Gas reserve plan ignites bitter debate

The federal government faces a fresh clash over a controversial plan to adopt the nation’s first domestic gas reservation scheme.

The federal government faces a fresh clash over a controversial plan to adopt the nation’s first reservation scheme.

The federal government faces a fresh clash over domestic gas after a controversial plan to adopt the nation’s first reservation scheme ignited fears it may curtail investment and fail to reduce prices, while users backed the move as a necessary intervention to correct the market.

Prime Minister Scott Morrison has positioned gas as the centrepiece of his economic ­recovery plan. However, energy producers fear the government’s approach — aimed at boosting supply and cutting prices — could backfire and dent future spending should suppliers be obligated to set aside a certain quantity of gas for local users.

Australia‘s big oil and gas producers said there was no domestic supply shortage and warned the move — which applies to future supplies rather than existing production — may hurt investment.

“While sensible reforms can improve the efficiency of the domestic gas market and its operation, unnecessary market interventions can affect confidence in the sector and discourage investment,” said Andrew McConville, chief executive of the Australian Petroleum Production and Exploration Association, which represents the energy industry.

“Rather than generating more gas or driving down prices, intervention may impede the very investment needed to bring on new, or cheaper, supplies. So a more sustainable solution is to support investment that can increase ­supply.“

Resources Minister Keith Pitt began the process of implementing a national gas reservation system on Tuesday, seeking input from state governments, gas companies and energy users before a final decision in June 2021. Western Australia already operates a reservation scheme requiring 15 per cent of gas reserves at LNG export projects to be set aside for use within the state.

While wholesale spot gas prices on Australia‘s east coast have rapidly fallen this year, buyers wanting to lock in gas on a contractual basis say they are still being offered prices in a much higher $8-10 a gigajoule range.

Still, the reservation scheme will not lead to materially lower prices in the next decade, according to Credit Suisse.

“A prospective reservation policy is unlikely to impact pricing materially for at least the next five to 10 years, in our view,” Credit Suisse analyst Saul Kavonic said.

“Every new molecule supplied to the market under reservation would simply be swapping out another molecule from existing fields that can instead go to export (the latter not being subject to reservation).”

Santos, operator of the GLNG export project in Queensland, has cautioned the Morrison government against creating a domestic gas reservation scheme that thwarts spending or output.

“Santos has an open mind on prospective domestic gas reservation policies that don’t discourage investment and reduce supply, which would simply put gas prices up,” a Santos spokesman said.

Santos noted the Productivity Commission had already found domestic gas reservation schemes can reduce returns to investors and discourage investment in gas exploration and extraction, leading to higher prices in the longer run and imposing net costs on the community.

APPEA said the competition regulator had concluded there was no shortfall in the domestic gas market, with LNG producers adding supplies to the market as required under the Australian Domestic Gas Security Mechanism.

“Intervention into a market by government is a blunt tool which can have unintended economic consequences and should generally only be considered in situations of genuine market failure,” Mr McConville said.

Energy giant ConocoPhillips, a partner in the $25bn APLNG export project, cautioned against intervention in Australia’s gas market on Tuesday ahead of separate talks over the ADGSM scheme between the Morrison government and Queensland gas exporters to ensure sufficient affordable supplies are available.

Big gas users backed the sentiment of the potential policy reform but said they still required short-term relief on prices.

Australia‘s largest commercial gas user, Incitec Pivot, has been urging the Morrison government to press ahead with a reset of the gas market but said the industry still needed lower prices and more supply in the short term and LNG producers needed to step up.

“Gas reservation is a long-term solution. However, we will still need short-term actions to ensure domestic consumers and manufacturers get a fair deal on access and globally competitive prices," Incitec chief executive Jeanne Johns said.

"The privilege of exporting gas should also require meeting domestic needs at a globally competitive price."

Gas buyer Orica said it wanted to see more competition and new entrants in the domestic gas ­market.

“It’s important to remember why this paper and consultation are so important. Australia is the only major gas-producing country which doesn’t ensure adequate supply at competitive prices for its own domestic market,” Orica chief executive Alberto Calderon said.

“We hope that a reservation measure may also encourage new entrants into the market and improve competition.”