seen an equally dramatic collapse in drilling activity in the US shale oil and gas sector. Baker Hughes data published by the World Bank (Figure 5) shows that between October 2014 and April 2015 the number of active drilling rigs fell from about 1,600 to fewer than 750. Shale oil and gas wells typically exhibit high initial rates of decline after being brought into production. It would therefore be reasonable to expect that this pull-back in drilling activity will see the recent rapid increases in US oil production levels stall over the next 12 months or so.

To view the infographics associated with this article, please refer to the digital edition of Gas Today Winter 2015.

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