Sunday, June 01, 2008

More pain for working families

Unless you read the financial section or watch some decent finance programs you may not have seen the continuing saga which will lead to higher natural gas prices in Australia. Especially in the main consumption areas of the Australian Eastern Seaboard (Brisbane down to Melbourne).

Basically the local price for natural gas is completely disconnected (at least for most Eastern states) from the global price for natural gas by the tune of roughly 250-350%.
There are companies both in Australia and overseas trying to cash in on that difference.

One such company is Origin Energy, they hold a large amount of natural gas reserves (recently updated). Last week they rejected in offer from BG (British Gas) to be taken over. What BG and others are looking at is creating a LNG train and export facility in Queensland.

So why would this increase the price of natural gas in Australia?

In setting up a new demand source (exporting natural gas as LNG to China, US, Japan etc) whilst the supply remains relatively fixed means the price must increase. Export demand will mean that gas producers will export into that market in preference to supplying locally until the market price locally is almost the same as they can receive selling overseas.

Look at the numbers for Origin Energy.

It has Proven, Probable and Possible (3P) reserves of 10,222 Petajoules (PJ).
Australian natural gas prices are quoted in dollars per GigaJoules around $3.80 per GJ (see Govt. research paper)
1 PJ is 1 million GJ.
So 10,222 PJ is 10,222,000,000 GJ
So Origin has $38.8 billion dollars of natural gas and a market value (capitalisation) of $13.7 Billion.

Here is the reason for this article.
One Gigajoule is approximately equal to one thousand cubic Feet (Mcf).
The Henry Hub futures price in the US is around $12.50 per Mcf. That is a 328.95% difference in price compared to the local Australian natural gas price.

So if Origin were to export all that gas. It would mean those gas reserves are worth $127.7 Billion.

Now if the local market has discounted this new reserve information in, has it discounted in the price those reserves are worth at world prices or Australian prices?
Is it worth $14.60 or $48.08?

See what I mean about more pain in the pipeline for retail consumers who rely gas for heating or cooking. How would a 328% increase in your bill feel like?

Have Fun

Paul

Australian Government research paper of Natural Gas
LNG Conversation tables
ABC Inside Business Origin CEO interview

GJ per Mcf 1.000
EastAus per GigaJ (GJ) $3.80
EastAus in McF $3.80
US Henry Hub McF $12.50
Difference 328.95%