Australia's east coast LNG exporters brace for price controls
Australia’s big east coast LNG exporters face the introduction of formal price controls on their supplies for the first time.
Australia’s big east coast LNG exporters face the introduction of formal price controls on their supplies for the first time in a radical shake-up floated by the Morrison government as it pursues a gas-fired economic recovery.
A draft heads of agreement sent to Queensland’s three LNG producers has included reference to a pricing mechanism following sustained pressure from Australia’s big manufacturers for cuts to their gas costs, sources told The Australian.
Resources Minister Keith Pitt held a meeting on Thursday with the Santos-led GLNG project, Origin Energy’s APLNG and Shell’s QCLNG, where concerns were raised over issues including a reference to prices being based on an LNG “netback” formula.
The pact has worked for the last few years by ensuring LNG exporters offer uncontracted gas to the domestic market in the event of a shortfall before it is shipped offshore to Asian buyers.
It is currently based on a supply mechanism, but producers are worried about any additional reference to price informing decisions on triggering LNG export controls.
The LNG netback formula — effectively a local LNG price that takes out the cost of processing and shipping gas to Asian customers — has been developed by the Australian Competition & Consumer Commission in the past few years to boost transparency in the east coast gas market.
Prime Minister Scott Morrison in a September pledge said the government would “strengthen price commitments” as part of its plan to get more gas into the market and re-establish a strong economy after a COVID-19 economic rout. The ACCC also recommended the heads of agreement be extended beyond 2020 and should strengthen requirements around price offers.
However the Queensland producers — who have sunk more than $70bn into building the state’s giant gas export industry — are nervous that should the pricing option be introduced it could effectively represent a rewrite of regulatory rules, hindering future investment and Australia’s sovereign risk profile.
Mr Pitt said he was in talks with the LNG producers about the heads of agreement, which will apply for 2021 and 2022. “The heads of agreement is an important part of the government’s commitment to a gas-led recovery,” Mr Pitt said. “I will continue to consult with industry before the agreement is finalised.”
Major gas users including billionaire Anthony Pratt’s Visy Industries, Qenos, Incitec Pivot and Orica took part in a high-level meeting a week ago with Mr Pitt and Energy Minister Angus Taylor to push for the policy change.
Producers remain uncertain how the price reference would apply to gas supplies and are looking for more clarity on the policy details. Sources also said it could be complicated to enforce the price mechanism as part of commercial negotiations.
The federal government faces a difficult juggling act keeping both producers and gas-hungry manufacturers happy. Big energy users complain they can’t find gas on a contracted basis for less than $8 to $10 a gigajoule, more than double historic levels, which could force some facilities to import products rather than producing Australian-made goods, or even shutting their doors. Producers, however, could retaliate if new controls are introduced.
One of Origin’s partners in APLNG, US giant ConocoPhillips, has cautioned the Morrison government against intervention in Australia’s gas market, warning investment could stall should price controls be introduced.
Conoco said in October a thriving manufacturing sector was vital but so too were realistic price expectations, which can quickly change depending on underlying dynamics in the broader Asian LNG market which consumes the bulk of Australia’s gas exports and acts as a defacto price guide.
Australia’s first ever national gas reservation scheme is also set to be introduced.
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