The proposed west-east gas pipeline, seeking to bring volumes from Australia's gas-rich west to the gas thirsty east, both benefits and is hurt by high Asian LNG prices, which Rystad Energy forecasts to increase post 2020. Our analysis shows Western Australia gas would be competitive on the market in the eastern states if sent via pipeline, but the higher regional LNG price also increases the opportunity cost for current exporters to sell volumes domestically rather than selling to the export market.

However, not all of Western Australia's gas producers have access to the export market, so the pipeline would provide much-needed long-term demand options for these producers. In turn, this would stimulate development and further exploration activity in Western Australia.

Large gas consumers in the eastern states, where the majority Australia's population is located, will be attracted to the greater certainty that contracts for pipeline gas will provide, but it remains to be seen whether a sufficient number of them are willing to make the commitment and whether there is sufficient supply for a west-east gas pipeline to proceed.

It's worth noting that public and professional opinion on the pipeline has been mixed. Some see the A$5 billion price as an immediate disqualifier, while other reactions have been milder but still suggest the project won't get off the ground without significant investment by the government.

Background and Context

In October 2017 the Federal Government commissioned a pre-feasibility study into a gas pipeline connecting the gas markets of Western Australia and the eastern states. The map above shows three possible routes for such a pipeline:

  • Alternative A involves sending new supply through the existing Blacktip pipeline from Western Australia's Bonaparte Basin, via the Northern Territory's gas network and then through the new Northern Gas Pipeline (NGP) which could expand capacity to meet the additional supply.
  • Alternatives B1 and B2 involve building a new, dedicated link connecting Western Australia's Karratha with the southerly portion of the NT's gas network and then transit gas either northwards through the NGP or via a new pipeline link to Moomba.

Interest in a transcontinental pipeline arose in response to extra-ordinarily high gas prices in the eastern states (such as spot prices in the mid A$20.00/GJ during 2016) as it will diversify gas supply and hence relieve some pressure on prices. Given some of this volatility arose out of the start-up of the LNG facilities on Gladstone Island and that prices have subsequently declined and stabilised, it is worth considering the circumstances in which a west-east gas pipeline would be commercially viable.

Asia Pacific LNG prices forecast to increase
Rystad Energy expects a marked increase in the amount of gas imported into Asia Pacific at least out to the mid-2020s as demand in the region increases. Additionally, an expected recovery in oil prices will drive prices higher as oil-indexed LNG contracts currently account for about 70% of the imported LNG volumes in the region. Figure 1 shows how Rystad Energy expects spot prices to fall in 2019 and 2020 due to excess supply in the market but begin to recover in the early 2020s as oil prices rise and new investments in international LNG exporting infrastructure is required to keep up with the increasing demand.

Rising Asian LNG spot prices in the early 2020s has implications for AGL's and Australian Industrial Energy's (Squadron Energy, Marubeni and JERA's initiative) proposals to import LNG into Victoria and New South Wales, respectively, using floating storage and regasification units (FSRU). While importing gas has the advantages of being quicker to deploy, cheaper to bring online (A$300 million compared with around A$5 billion for the pipeline) and flexible, as an FSRU can be relocated if no longer required, the price of the gas could be around A$13.00/GJ and subject to any volatility in the Asia-Pacific LNG market. If LNG importers were to sign long-term agreements to guarantee their supply, import prices could be closer to A$15.00/GJ.

Clearly the Asia-Pacific market gas price has implications for both the Western Australia and eastern states markets, as producers will seek to sell their gas to the highest bidder and higher prices in the Asia-Pacific market will put upwards pressure on prices in Australia. However, there are limits on how much gas Australia can export, both physically in terms of access to liquefaction capacity and due to Western Australia's and the federal government's policies. Eastern Australia could benefit if supplies came from constrained domestic resources via the new pipeline.

What are the breakeven prices for delivering Western Australia gas to the eastern states?
A starting point is to compare the cost of Western Australia gas delivered into the eastern states' market with anticipated gas prices in 2023, when such a pipeline could begin operating. The following focuses on options to use gas from the Carnarvon basin, as existing capacity to deliver gas from the Bonaparte basin is limited. Blacktip can produce 44 PJ/a, which is supplied to the Power and Water Corporation in the Northern Territories.

Rystad Energy estimates that most Western Australia gas producers will have breakeven prices below A$4.50/GJ in 2023. A reasonable transport charge would be in the order of A$2.50 to A$3.00/GJ given the current full haulage tariff for Western Australia's main onshore trunkline, the Dampier Bunbury Pipeline (DBP), is A$1.33/GJ and a pipeline connecting Karratha with Moomba would be roughly twice the length of the DBP. This suggests a floor delivery price into the eastern states' wholesale market of A$7.00 to A$7.50/GJ.

Figure 2 shows the gap in 2023 between the breakeven price for Western Australia gas projects with a A$2.50 and A$3.00/GJ transport fee, and the forecast Asian LNG spot price of A$11.90/GJ plus A$1/GJ for regasification.

This suggests it could be possible to deliver gas into the eastern states at lower prices than those available through importing LNG.

The pros and cons of a pipeline
A pipeline will enable both suppliers and consumers to reduce their risk through entering into long-term contracts. This in turn will help secure financing for new, expansion or backfill supply projects while high-volume users can limit their exposure to potential tightening and higher prices in their local or the Asian gas markets.

Despite being interested in signing long-term gas contracts, large users in the eastern states have faced difficulties doing so in recent years. Establishing commercial arrangements between producers in Western Australia and eastern states consumers can provide the security of demand to enable the financing of a pipeline and to proceed with new projects sourcing gas from fields that are locked out of the Western Australia domestic or export markets, as well as de-risking expansion and/or backfill projects.

It remains to be seen whether a sufficient number of large gas consumers are willing to make the commitment for a west-east gas pipeline to proceed.

Summary

The proposed west-east gas pipeline, seeking to bring volumes from Australia’s gas-rich west to the gas thirsty east, both benefits and is hurt by high Asian LNG prices, which Rystad Energy forecasts to increase post 2020. Our analysis shows Western Australia gas would be competitive on the market in the eastern states if sent via pipeline, but the higher regional LNG price also increases the opportunity cost for current exporters to sell volumes domestically rather than selling to the export market.