Australia Pipeline King Fights Questions on Monopoly Prices

  • Review aims to boost domestic supplies to ease gas shortage
  • APA Group investors ‘concerned’ about threat of regulation

After a decade of unrivaled expansion, Australia’s largest gas-pipeline owner is facing growing pains.

Complaints from industrial gas users, frustrated by supply shortages and hefty price spikes following the start of Queensland’s liquefied natural gas export plants, sparked a regulatory review last year aimed at boosting competition in the eastern seaboard market.

APA Group Ltd. is now looming as a potential casualty of that probe. The Australian Competition and Consumer Commission raised questions in April about monopoly pricing among pipeline operators which it said may have contributed to gas shortages and higher prices in the eastern Australian market. A government appointed expert, Dr. Michael Vertigan, will on Friday start weighing industry submissions ahead of a recommendation to be delivered to the Australian government in December.

APA Chief Executive Office Mick McCormack rejects the ACCC’s assessment and says greater regulation will deal the industry an even worse hand by stifling new investment.

Grid Building

“Show me a regulated piece of infrastructure and I’ll show you no incentive to invest,” McCormack said in an interview with Bloomberg prior to its submission to Vertigan on Thursday. “What we’ve done is unparalleled on the planet. No one else has got an east coast grid. We have spent A$12 billion ($9.2 billion) putting it together."

APA Group has grown from a market capitalization of A$1 billion a decade ago to a company whose value topped A$10 billion this year after building a vast pipeline grid delivering gas in most Australian states. The company carries more than half the nation’s gas after building up its fast-growing portfolio with deals such as the $5 billion purchase of BG Group’s LNG pipeline in Queensland state.

APA Group fell 0.3 percent to close at A$8.09, while the benchmark S&P/ASX 200 lost 0.2 percent.

McCormack said the company has helped grow Australia’s gas infrastructure to its current level and isn’t making excessive profits.

Prices Surge

“We’re in a position where you would think we had destroyed the Australian economy,” he said. “But just get out a calculator. We’re making about 8 percent on our assets. Is that monopoly returns?”

McCormack disagrees there’s a gas shortage on Australia’s east coast while saying Queensland’s A$70 billion LNG export industry has led to higher prices for domestic users. Spot natural gas in Brisbane, the capital city of Queensland, rose to an average of A$10.33 a gigajoule in July, up from A$5.16 the year before, according to the Australian Energy Market Operator. Prices have averaged A$5.95 in October.

Critics “said earlier this decade that by 2016 there will be cold water in the showers here in Sydney," McCormack said. “We at the time said that’s not going to happen. Not because we were prophetic geniuses but because we talk to anyone with gas. There is clearly no east coast gas crisis."

Share Slump

Credit Suisse Group AG downgraded APA in September saying it was a probability rather than a possibility the pipeline operator would face increased regulation following a meeting of lawmakers later this year. Full regulation could cost APA A$1.40 a share with a potential hit to revenues within five years, according to the bank.

That bearish piece of research saw APA stock suffer its biggest fall in three years and the company has now seen about $2 billion wiped off its market value since July. APA conceded at its results in August it may now look offshore for its next phase of growth.

“Are investors worried? Of course they are," said McCormack. “They have money invested in this company and all around us is negative stuff. So yes investors are concerned."

Still, the APA chief said he is prepared for any regulatory changes and remains hopeful the Vertigan review will recognize APA’s role in developing the gas market.

“If the unthinkable happens, it has no impact on us for years because we’ve got long-term contracts,” McCormack said. “Ten years ago we were worth A$1 billion. This year we were A$10 billion. In five years who knows where we’ll be."

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