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Origin Energy strikes deal with APA

Integrated energy company Origin Energy (ASX: ORG) has announced a deal with Australia’s largest natural gas pipeline owner and operator APA Group (ASX: APA). Under the new agreement, which has a six-year term, APA will increase gas transportation and storage services to Origin including an increase from Victorian gas sources to NSW and a reduction from Moomba to Sydney.

Origin’s new agreement with APA follows a recent deal struck between Origin, BHP Billiton (ASX: ASX: BHP) and ESSO that locks in up to 432 petajoules of natural gas supply out of Victoria.

APA, which operates gas transmission pipelines in all mainland states and delivers around half of the nation’s gas usage, stands to benefit from the soon to be completed Queensland LNG export plants. Once export of LNG commences from Queensland, the domestic supply dynamics will take a significant turn for the worse. The Origin-APA deal is effectively an acknowledgement that previous gas destined for NSW is going to be diverted to export terminals in Queensland. In response, Origin is looking for a way to serve the NSW market, albeit at what will most likely be at prices much closer to export parity.

NSW gas supply is shaping up to be a potential major issue with newly installed Federal Resources Minister Ian Macfarlane reportedly prepared to intervene in NSW to ensure that coal seam gas projects, of which Santos (ASX: STO) is a major player, get underway without further delays.

Foolish takeaway

With the demand for Australia’s gas set to increase dramatically once the option of export begins next year, the potential for supply constraints and price increases is very real. This isn’t great news for customers downstream, including households and manufacturers but for shareholders in the upstream industries, including the pipelines and producers, there is potential for significant earnings growth.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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