Consultation draft released 5 min read
The Federal Government has released a consultation paper seeking submissions in relation to the most appropriate mechanisms to secure domestic gas supply in Australia. Written submissions (on either a public or confidential basis) are due by 22 August 2022 via the Department of Industry, Science and Resources website.
Key takeaways
- The Federal Government is considering strengthening the mechanisms by which domestic gas supply can be secured, and released a consultation paper on 1 August 2022.
- The options considered include strengthening existing mechanisms such as the Australian Domestic Gas Security Mechanism (ADGSM) and Heads of Agreement with the east coast LNG exporters (HoA).
- Any new material domestic supply obligation will have a significant impact upon east coast LNG producers, and may impact Australia's reputation internationally as a low-risk investment destination (although the consultation paper is clear that solution should be consistent with continuation of Australia's position as a trusted energy exporter).
Who in your organisation needs to know about this?
Board members, gas marketing and procurement teams, business development managers and legal teams.
The Consultation Paper
In response to an expected shortfall of gas in the east coast market in 2023 and broader energy security issues, the Federal Government is reviewing the means by which it can ensure the secure supply of gas to domestic users. This may include amendments to, or replacement of, the ADGSM and HoA, which otherwise expire on 1 January 2023.
The Consultation Paper suggests that the ADGSM and HoA (which are intended to encourage industry-led supply solutions) may have had a diminishing effect, as the net contribution of gas to the east coast domestic market by LNG exporters has declined since 2019. Of course, there are significantly broader global issues at play, including the energy transition, and global energy security challenges that have heavily contributed to that outcome.
Principles of review
The review will be guided by seven principles:
- ensure sufficient supply of gas to the domestic market to support manufacturing and energy security;
- put downward pressure on domestic gas prices;
- maintain Australia's position as a leading contributor to global energy security;
- respect the trust trading partners and international investors have shown in Australia's resources and energy sectors;
- support energy transition in line with climate action goals;
- enhance transparency and processes that support competitive pricing outcomes for gas consumers; and
- minimise implementation cost and complexity for government and industry.
Even those high-level principles demonstrate some of the tensions that exist between encouraging gas exports and investment, and protecting consumers from the market outcomes that would otherwise apply. However, the Consultation Paper clearly acknowledges the linkages and the need to avoid unintended consequences for Australia, such as deterring investment.
Options and consultation questions
The Consultation Paper presents two options and 12 consultation questions. Stakeholders are invited to comment on the options and the questions, or suggest alternate options.
Option 1: Strengthen the ADGSM
The ADGSM is an existing mechanism under which the Federal Minister for Resources can declare a domestic gas shortfall for a year, leading to limits on east coast LNG exports (to effectively preserve gas for the domestic market). It has never been formally triggered since its inception, and has merely served as a 'stick' to incentivise east coast LNG exporters to supply some volume into the domestic market.
The primary issue the Consultation Paper identifies with the current ADGSM is the difficulty in activating it quickly in response to exceptional, shorter-term shocks. The Government will consider ways that the ADGSM may be able to be activated more flexibly and quickly. Depending on the scope of export controls that could be implemented on shorter notice, consideration will need to be given to the challenges this may pose for LNG suppliers in managing contractual commitments.
The means identified for allowing shorter-term activation are shorter notice periods, price-based activation, mechanisms to incentivise domestic supply, and improved administration of export permits.
We anticipate industry will be particularly concerned about price-based activation, given that domestic gas pricing is a result of not only local supply/demand and competition dynamics but also global factors.
The consultation questions raised in relation to Option 1 are:
Activation at short notice
- Would a short-term activation power effectively address sudden shocks or shortfall risks?
- What timeframes and limitations should apply to shorter-term activation powers?
- How would short-term activation interact with other energy security measures, like the Gas Supply Guarantee?
- What should be the threshold for a short-term activation mechanism?
Price-based activation
- What factors should a reference price take into account? How should each factor be measured or monitored?
- Which entity is best placed to determine the price, and what should that process include?
- What implications or unintended consequences could price-based activation have, including on new supply and the competitive functioning of the market?
Incentivise domestic supply
- How could the ADGSM be amended so that during a shortfall year, stronger incentives exist for LNG exporters to increase domestic supply?
Improve administration of export permits
- How could the Total Market Security Obligation (TMSO) be improved? The TMSO is a mechanism under the ADGSM which determines which LNG producers will supply gas to the domestic market on the basis of which producers are contributing less gas to the domestic market than they are withdrawing from the domestic market to export as LNG.
- What features would effective LNG export permits have?
- Should contracted gas be exempt from the ADGSM? If so, how could this exemption be designed to ensure the objectives of the mechanism are met?
Option 2: State and territory measures to increase supply
The second option considered in the Consultation Paper recognises that there is a large disparity between the level of gas produced within some jurisdictions and the volume of gas they consume.
That disparity is not just a feature of the location of economically recoverable gas reserves but also of policy settings, with Queensland's acreage releases subject to a Australian market supply condition being a prime example of a state regime encouraging increased supply.
The paper does not explicitly suggest allowing greater development of new gas fields in jurisdictions like New South Wales and Victoria but, rather, leaves the question open for stakeholders to suggest solutions.
- What can states and territories do to ensure their gas needs are met during the energy transition?
- How can the Commonwealth support the states and territories to do this?
It will be particularly interesting to see the responses from states and territories to this question, as any new gas projects will require approval by state authorities, and be open to challenge by environmental and other activists. Recent experience has shown that obtaining such approvals is increasingly challenging for Australian gas development projects.
Actions you can take now
- Consider the effect that the options proposed in the Consultation Paper may have on your organisation.
- Visit the Department of Industry, Science and Resources website to review the Consultation Paper in detail and make submissions.