ACCC Gas Inquiry: shortfalls and solutions?

Domestic gas market facing shortfall and other competition issues 9 min read

The Australian Competition and Consumer Commission (the ACCC) has released its July 2022 interim report (the Report), which is the 13th interim report in the inquiry into gas supply arrangements in Australia (the Gas Inquiry).

The report identified a projected 56 petajoule (PJ) shortfall in the east coast gas market in 2023, further fuelling speculation about Federal Government intervention under the Australian Domestic Gas Security Mechanism (the ADGSM).

In addition to identifying the estimated shortfall and recommendations for its resolution, the ACCC reiterated its concerns about joint gas marketing and monopoly pricing of pipeline infrastructure.

Key takeaways

• The key findings of the Report include:
  • projected east coast gas market supply shortfall of 56 PJ in 2023 creating energy security risks;
  • ACCC recommendations to resolve the shortfall, including intervention by the Government through the ADGSM and strengthening of the heads of agreement with LNG exporters for supply to the domestic market (the HoA); and
  • the ACCC is increasing regulatory scrutiny regarding joint venture practices, to seek to prevent upstream competition issues, including joint marketing and any failures to properly ring-fence a joint venture's commercially sensitive information.
• The key findings make clear that Australia's LNG exporters will face increased pressure on a number of fronts to assist in resolving the supply pressures currently present in the domestic gas market. However, exactly what will be required is not yet clear, with the Government having not made any firm announcements in relation to any restrictions that might be imposed in 2023, and also currently reviewing the operation of both the ADGSM and the HoA.

Who in your organisation needs to know about this?

Board members, gas marketing and sales teams, business development managers and legal teams.

Key Report findings

Projected gas shortfall

The Report indicates that:

• the east coast of Australia is forecast to produce 1981 PJ of natural gas in 2023, over two-thirds of which (1299 PJ) is required to be exported to overseas markets under long-term LNG contracts; and
• any remaining uncontracted or excess gas will be supplied by producers to domestic or overseas markets. The ACCC noted that since 2018, between 50% and 70% of excess gas produced has been exported through LNG spot sales.

The Report identifies that if LNG exporters sell all available excess gas to overseas markets, there may be insufficient gas available to meet forecasted domestic demand in 2023. The predicted shortfall is expected to be 56 PJ, representing 10% of annual domestic demand and presenting what the ACCC has described as a 'significant risk' to the east coast's energy security.¹

To prevent this shortfall, the ACCC suggests that additional volumes of gas will need to be produced in east coast gas fields, produced in the Northern Territory, and transported to the east coast by the Northern Gas Pipeline, withdrawn from storage and/or diverted by LNG exports to the domestic market.

However, the Report places pressure on east coast LNG exporters to be a key part of overcoming the shortfall, as it indicates that the other avenues identified for increasing supply will not be sufficient in isolation to meet the projected shortfall.²

The Report states that effective operation of both the ADGSM and the HoA will be necessary to ensure LNG exporters supply more gas into the domestic market and maintain Australia's energy security.³ The ADGSM allows the Federal Minister for Resources to impose export controls after formally declaring a domestic gas shortfall. By contrast, the HoA was entered into as a voluntary mechanism under which LNG exporters agreed to offer uncontracted gas to the domestic market on ‘competitive market terms’ and ‘with reasonable notice’ before offering it to the international market.

The ADGSM was put in place in 2017 but, to date, has never been activated (but may still have served its purpose through incentivising domestic supply). Significantly, the ACCC recommends that the Government initiate the ADGSM process for establishing whether 2023 will be a shortfall year. The Minister for Resources announced on 1 August 2022 that she was preparing to issue a notification of intention to make a determination to invoke the ADGSM.

The Report also notes that the ACCC supports the review underway by the Government of the ADGSM, as summarised in our earlier Insight, and recommends that both the ADGSM and HoA be strengthened. The shortcomings in the ADGSM identified by the ACCC are:

• (timing) the ADGSM can only be initiated in the year before a shortfall year and could take between three and six months to take effect;
• (calculation of LNG exporters' required contributions) the calculation of the proportion of domestic supply shortfall that should be met by imposing export controls on LNG projects is based on a net-deficit concept, which enables export restrictions on exporters who are drawing more gas from the domestic market than they are putting in – however, this may not actually result in supply of sufficient gas to address a shortfall; and
• (application to LNG projects) the mechanism used to calculate required contributions might result in only one LNG project being subject to export restrictions.

The current HoA expires on 1 January 2023, and the Report notes there may be deficiencies in the way it is operating, such that the ACCC considers a new HOA would be needed to support the required level of domestic supply.

Accordingly, there is currently significant uncertainty as to how east coast LNG exporters will be able to manage their uncontracted quantities of gas in 2023 and beyond.

