Major changes proposed to WA Domestic Gas Policy

Proposed regulations could materially impact gas producers 6 min read

On 15 August 2024, after 59 weeks of inquiry and nearly 8.5 months of delay,¹ the Parliament of Western Australia’s Economics and Industry Standing Committee of the Legislative Assembly (Committee) tabled the 'Domestic Gas Security in a Changing World: Inquiry into the WA Domestic Gas Policy: Final Report' (Report) and made recommendations to the State Government about improving the operation of the WA Domestic Gas Policy (Policy).²

In this Insight we outline some of the key recommendations and their implications for the industry.

Key takeaways

• WA faces increasing demand for gas with declining supply, and a forecast supply deficit from 2030 onwards. This has placed greater scrutiny on WA's domestic gas policy.
• In tabling the Report, members of the Legislative Assembly placed great emphasis on the understanding that the Western Australian natural gas market was different to the east coast market with a small number of producers and a small number of large users who dominate the system.³
• The Report finds that producers that were previously lagging in the delivery of domestic gas volumes have now improved the rates at which they are supplying the domestic market.
• The Report has proposed a number of regulations which could, if implemented, materially impact gas producers and future LNG developments in the State.
• These recommendations include:
  • changing the reservation amount for new LNG projects or gas fields
  • a new (possibly compulsory) long term trading market
  • providing gas pricing information to government agencies
  • considering a wholesale gas price cap
  • restricting the renewal and grant of retention leases.

Key recommendations and implications

The Report put forward 30 recommendations to tighten the market ahead of the impending supply deficit.⁴ We have set out a number of these key recommendations and the impact they could have on gas producers below.

Reservation quantity 

• The Inquiry found that it would be too great of a sovereign intervention to change 'fundamental parameters' in existing gas agreements for existing projects,⁵ but that a 'more flexible, evidence-based approach' should be adopted for new projects.⁶
• These recommendations confirm that existing gas agreements will remain unchanged.However, uncertainty for new projects has increased, as the Report does not cover how the reservation level would be set, or what information will be considered. The Report offers no confidence that the reservation amount will be set proportionately or applied consistently between projects.

Widening of legislative instruments

• WA's domestic gas policy has never been legislated (other than in State Agreements) and therefore enforced through contractual commitments with the State. Legislating this policy would codify the arrangements, and remove the bespoke and flexible nature in which these obligations have been approached to date.
• While a legislative framework would create certainty as to how these obligations will apply and be enforced, the drafting process should involve consultation from the industry so that concerns are adequately addressed.

Long term trading market

• The Report recommends that if a LTTM was established, each producer would be required to calculate the total-life-of-project reservation commitment and publish that information on the LTTM.⁷ The Report notes that buyers of gas would determine how much of this reserved gas they wish to purchase, and over what time periods, with the ability to negotiate prices built in to the LTTM.⁸
• The introduction of a LTTM introduces market transparency, but places greater control in the hands of buyers. It also raises questions as to how such a mechanism would be administered, regulated, and funded.
• Gas sale and purchase agreements are keenly negotiated, with various project-specific terms and conditions to adapt for the particular supply scenario. It is difficult to see how this LTTM could cater for these specificities.

Government oversight

• The Committee found that public information in relation to domestic gas prices is not readily available, as this information is confidential, or confined within bilateral agreements.⁹ The recommendation to introduce a government agency body to report on pricing, suggests that gas suppliers will be required to continually report on gas prices achieved in the market. This information is commercially sensitive and sharing it will likely be heavily resisted by parties to these commercial arrangements.
• If this is pursued by government, it will be imperative to ensure there are very tight safeguards around the handling and publishing of this information (eg, aggregation and anonymisation of data would be paramount). It is essential to ensure that such information could not be the subject of Freedom of Information applications.
• The consideration of wholesale gas price cap is a very significant market intervention, as can be seen by the introduction of the emergency price cap in the East Coast gas markets. Such intervention is likely to be heavily resisted by those in the gas industry.

Use it or lose it

• The Committee found it would be difficult to argue that a project that would supply the WA market is not commercially viable.¹⁰ It is therefore proposed that retention leases not be renewed or granted.
• This recommendation, if implemented, would be a significant intervention in the offshore licensing regime, which would need the co-operation of the federal regulator.

Export

• The existing policy position within the State Government is that gas from onshore projects cannot be exported, but the Report found that gas producers are continually seeking exemptions to export onshore gas as LNG.¹¹
• This recommendation, if implemented, may allow more onshore gas producers to access the export market.
• However it does not define or outline what 'adequate supply' is or how it will be measured.

Actions you can take now

Any current or prospective domestic gas producers should monitor any further announcements from the State government in response to the recommendations.