Panic at the pump: shortfalls in Australia's gas supply and intervention measures

Gas development and supply continue to be a topical consideration in Australia's energy security and transition.
Australia Energy and Natural Resources
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2023 outlook

Predictions in 2022 of a gas shortage in Australia's east coast energy market have extended into 2023, with continued concerns for the stability of the country's energy supply. The Australian Competition and Consumer Commission's (ACCC) most recent gas inquiry report (released on 27 January 2023) forecasted a 30 petajoule (PJ) shortfall in the Australian east coast gas market in 2023, if LNG producers exported their uncontracted gas outside of Australian shores. While this news is concerning, the silver lining for consumers is the 26PJ make-up in predicted shortfall since the ACCC's previous forecast of a 56PJ shortfall for 2023, announced in its interim report. Even so, the ACCC maintains that Australia's east coast gas shortage will continue into 2023 and beyond if new gas fields (and/or projects) are not identified and developed.

New Price Cap implemented

Compounding the concerns for available domestic supply is the Federal Government's price cap on gas prices. On 22 December 2022, the Federal Government announced its one-year gas price cap of $12/gigajoule (GJ) (Price Cap). The Price Cap, introduced by the Minister's new powers to make a 'gas market emergency price order', places an immediate cap on gas and strictly prevents gas producers from entering into agreements for the supply of gas at a price greater than $12/GJ. Notably, the Price Cap does not apply to Western Australian producers and producers who entered into agreements before the 22 December 2022 cut-off date.

The ACCC has released its Compliance and Enforcement Guidelines which outline how providers can comply with the Price Cap. These guidelines suggest a hard-line approach will follow, and likely apply to supply contracts where (for example):

  • the $12/GJ Price Cap is exceeded;
  • the nominated gas price is linked to international pricing models; or
  • the nominated gas price is linked to seasonal demand.

The guidance suggests that the ACCC will make a case-by-case evaluation, leaving producers concerned about how the Price Cap will be enforced in the industry. The maximum penalty is the greater of $50 million or three times the value of the benefit obtained (or 30% of the annual Australian turnover of the company in the prior 12-month period, if the value of that benefit cannot be determined).

The views of operators and producers on the introduction of the Price Cap have been less than favourable, with proponents (including Senex as regards its Atlas project) pausing their undertakings until a full and comprehensive review of their compliance with the new laws has been completed. The operator has cited the risk now faced by its investment, due to the rapid legislative changes, as the primary reason for the project's immediate pause in December 2022.

Further, moving through 2023 and beyond, there are concerns about what effect the Pricing Cap will have on any new east coast gas investment. While some stakeholders (including the Australian Aluminium Council) have highlighted that pricing provisions such as the Price Cap were justified by a lack of competition, high prices and risk of supply shortages, others have raised concerns that the Federal Government's intervention is likely to compound the chill on investment in east coast gas. Whilst the Price Cap will ease the average consumer, there are question marks over its effect on the market in the coming months. Some proponents and large-scale investors have queried whether the government's Price Cap will trigger worsened supply and increased prices (post-cap) of gas. Further, it is largely uncontroversial that the government's Price Cap has all but disincentivised foreign investment in Australian gas projects, given the significantly reduced returns on investment.

Further powers regarding gas exportation

The other government intervention of note is the Federal Government's recent announcement to extend its Australian Domestic Gas Security Mechanism (ADGSM). The ADGSM was established to manage exports in the case of domestic shortfall and provides the Minister for Resources with a backstop to control LNG exports on the basis of supply shortages. Certain reforms were proposed as part of the extension, including:

  • affording the Minister for Resources greater flexibility to protect domestic gas supplies, by receiving expert advice each quarter;
  • requiring all LNG exporters in a shortfall market to share the shortfall liability equally; and
  • requiring export permissions to be made tradable to improve the economic efficiency of an activated ADGSM.

These reforms came into operation on 1 April 2023.

There are several proponents in support of both the Price Cap and the ADGSM. There are views that the surety of supply costs will protect the continued operation of, and further investment in, Australia's manufacturing industry. It has also been said that the Price Cap quantifies the reality of emissions reduction and will help inform decarbonisation investment decisions. This is key in Australia's drive to reduce emissions.

Ultimately the main concern of the market, as echoed by the Australian Petroleum Production and Exploration Association (APPEA), is the lack of green lights for new (or developmental) gas projects. APPEA has cautioned that continued intervention not only puts Australia's reputation as a secure, stable and reliable supplier of petroleum at risk, but also sends worrying signals to both domestic and international investors.

From all perspectives, gas development and supply continue to be a topical consideration in Australia's energy security and transition. For some, the Government's interest in the industry has been welcomed, resulting in the progress of a number of manufacturing projects. While on our clients' behalf, we continue to consider the new laws in light of existing manufacturing contracts, as well as discussing contractual pathways that bridge the investment risk between all participants in the supply chain.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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