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Gas crisis lures Shell to energy trading

by Matthew Stevens: 28 June 2017

Royal Dutch Shell has established a new energy trading business in Australia and has already started work on mitigating the growing political risk of supply-side failure in the liquid natural gas drained east coast gas market.

Shell Energy Australia recently signed its first gas supply contract with a Victorian customer and the plan is to trade actively in Australia’s domestic gas and electricity markets.

The immediate plan is that traders based in Melbourne and Brisbane will bypass existing market structures to deliver gas and electricity to, initially at least, commercial customers up and down the east coast.

The new operation will trade gas acquired from its own east coast gas joint venturesand from third party producers. Shell will trade power acquired from wholesales and directly from generators with a bias to peak and renewable production. And the still-evolving trading desk will be pointed at environmental products like carbon credits.

One of the lead indicators of the east coast gas supply crisis that continues to play out was that mainstream commercial customers were issuing supply tenders that, in some cases, attracted no offers from producers or wholesalers.

Others are said to have been offered gas but at massively inflated prices and on contract tenors that were rejected as being too short for investment comfort.

While there was an inevitability to the price inflation and the supply-side pressures caused by the three gas export gateways so expensively built in Queensland’s Gladstone, the potential that the market might end up disconcertingly short of supply seems never to have been seriously contemplated by the government.

As a result, warnings that delays to the introduction of unconventional gas projects in NSW and Victoria went ignored, and the final seeds of a crisis were cast.

It was the subsequent justified complaint about supply and pipeline capacity warehousing and price gouging from those gas dependent manufactures that had traditionally relied on reliable supplies of relatively cheap gas that triggered the Australian Competition and Consumer Commission’s 2015 review of the changing tectonics of the east coast gas market.

Now, while governments federal and state still grappling with market reforms that emerged from that market assessment and the subsequent Vertigan Report, Shell has fabricated a classic market-based response that aims first to introduce gas customers to the molecules they need.

At a bare minimum, the plan would be that no tender would close without some sort of response and that gas would be delivered at a transparent market clearing price.

There is talk that Santos, the gas and LNG producer left most in the gun by the recently formulated Australian Gas Security Mechanism (AGSM), has also been reflecting on the potential of an active trading desk as a means of directly linking production with custom.

Meanwhile, from Shell’s perspective, this necessarily immediate tactical opportunity is a spin-off from a much more long-dated strategic initiative that aims to prepare the business both local and global for the rapid desegregation of increasingly discriminating energy markets.

To that end, Shell Australia’s new trading desk will be as much a litmus of domestic energy market evolution as it is a means of extracting value from opportunities that arise from the evolving diversification of energy supply, demand and customer preference.

Big petroleum has lived pretty simply through the oil age that began in earnest with Henry Ford’s genius. But the demands of a climate threatened world will increasing force a change in energy diets across the first economic world. That diversification of energy sources with the embrace of renewables and the uncertainties around innovation in power storage and carbon management generate both risk and opportunity.

To defuse risk and capture opportunity, Shell has returned to its nimble-trading roots and, with that, the disrupted might well emerge disrupter.

Business recast

The potential for this gambit to recast its Australian business is said to be profound. From where I sit, it looks rather like one of the options here is that Shell could backward integrate itself into the Australian energy market, transforming itself from gas driller and freezer into a business that looks a lot more like Origin Energy.

There is the potential, for example, that the move into power trading is a presage to investment in Shell-owned peaking gas capacity that captures downstream value from its vast coal seam gas wealth in central Queensland. Along the way this most identifiable of market brands might be stamped on a retail power and gas offering that is sustained by the new energy trading wing.

From what we understand, nothing has been left off the table in the scenario planning that paved the way for sign-on on Shell Energy Australia.

You might ask yourself, as we did, why would you imagine that gas trading might be a solution to supply shortage? The Shell answer is blunt. Whatever shortage there might be is transitional and the market will recover balance once the ramp-up of Gladstone’s liquefaction plants is complete.

Let me explain. Presently the contract price of LNG can be up to twice that earned from spot sales. The long-term contracts that are the foundation of investments in LNG plants do not kick in until the individual production trains that support them are fully certified and under the management of the operator.

Presently the second of the Origin joint venture’s two very big trains is ramping up to the point that contracts will be triggered. That is supposed to happen around October. Origin’s APLNG project has contracted only about 80 per cent of its output. That means, once those contracts are triggered, Origin can get a whole lot more flexible about where its gas goes. And given the gas industry is all about sending its molecules to the highest yielding market, that means more gas will end up in the local market.

Sitting distant at the opposite end of the Australian gas industry scales is Central Petroleum. Like Shell, Central’s mission is to capture advantage from the gas industry crisis.


Central is run by self-proclaimed maverick, Richard Cottee. He made his name running Queensland Gas. Cottee was one of the coal seam gas pioneers who helped open Queensland’s eyes to the opportunity of export gas. QCG was acquired for $6 billion by BG Group. Cottee’s legacy is now owned and operated by Shell.

Like many of us, Cottee believes that the sustained retreat of oil prices and the resulting collapse of investment in Australian funding of oil and gas exploration and development leaves private equity a natural home for a gas junior who potentially seems as far from release now as it did five years ago.

To that end Central’s board has recommended an $84 million takeover offer made by Macquarie Group, which is already the driller’s only banker and is the joint venture partner in the gas fields most likely to be Cottee’s company-maker.

But accepting that deal means a whole lot of Central’s longer-dated shareholders will take their leave at a considerable loss. Two cohorts of them have assembled apparently separate ginger groups of protest and there is a very good chance that Thursday will see Macquarie’s offer rejected and Central’s immediate and medium-term fate a matter of serious conjecture.

Cottee spoke at an energy industry conference in Melbourne last week. He left his audience with an ominous farewell, suggesting that his speech might be the last he makes as an officer of a public company.

Also last week we reported claims from one of the Central reform factions that Cottee’s determination to leave no stone unturned had seen him “cold calling” retail shareholders. Cottee is said to have denied that claim.

Nonetheless, ASIC’s legal eagles were concerned enough about the suggestion to make contact with Central’s man to discuss what is obviously an unusually direct method of shareholder advocacy.

As it turns out, there is nothing in the law that prevents a chief executive from cold calling owners. But this sort of direct action runs the risk of conversations stretching into places that are not yet in the public domain. So the ASIC advice is, if you want to go cold calling you really should have a second person in the room who will be able to corroborate the content of the conversations being held.


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