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The Future Examined: Academics spell out the reasons for high domestic gas prices

"The export market is competitive, but the domestic market is not"

Domestic gas prices would be significantly lower if there was more market competition and major investment in transportation and pipeline transmission infrastructure, according to academics from Deakin Business School.

Although domestic prices have declined since peaking on the west coast in 2009 and on the east coast in 2016, they remain high relative to the LNG export market.

The export market is competitive, but the domestic market is not, says Dr Shuddha Rafiq, the deputy director of the Centre for Energy, Environment and Natural Disasters at Deakin Business School.

 “The major producers seem to be more willing to ship away LNG to these big growth centres and global markets where they have to compete with other African and Asia-Pacific nations to sell their LNG,” Dr Rafiq said.

The gas companies were seeking market share in a competitive global market and needed to sell at a lower price to access these markets, he said, whereas in the domestic market, which was somewhat oligopolistic, there was no reason for them to lower their prices because they controlled the market.

“If you have only a few major players operating in a market, you’re exposed to possible cartel behaviour,” Dr Rafiq said.

“So the pricing strategy for these companies would be to cut down their prices to be competitive in growth centres and have a global presence, rather than looking at the domestic market because there’s not much competition here.”

Dr Munirul Nabin, a senior economics lecturer at Deakin Business School, said the system disadvantaged domestic consumers. “Domestic consumers are bearing the cost while gas companies take advantage of that and make their competitive advantage in the world market,” he said.

Dr Rafiq said there was a lack of competition in transportation and transmission, with only one major company and a few others involved. The primary demand for gas domestically was in the east, but the main production was offshore in the west. “Both sea transport and pipeline transmission move the gas, and there’s a considerable cost involved. Without significant investment in the infrastructure, transport and transmission costs will keep domestic prices higher than they should be,” he said. “Because there’s only a handful of companies involved, they’re not always open to investing in overhauling transmission technologies for the future welfare of society.

 “We need to modernise our regulatory frameworks linked with gas production, and transportation and transmission in the same way as the electricity market was revised, to increase competition and lower the barriers to entry,” he added.

Investment in infrastructure should, one way or another, be encouraged by the government.

“The more you invest, the more the cost-per-unit will go down,” Dr Nabin said. “At the moment the infrastructure is not adequate, and profit-motivated firms have no incentive to invest heavily in the infrastructure because that will reduce profits.’’

Dr Nabin said the lack of competition was the reason there had been no major investment in the infrastructure.

“The top six firms control 60 per cent of production, and one firm owns almost 60 per cent of the gas transmission pipelines in the eastern market of Australia,” he said. “When you have a near monopoly market structure, those companies will always try to keep their profit intact.”

The government could play a vital role by redesigning the regulatory system and providing more incentives to firms so they invested in the infrastructure, Dr Nabin said, adding the present pricing mechanism was not efficient or transparent.

“Our domestic and foreign market circumstances have completely changed, but we are still following the same mechanism we adopted a long time ago,” Dr Nabin said.

Greater transparency about supply was essential, he said.

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