Russell: Who Took My Gas? Australia's LNG Boom Hurts Locals

Up to now the domestic gas market in eastern Australia has largely been supplied from conventional wells in central Australia, and offshore platforms in the Bass Strait between the mainland and the island state of Tasmania.

The eastern states are linked by a pipeline network and the market has been characterised by long-term contracts at fixed prices, which has helped underpin industrial users such as glass and paper manufacturers, as well as retail customers.

Prices for domestic gas have also been below that for LNG in Asian markets, although the collapse of spot LNG prices to record lows of $6.70 per million British thermal units (mmBtu) last month has brought the two closer together.

The problem for domestic users is that many of the long-term contracts are expiring in the next few years and they have found that suppliers are unwilling to enter new long-term contracts, or will only do so at prices that are higher than equivalent LNG costs.

One manufacturer at last week's Australian Domestic Gas Outlook conference in Sydney was adamant that the market has failed and his business is at risk of closure without certainty and stability of natural gas supply.

From his perspective, natural gas was being diverted away from the domestic market and to the export-focused LNG plants, even though the companies running these projects claim to have sufficient reserves to meet their supply needs.

What became clear at the conference was that domestic prices will inevitably rise to meet LNG prices, although whether these are long-term, oil-linked LNG prices or the more volatile spot price is something that remains to be determined.