Government’s gas cap extended but experts say it will crush new supplies

Gas producers face the extension of a $12 per gigajoule price cap until at least July 2025 as Labor unveils its latest plan to boost supplies and lower east coast prices.

The government will require participants to abide by conduct provisions ‘that will level the negotiating playing field between users and producers’. Picture: Getty Images

Gas companies which commit to sell volumes into the east coast domestic market may be able to dodge Labor’s two-year extension of a $12 per gigajoule price cap, but industry figures say the government’s intervention in the sector may crush the development of new supplies.

The Albanese government has unveiled its mandatory code of conduct, the latest intervention aimed at boosting supplies and lowering prices on the east coast.

Although the current 12-month price cap has been extended until July 2025, the code will allow small producers of gas to be exempt from the restriction if they supply only the domestic market – meaning they can sell gas at higher prices than $12GJ.

Analysts said companies from Gina Rinehart’s Senex Energy through to the Kerry Stokes-backed Beach Energy, Santos and Woodside Energy might all avoid the price impost, while LNG import projects such as Andrew Forrest’s NSW facility could also receive exemptions.

Senex had put a $1bn expansion on hold in December over uncertainty relating to the gas price cap rules.

“In reality, it is only the LNG export projects that will be subject to the code of conduct and, even with them, their domestic obligations are likely to be managed through domestic volume commitments to avoid the Australian Domestic Gas Security Mechanism being triggered,” MST Marquee analyst Mark Samter said.

The industry has been on high alert over a clause specifying the need to strike “reasonable pricing” deals with users on a permanent basis.

APPEA chief executive Samantha McCulloch. Picture: Tom Huntley

The Australian Petroleum Production and Exploration Association said it was concerned that exemptions would start at 12 months’ duration, which it sees as unworkable for producers to green light long-term projects.

“While automatic exemptions from price controls are proposed for small domestic-only producers, in most cases meaningful supply investments will require further conditional exemptions,” APPEA chief executive Samantha McCulloch said.

“This will be at the joint discretion of the Climate Change and Energy Minister and Resources Minister, and will need to be approved by five separate government departments and agencies.

“Exemptions will start at 12 months in length, meaning projects may need to reapply many times over the course of project operations, with no guarantee that the basis for an exemption today will be sufficient for an exemption in the future.

“Conditional exemptions may also be varied or revoked at any time. Long-term capital investments for new gas supply cannot be made on the basis of one year of certainty.”

Still, the Ai Group, representing big users, said putting the $12 price anchor in place for two more years was a sensible move while cautioning that the federal government’s emergency interventions required an exit strategy.

Ai Group chief executive Innes Willox.

“An effective strategy to avoid gas shortfalls and to make a successful transition will take much more than the Code,” AI Group chief executive Innes Willox said.

Mr Samter questioned when the gas intervention would end.

“Perhaps the one negative I can see is that there is no sunset clause for the policy and so the ACCC can set a new cap from 1st July 2025. Given the lead times in investing, I guess there will fairly be natural cynicism as to what the playing field might look like by the time a new project actually starts producing,” Mr Samter said.

Credit Suisse slammed Labor for its code of conduct and declared it poorly designed and with too much discretion to the government to make arbitrary exemptions.

“It’s amateur hour policy making, focused on making things up as they go and trying to pressure the industry to be quiet about it, rather than actually delving into policy and market design,” Credit Suisse analyst Saul Kavonic said.

“Depending on ministerial discretion, the policy could amount to being anything from a hard price cap for most of the market, through to a complete backdown from any meaningful price regulation. All to be decided case-by-case with no guidelines. Basically it is ‘the government will make it up as it goes’ policy.”

Consultation for the code closes on May 12.

The price cap was introduced by Anthony Albanese’s government in December 2022 for an initial 12-month period in an effort to calm prices. Picture: Getty Images

The Energy Users Association of Australia said a voluntary code had proved ineffective at solving any of the problems domestic gas users face and the mandatory policy will help in addressing some “fundamental pain points” for big buyers.

“Many EUAA member companies have had trouble accessing gas contracts this year since the price cap came into force. With the draft mandatory Code now moving forward, EUAA’s expectation is that this situation will rectify itself soon now that gas producers have more confidence and clarity in the likely ‘rules of engagement’,” EUAA chief executive Andrew Richards said.

Still, Mr Kavonic said the entire health of the east coast gas market now comes down to a case-by-case discretion by the Government to award exemptions.

“Smaller producers being exempt is welcome, but isn’t going to move the dial for supply which is almost all in larger producer hands. The policy guidelines as they stand is not going to foster supply investment in most instances, especially from the key supply areas in Bass Strait and Queensland,” Mr Kavonic said.

“We are entering a period where the government can now favour one producer over another for any reason it sees fit with little transparency or accountability.”

Originally published as Government’s gas cap extended but experts say it will crush new supplies