Government may invoke powers as gas producers face export curbs

The Morrison government may consider tapping its emergency powers to limit gas exports

Minister for Resources Matt Canavan. Picture: Keri Megelus

The Morrison government may consider tapping its emergency powers to limit gas exports following warnings from the ACCC that high gas prices could lead to job cuts among the nation’s manufacturing sector.

Amid a warning from the competition regulator that Australian factories face closure due to spiralling prices, Senator Matt Canavan indicated that he would be prepared to pull the trigger if Australian gas prices remained significantly above those in Asian markets.

“That next Australian Competition & Consumer report feeds into my consideration around the export control framework. I have said I will be watching very closely as well to see how our market reacts,” Senator Canavan said.

Gas prices are “no doubt a risk to manufacturing employment”, he said. “It is why the government took significant action two years ago to introduce an export control framework as the ACCC has highlighted in its report: that change led to a material decrease in gas prices in eastern Australia.”

The competition regulator told the energy industry yesterday that manufacturing in Australia’s eastern states will be forced to close if gas prices stay above current levels above $10 a gigajoule.

Some commercial and industrial users will pay more than $11 a gigajoule for gas this year, more than three times historical levels, the ACCC says.

Domestic gas tariffs must urgently fall to $7 a gigajoule to allow manufacturers to compete and remain viable.

“The problem is if they don’t get that soon they (industry) just won’t be here,” ACCC chair Rod Sims said at the APPEA oil and gas conference.

“I think at $11 gas you are going to see a lot more closures.”

The stark situation has raised the prospect of new intervention measures in the energy industry to free up more gas and cut prices.

Manufacturing Australia chief executive Ben Eade told The Australian that the time had come for the government to exercise the Australian Domestic Gas Security Mechanism, which allows for the limiting of LNG exports if there is a shortfall of supply to domestic markets.

Mr Eade noted that the gas mechanism was legislated and enjoyed bipartisan political support.

“For goodness sake, trigger it,” Mr Eade said.

“This is absolutely urgent.”

The government’s emergency gas tool can direct Queensland LNG exporters to divert supplies to the local market if a shortfall is forecast for the following year.

Senator Canavan said he was satisfied exporters were complying around requirements implemented by the Turnbull government to offer uncontracted gas to Australians before sending it offshore.

“We are happy with the compliance of it, the ACCC has said it has led to some price relief,” Senator Canavan said.

But he said he would keep an eye on the local market and he was prepared to pull the trigger on export controls if prices did not start dropping.

He declared the key to reducing prices was opening up development in NSW and Victoria.

“Further decreases in prices are reliant on the development on new supplies of gas, particularly the traditional industrial centres, in Victoria and parts of NSW.”

In Victoria’s Latrobe Valley, the state’s largest industrial consumer of gas, Australian Paper is preparing to invest in a new $600 million waste-to-energy plant that will slash its exposure to gas markets. The plant will burn more than half a million tonnes a year of household waste, cutting its gas needs by around 60 per cent.

Craig Dunn, the general manager of communications and sustainability at Australian Paper, told The Australian that gas prices had risen by between 250 and 300 per cent in recent years, which would have left the plant heavily exposed once its existing supply contracts expired.

“We have already experienced gas increases and expect significant further gas increases into the future, so we need to stabilise our long term energy position,” Mr Dunn said. “The increases are too large for us to absorb.”

Chemical giant Dow said this week it will close its Altona factory in Melbourne, adding to a growing list of manufacturers buckling under the weight of higher energy prices. The Queensland brickmaker Claypave sunk into administration in March while polystyrene coffee cup maker Remapak appointed administrators in January after experiencing a 400 per cent increase in its gas costs over the last three years.

“Many other manufacturers are close to making critical decisions on their future operations. If wholesale gas prices do not soften, it is just a matter of time before they follow Dow, RemaPak and Claypave,” Mr Sims said.

The national power grid operator also stressed the need for the industry to boost investment to help head off domestic gas shortfalls due to hit the southern states after 2023.

“There is a requirement for further investment in existing reserves or alternative gas supply infrastructure developments, such as additional north-to-south pipeline capacity or gas import terminals, to reduce the risk of shortfalls,” Australian Energy Market Operator chief executive Audrey Zibelman said.

Senator Rex Patrick said the two government energy bodies also had questions to answer as to whether their gas market forecasts accurately represented conditions on the east coast.

“Noting the gravity of the situation for Australian industry, as described by Mr Sims in his speech, government must act with greater force to take on the gas producers,” Mr Patrick said. “I am of the strong view some adjustments are required to the mechanism such that it is mandatorily invoked when average domestic prices exceed average Western Australian or Asian prices by a certain threshold.”

Still, Mr Sims maintains the controversial mechanism has worked by bringing prices back from a peak of over $20 a gigajoule in 2017 to $10 to $12 a gigajoule now.

“What I find very strange is to hear gas producers complaining about government intervention when their lack of attention to the domestic market brought it about,” he said.

Rather than a forecasting issue, the ACCC contends that gas producers took their eye off the domestic market in recent years.

“We has comments from a number of big suppliers a couple of years ago that they didn’t understand that the domestic market had a problem,” Mr Sims said.

ExxonMobil, operator of Bass Strait gas offshore Victoria and weighing an LNG import terminal in the state, said it would look to boost supply but was wary of any government intervention in the market.

“What you would struggle with is a retrospective application or continuing uncertainties about policy,” Exxon Australia chairman Nathan Fay said.

The ACCC also raised concern that a fall in international LNG netback prices over the last six months has not appeared to translate to a fall in domestic tariffs.

“We expect that those same suppliers have revised their prices down this year to reflect these latest expectations as quickly as they escalated them last year,” Mr Sims said. “So far we are not seeing this.”

The plight of manufacturing has been under the spotlight at the annual oil and gas conference as the nation’s top energy producers weigh the quickest way to bring more supplies into the market.

“Commercial and industrial gas users have been telling us for some time that at those gas prices their operations are not sustainable,” Mr Sims said. “Businesses that rely heavily on gas are increasingly likely to relocate or wind up their operations.”

Heavy industry including Incitec Pivot and the nation’s largest petrochemicals producer Qenos have all raised concerns over their ability to remain competitive with energy costs on the east coast remaining stubbornly high.

Mr Canavan said rising gas prices were a risk to employment and is urging NSW and Victoria to encourage gas development.

“It is no doubt a risk to manufacturing employment. It is why the government took significant action two years ago to introduce an export control framework as the ACCC has highlighted in its report: that change led to a material decrease in gas prices in eastern Australia,” Senator Canavan said.

“But further decreases in prices are reliant on the development on new supplies of gas.”

Mr Canavan reiterated his call for the NSW government to approve the Narrabri gas project and called on Victoria to lift its moratorium on conventional gas development, which ends next year.

“If the Victorian government doesn’t change tack here, any future loss of manufacturing jobs in this country can be sheeted home to their ... unexplainable decision to stop the development of conventional gas in their own state,” Senator Canavan said. “This is not gas that needs to be fracked or anything like that. This is gas production that has been safely done in this country for 100 years.”