Australian competition watchdog probes ExxonMobil, BHP joint gas sales

Australian competition watchdog, the Australian Competition and Consumer Commission (ACCC), is looking to put an end to a marketing joint venture between ExxonMobil and BHP Billiton in order to boost competition in the Australian gas market. 

The Federal Government has released the report of the Australian Competition and Consumer Commission Inquiry into the competitiveness of wholesale gas prices in eastern and southern Australia.

“There has been unprecedented change in the east coast gas market over the last four years with the development of Liquefied Natural Gas (LNG) facilities in Queensland. These changes have created winners and losers, and industrial gas users in particular have been acutely affected by the transition,” ACCC Chairman Rod Sims said.

“The triple whammy of the introduction of LNG and with it exposure to international gas pricing, a fall in oil prices leading to a downturn in exploration and new development, and regulatory uncertainty and exploration moratoria, has created an increasingly complex environment for many gas market participants.”

Some suppliers have taken advantage of this supply uncertainty and potential shortfalls to increase prices and implement more restrictive non-price terms and conditions. 

“The future supply outlook is uncertain. Meeting future domestic and LNG demand will require extensive development of undeveloped gas reserves and resources. Sufficient gas is currently forecast to be produced in the east coast gas market to meet domestic demand and existing LNG contract commitments until at least 2025, but there is uncertainty over the timing of some developments, particularly due to low oil prices.”

“Some suppliers have taken advantage of this supply uncertainty and potential shortfalls to increase prices and implement more restrictive non-price terms and conditions,” Sims said.

The report makes a number of recommendations that the COAG Energy Council and state and territory governments can consider to alleviate gas market issues, particularly for industrial users. These include:

– Enabling new gas supply to come to market, in particular in south eastern Australia;

– Revisiting the regulatory coverage of pipelines, increasing the ability for pipelines with market power to be regulated, and;

– The consistency and transparency of the provision of information to the market.

“A $2 per gigajoule increase in the wholesale price of gas could increase residential bills by 5 per cent in New South Wales and 11 per cent in Victoria. The difference between a competitive market and an uncompetitive market in south eastern Australia could be as much as $4 a gigajoule for wholesale gas. A competitive market requires more gas supply and more sources of gas supply.”

“While the pipeline sector is responding to the changing market dynamics and offering new services, pricing based on significant pipeline market power is prevalent. The regime regulating gas pipelines is not fit for purpose and pipeline pricing is largely unconstrained by either the threat of regulation or effective competition,” Sims said.

“Pipeline pricing exacerbates the effect of supply tightness on wholesale gas prices. There are currently very few constraints on monopoly pricing by pipeline operators.”

“Compounding supply tightness and the effects of pipeline pricing, is the effect of an opaque and illiquid east coast gas market. Confidential bilateral negotiations remain the norm for both gas supply and transportation contracts. The lack of consistent, publicly available data on the sector is an impediment to participants, investors, and policy makers,” Sims said.

More supply, new suppliers and an increased diversity of supply sources are crucial for the future competitiveness of, and pricing in, the gas market. 

The ACCC said it would also further consider some practices in the market, including the joint marketing of the Gippsland Basin Joint Venture between Esso and BHP Billiton.

“While market conditions have been difficult, it is important that new supply comes online and that new opportunities are developed. Trading markets are developing and the Australian Energy Market Commission and the Australian Energy Market Operator are working towards further improvements in market design. More supply, new suppliers and an increased diversity of supply sources are crucial for the future competitiveness of, and pricing in, the gas market,” Sims said.

According to Reuters, both companies are fighting this move by the competition watchdog and ExxonMobil stated that separate marketing would increase costs.

The news agency quoted ExxonMobil as saying: “Any unwinding of joint marketing will only increase those costs in the short term and make it more difficult to invest and bring on new supplies in Gippsland.”

Reuters also reported BHP’s point of view and the company said the joint venture had served the market well and was still meeting the market’s needs.