Petronas, EnergyQuest warn on gas intervention policies
A major energy investor has raised concerns over the federal government’s intervention in the domestic gas market while EnergyQuest says it risks killing off investment for new supplies.
A major Australian energy investor has raised concerns over the Albanese government’s intervention in the domestic gas market while consultancy EnergyQuest said it poses a significant risk of killing off investment in bringing on new supplies.
Petronas - a partner in Santos’ Gladstone LNG export plant in Queensland - told a conference the government’s interventions were troubling.
“What investors are looking for is stability, especially after a final investment decision is made,’’ Petronas chief operating officer Adnan Zainal Abidin told S&P Global’s CERAWeek energy conference in Houston.
“Whenever the rules of the game change, after a decision is made, it raises concerns.’’
Petronas is a partner with Santos in the Gladstone LNG project, and Mr Abidin said they were themselves tied in to contractual commercial arrangements.
“That raises a concern for us and we hope that this is being respected, because otherwise it will rattle investors confidence,’’ he said.
Shell, which operates a rival LNG plant next to GLNG, last week attacked government’s planned changes to the LNG export trigger, saying a raft of policy clampdowns may make supply shortages worse for the eastern seaboard.
EnergyQuest said the government’s current and planned rules governing the sale of domestic gas had spooked investors and in the case of LNG import terminals, had effectively put them on ice for now.
The consultancy’s report for the March quarter also says the government’s current $12 per gigajoule emergency price cap for east coast gas would force companies to discount their product to the tune of more than $2bn against international spot prices, should they seek to fill the expected shortfall in gas supplies.
”The OECD gas market rule book has been thrown out the window, at least on the east coast, with a move to cost-based pricing,” EnergyQuest chief executive Graeme Bethune said.
“The proposed changes are a stunning departure from decades of gas market regulation and severely damages Australia’s global reputation as a safe place to invest.”
EnergyQuest says the industry actually bolstered gas reserves on the east coast last year, with the proved and probable reserves replacement ratio coming in at 121 per cent, and while supply in 2022 was the highest in five years, this trend could soon reverse.
“There are certainly green shoots appearing but with the risk that they will be killed by the government intervention,’’ Mr Bethune said.
“Although the (Ukraine) war was a pretext for the Australian intervention, it brought to a head long-running tensions between east coast gas producers, buyers and governments flowing from decisions more than a decade ago to build a world-scale LNG industry based on largely untried, unconventional gas within a largely unregulated free market but in a federation with powerful state governments.
READ MORE:Cooper Energy delays Victorian project due to intervention
“Until the new rules around reasonable pricing are clear, explorers and producers alike will struggle to justify ongoing investment in supply.
The report also says the business case for liquefied natural gas imports has “evaporated for the time being’’, with the uncertainty around government intervention in gas prices making investors wary.
The report says there is the risk of an accelerated decline in the availability of gas over the longer term if there is an extended investment strike, and there is a risk to domestic users of a gas shortfall.
EnergyQuest says one of the conundrums presented by the government’s current $12 price cap, is that public companies are obligated to maximise value for their shareholders.
With the $12 cap “a fraction’’ of LNG prices paid over the past year, it’s a hard case to make that companies should be looking to bring on more domestic supply EnergyQuest says.
“International gas prices have fallen significantly but average spot LNG prices under the Platts JKM forward curve are $US39.26/PJ for 2023, equal to $56.38/PJ at current exchange rates,’’ the report says.
“The ACCC’s interim gas report from July 2022 forecast the domestic market would need 56PJ of that gas to avoid a shortfall.
“The value of 56 PJ of gas at spot LNG prices is $3.2 billion which compares to $0.7m at the $12/GJ cap. In effect, the government is asking industry to voluntarily lead the development of a solution at a cost to their shareholders of several billion dollars.’’
EnergyQuest says it seems the federal government either doesn’t understand that there will be a material impact on investment from its actions “or it simply doesn’t care’’.
The report says comments from Minister for Climate Change and Energy Chris Bowen that the gas sector was being “shrill’’ in its response to the interventions indicated that the latter could be the case.
“The government’s plan appears to be to rely on redirected exports as needed to ensure domestic supply at a ‘reasonable price’ while it develops storage capacity for renewables, past which point it may not support any gas development at all,’’ the report says.
“The introduction of a price cap, government rhetoric against the industry, and the spectre of permanent market intervention has clearly already discouraged investment in gas supply.
“December 2022 may mark a turning point for Australia’s gas industry.’’
Under the government’s gas market interventions there is a 12-month $12 per gigajoule price cap on new domestic gas supplies, implemented last December, with a mandatory code of conduct to be implemented which will include a “reasonable pricing” clause.
This is causing concern in the industry, with Cooper Energy for example telling the Australian recently that the plan effectively undermined a contract it had struck with AGL which would have underpinned its OP3D offshore gas project in Victorian waters.
Given the government could intervene to set the sale price for the gas, and even to whom the gas was sold, as and when it saw fit, Cooper said it was not willing to commit to a financial investment decision on that project until the regulatory environment became more certain.
Santos chief executive Kevin Gallagher, who also spoke at the CERAWeek conference, said that it was a decade or so of “a lack of aligned government policy, which has led to no new domestic projects coming on line in that time’’.
Mr Gallagher said this made LNG exporters an easy target for criticism.
“The reality however is quite different, it’s been the inability to develop the resource. We have 200 years’ worth of current production levels under the ground.
“It’s a very rich gas province, it’s just been tough to develop.’’
The federal government has been consulting on the next steps in its intervention plans and plans to finalise legislation in April.
“There are reports the ACCC is considering various changes to the proposed new rules but is holding firm on the reasonable pricing provisions,’’ EnergyQuest says.