'Australian Gas Markets-Moving Towards Maturity' was drafted as a service to gas market participants and policy-makers as a reference document for the national energy policy debate.

The report considers in detail how Australia's natural gas wholesale and gas transport markets may develop in the future, and considers these paths against the experiences in more mature gas markets such as in the USA and the United Kingdom.

It describes the market for natural gas in Australia as being characterised by having only a small number of producers, a small number of consumers, limited depth in consumption (as reflected in the limited diversity of end-user needs), and a range of legacy gas supply agreements put in place from before the current gas market reforms.

It also finds that, currently, three suppliers account for more than 95% of contracted supply within the eastern Australian gas markets. There are a number of emerging new gas suppliers that will slightly decrease this level of concentration in the gas supply industry over the medium-term. By 2010, however, ABARE expects that the three existing suppliers will still control around 85% of gas supplies in eastern Australia.

On the positive side, ABARE has found that some competition has been introduced in the Australian gas market. Gas resources are no longer restricted to consumption in related States, the long-term supply contracts that were signed as part of the initial development of resources expire over the next five to eight years, and pipeline interconnections have increased. Additionally, although there are some legacy agreements in the current contractual arrangements for the supply of gas that may limit competitive forces, these agreements will lapse over time.

But because the current short-term markets in both gas and transport that exist in Australia are all characterised by a very limited number of players, ABARE believes this lack of liquidity is the greatest impediment to the development of transparent wholesale and spot markets.

At this stage of the market's development, ABARE has found it difficult to see where new market participants will emerge in order to increase liquidity in the market. The current licensing arrangements across jurisdictions inhibit competition through the diversity and multiplicity of regulations, increasing the costs of entering any particular regional market.

ABARE states that the proposed streamlining of State-based regulations with the creation of a national energy regulator would potentially ease this-but it adds that it would not be sufficient to establish transparent spot markets, as the number of retailers operating either nationally or in jurisdictions is likely to remain limited, as is the number of direct demand-side participants that would be prepared to purchase gas on a spot market basis.

ABARE concluded that the future development of the gas market in Australia will be influenced not only by the extent of market liquidity, but also by the development of the pipeline network (including the development of market hubs-not just physical hubs) and policy developments. ABARE says it is unclear as to whether potential hubs in Australia will develop into market hubs, but it thinks it unlikely given the size of Australia's market.

The report is available as a free download from the AGA's website at www.gas.asn.au (go to What's New), or from ABARE's website (product code 12621) at www.abareonlineshop.com.