Domestic pricing and HoA

The ACCC has undertaken considerable scrutiny of the prices being offered for domestic gas in the east coast market. There has been significant volatility and uncertainty in global markets, in turn impacting international prices for oil and LNG, and concern these impacts will flow through to the domestic market.

Prices offered to domestic gas users between November and December 2021 are the highest prices that the ACCC have reported since the April 2019 interim report (around $16/GJ), with even higher prices being offered to commercial and industrial users in April and May 2022 (around $21/GJ). Significantly higher prices have also been reported in domestic spot markets, which may ultimately impact long-term contract prices.⁴

This is relevant to the HoA, which requires LNG exporters to offer gas to the domestic market:

• at demonstrably competitive prices;
• in volumes and for periods generally suitable to buyers' needs; and
• with sufficient notice.

The Report suggests that while LNG exporters may be in technical compliance, the ACCC perceives practices may be, in substance, undermining the HoA by:

• the offering of prices that are not actually internationally competitive, or are too high for market participants to take up;
• failing to provide reasonable notice to domestic market participants; and
• not providing counteroffers to parties when bidding into expressions of interest.⁵

These comments may encourage the Federal Government to seek stronger controls under any new HoA.

Transportation and storage

With the bulk of the predicted 2023 shortfall (54 PJ) expected to occur in southern states, there will be an increase in the net amount of gas required to be transported from production facilities in Queensland (and potentially the Northern Territory) to southern states in the coming year. The Report notes that although there is currently sufficient capacity in the pipeline system to meet this increased transportation demand, additional multi-asset services, where gas is transported across multiple pipeline systems, will be required and such services will be subjected to higher transportation prices.

The ACCC has continued to express its previously raised concerns that the monopoly characteristics of gas pipelines mean that operators have considerable market power, and are able to command substantial prices for pipeline access and transportation charges. The ACCC notes those issues are exacerbated for gas travelling across multiple pipelines and create an additional barrier for ensuring gas in the domestic market is supplied on a cost-effective basis at the locations it is needed.

Further, gas storage will be important to manage peaks and troughs in demand, and the Report notes that there are concerns for the security of the Victorian transmission system, due to changes to the contracting model at the Dandenong LNG storage facility coinciding with decreased contracted capacity.

Upstream competition

Due to concerns raised about the degree of concentration in gas production, the ACCC is also conducting a multi-stage review of upstream competition and the timeliness with which gas is brought to market, as part of the larger industry review.

The findings of Stage 1 of the review were included in the January 2022 interim report, and Stage 2 is currently underway, with the Report summarising key findings, and some further matters intended to be reported on in the next interim report.

The Report highlights the ACCC's concern that the use of 'joint marketing' by joint venture (JV) participants within the market is more prevalent than anticipated, with some LNG exporters and other producers engaging in joint marketing in the domestic market without authorisation. The fact that some operators have moved to separate marketing has encouraged the ACCC to conclude that barriers previously experienced (additional costs and complexity for JV participants) have been able to be overcome and, therefore, separate marketing of gas should be feasible as the default position.⁶ 

The Report also notes the potential adverse effect on competition if robust ring-fencing arrangements are not implemented and adhered to by participants,⁷ to prevent commercially sensitive information from one joint venture being transferred to another and changing competitive dynamics or investment decisions (though it doesn't go so far as to suggest that gas producers are failing to put in place appropriate ring‑fencing arrangements).

The ACCC, also as part of Stage 2 of the review, focused on other common practices that may lessen competition or impact the timeliness of supply of gas to the market. Key findings included:

• The inclusion of exclusivity provisions in gas sales agreements (GSAs), which restrict the ability of the domestic producer (as the seller) to sell gas from prescribed areas to other buyers, which can reduce competition by removing a potential selling producer from competing in the domestic market; and
• The merging of producers, or acquisitions by producers of individual tenements or joint venture interests, can result in a reduction of the number of producers competing in the domestic market, and potentially delay the development of gas if the acquiring producer prioritises development of other projects in its portfolio.

The ACCC has signalled it is continuing to review arrangements entered into by gas market participants without authorisation and will consider enforcement action where appropriate.⁸

Government response

In response to the findings of the interim report, the Minister for Resources, Madeleine King, announced that the Federal Government would be implementing a number of measures to address the identified potential shortfall.

These included:

• extending the ADSGM, which was due to expire on 1 January 2023, to January 2030;
• opening a consultation process on reforms to the existing ADGSM;
• commencing negotiations on a new HoA with major gas producers; and
• issuing a notice of intent to make a determination as to whether to trigger the ADSGM.

Any determination in relation to triggering the ADGSM will occur in early October, after regulations to extend the mechanism have been implemented.⁹

Actions you can take now

• For east coast LNG exporters, prepare for the potential imposition of greater regulatory or contractual intervention in future management of uncontracted gas supplies; and
• For all gas producers and marketers in joint ventures, review any existing joint marketing arrangements and ring-fencing arrangements to ensure Competition and Consumer Act 2010 (Cth) compliance.