Australian gas users fear shortage as LNG exports grow

* Gladstone LNG hub may drain east coast gas supplies

* Miner Rio Tinto says having problems securing gas supplies

* Some domestic buyers press for government intervention

* Gas producers say higher prices to boost supply

By Rebekah Kebede and Sonali Paul

ADELAIDE/MELBOURNE, May 16 (Reuters) - Australia is on its way to becoming the world’s top exporter of liquefied natural gas, but industrial consumers on the country’s east coast are worried gas producers will ship so much to Asia’s booming economies that domestic supplies will be tight.

East coast gas will flow to international buyers via three multi-billion dollar LNG projects under construction near Gladstone and due to open in 2014 and 2015. Exports will drive up the price of gas, which previously had no outlet other than the landlocked regional market.

Big gas consumers such as power generators, miners and manufacturers will have to match Asian prices to keep gas at home, but are concerned even that may not be enough to beat buyers in China, Japan and South Korea to secure supplies.

Gas producers may find selling large volumes in single long-term deals is potentially more attractive than splitting up the volumes for many shorter-term deals to local consumers.

“We are looking at a gas supply shortage,” New South Wales resources and energy minister Chris Hartcher told reporters.

“We need assurances from producers around price structure and security of supply and we have no guarantee on either right now,” Hartcher added an industry event in Adelaide, noting New South Wales state has a million customers using gas,

Big consumers such as power generators, miners and manufacturers in the east, home to the bulk of the population, are pressing the government to ensure their access to supplies.

“Gladstone is going to be like a giant vacuum cleaner for the East Coast gas market hoovering up all the gas it can get its hands on,” Michael Fraser, chief executive of power firm AGL Energy, said in a speech last month.

He said annual demand for east coast gas could more than triple from about 12 million tonnes now to 46 million tonnes if the projects underway at Gladstone and another on the drawing board are completed.

Miner Rio Tinto and fertiliser maker Incitec Pivot , which needs gas to produce ammonia, have raised concerns about supply and prices, with manufacturers calling for producers to be made to keep some gas for domestic supply.

“Rio Tinto is actively seeking gas in the Queensland market for the 2015 period (and beyond), but is finding it difficult to secure firm offers for future supply, largely due to uncertainty with many producers balancing reserve growth, existing contract commitments and market expectations,” the company said in a submission to the government’s energy policy review.

Producers are already seeking export-type prices for long term gas contracts to manufacturers. Suppliers are asking Incitec Pivot for double current prices or more in negotiations for new contracts, Incitec spokesman Stewart Murrihy said.

Electricity producers have also faced hurdles in locking in supplies, according to the National Generators Forum (NGF), an electricity industry association.

Gas producers are reluctant to commit to new supply contracts from the time Gladstone projects are due to come on line, preferring to see if they can sell into export markets or achieve a higher price domestically once exports start.

“If you’re a local gas producer in Australia and you have the option of selling your gas into an LNG manufacturer or selling it domestically, then you’ll want to get a price that’s commensurate with what the LNG projects are willing to pay,” Peter Strachan, an analyst with Stock Analysis in Perth said.

Hartcher said that the state government has yet to decide on policy steps aimed at guaranteeing supplies. It is considering options such as requiring gas producers to reserve some volume for domestic supply or introducing a royalty scheme that would give producers incentives to supply the local market, he said.

Australia’s resources minister is due to complete an energy policy review later this year focusing on energy security.

“I am paying close attention to the suggestions that there are difficulties in negotiating long term gas supply contracts,” Martin Ferguson told Reuters on the sidelines of a trade event.

Both Ferguson and Hartcher said they would like to see the issue resolved by encouraging producers to pump more gas. One of the obstacles to doing that is opposition to the development of unconventional gas in Australia on environmental grounds.

Much of the gas reserves on the east coast are unconventional, such as coal seam and shale gas. Farmers and environmentalists have banded together to protest against drilling due to concerns about its impact on water supplies.


On the other side of the country, Western Australia has already seen gas prices rise to near parity with export prices.

Gas there sold for around A$9.50 per million British thermal units (mmBtu) last year, nearly double the price in Sydney and around four times the price in some other eastern state areas, according to the Bureau of Resources and Energy Economics.

Prices have risen there despite the Western Australian government’s requirement for producers to keep 15 percent of gas from new developments for the domestic market.

Producers say high prices in the east would encourage them to develop more fields.

“We passionately believe that (reserving supply) would be the wrong thing to do,” Santos Chief Executive David Knox told reporters this week at an industry event in Adelaide.

“Australia has plenty of gas in the ground ... to unlock the molecules we need good prices.”

Santos, operator of one of the Gladstone projects, would prefer to see a scheme that provided incentives for supplying the domestic market, Knox said.