Ukraine crisis: Experts warn of rising gas prices to hit Australia

Australian households already facing higher gas prices are being told to brace for more price hikes after Russia’s invasion of Ukraine sparked concerns from industry experts.

It came as domestic contract prices for major gas users, such as commercial and industrial customers, soared from $6-8 per gigajoule (GJ) in late 2020 to about $7-9.50 per GJ in mid-2021.

While most large-scale buyers lock in gas supplies through long-term contracts, there is concern as these contracts expire, major users will need to re-enter the market when prices are much higher. And this scenario may impact residential and small business customers as those potential higher prices trickle down, although the severity of which is hard to determine.

The Australian Competition and Consumer Commission’s (ACCC) February gas report also warned that a supply shortfall was expected to reach the southern states of Australia that would likely add pressure to costs from 2022 and beyond. This was despite additional gas being diverted from Queensland, the ACCC said.

Furthermore, the war in Ukraine has added another layer of uncertainty to what had already been tipped to be a tight period for local gas markets, Tennant Reed, energy advisor at The Australian Industry Group, told Canstar Blue.

“There has always been this potential scenario of Russia separating itself from the West, and European countries are now facing the brunt of supply disruptions,” he said.

These disruptions, and the resulting gas supply shortfalls, would likely trickle down to Australia, he said, noting that this would happen in “quite a messy and unpredictable way” that would impact households and businesses differently.

In Australia, meanwhile, the amount of gas obtained from the Bass Strait, which had been a major source for the domestic market for more than 50 years, has been declining in recent years. The offshore wells in the Bass Strait are expected to cease operations by late 2027.  And the development of new gas resources has been slowed by the pandemic.

So, while Queensland liquefied natural gas (LNG) producers would help fill some of the shortfall, supply would be “tight” in eastern Australia in 2023, Mr Reed said.

In the February gas report, ACCC Chair Rod Sims gave a similar timeline.

“There is a gas shortage forecast for Australia’s southern states from as soon as this year, which is likely to continue next year and beyond,” he said. “Southern states will be reliant on gas from Queensland until additional supply from new sources comes on.”

Our latest gas report shows that the prices paid by commercial and industrial gas users increased since late 2020, but are below the record high prices in Europe and Asia. It also warns that the supply outlook from 2022 onwards looks increasingly tight. https://t.co/QG1NFL524A pic.twitter.com/wIW4q20euh

— ACCC (@acccgovau) February 15, 2022

The watchdog noted at the same time that thus far, east coast spot market prices for households and small businesses “have been somewhat shielded from the record high prices seen internationally”, paying around $10-11 per GJ in recent months. This compared to Asia where spot prices have climbed to over $36/GJ on average.

Australian gas is for Australians, Energy Minister says

Energy Minister Angus Taylor acknowledged in a statement last week that the Russia-Ukraine war had caused volatility across global gas markets. But as the world’s largest LNG exporter, Australia was able to continue to meet its export obligations, contributing liquidity to the global market, and still ensure sufficient domestic gas supply, the Energy Minister said.

“Australia is in the fortunate position to be experiencing gas prices around 70 per cent lower than overseas,” he added. “The Government will continue to ensure Australian gas is continuing to work for Australians as a top priority during these difficult times globally.”

Could the ongoing crisis in Ukraine lead to a global recession?

Recent analysis from global natural resources consultancy Wood McKenzie highlighted that the conflict in Ukraine could lead to months of uncertainty for international commodities.

Kateryna Filippenko, the principal analysist in Europe gas research at Wood McKenzie, said: “If all Russian gas is cut off, Europe would have no chance of coping. Were all gas flows to stop today, Europe could well muddle through in the short term, given higher storage inventories and low summer demand.

“But in the event of prolonged disruption, gas inventory couldn’t be rebuilt through the summer. We’d be facing a catastrophic situation of gas storage being close to zero for next winter. Prices would be sky high. Industries would need to shut down. Inflation would spiral. The European energy crisis could very well trigger a global recession.”

Image credit: khorkins/Shutterstock.com, ACCC