Shell wary on gas intervention amid shortfall warning

Australia’s east coast faces a lack of gas to meet domestic market needs in 2023 if excess gas from LNG exporters is sold to overseas customers rather than locally, the ACCC has found.

Shell has warned the Albanese government over expected intervention in Queensland’s booming $70bn LNG sector, as Treasurer Jim Chalmers flagged concern over the prospect of a big gas shortfall next year.

Australia’s east coast faces a lack of gas to meet domestic market needs in 2023 if excess gas from LNG exporters is sold to overseas customers rather than locally, according to a report by the Australian Competition & Consumer Commission to be released on Monday. That marks a stark U-turn after the regulator predicted in February that the market would have a small surplus.

The forecast shortage will intensify pressure on the big three gas producers – Shell, Santos and Origin Energy – and add to growing speculation the federal government will pull a gas trigger to free up supply or introduce tougher terms, including a price mechanism, to ease an ongoing national energy crisis.

Shell – which operates the huge QCLNG project in Queensland – said it was concerned by the prospect of intervention, which could damage future investment and discourage customers entering contracts due to confusion over the outlook.

Intervention including the extension of the gas trigger until 2030 could “risk future investment in the development of gas supplies, import terminals and the green energy projects energy companies like Shell have the ability to fund”, the energy giant wrote in its submission to a government review. Government action would “send a message to international customers and governments that our nation is willing to compromise sovereign risk and potentially damage investment culture”, it added.

The federal government is urgently reviewing the trigger, known as the Australian Domestic Gas Security Mechanism, amid a national energy crunch sparked in part by a squeeze on gas supplies for users.

Expectations are growing that the government will now act on the threat declared by the ACCC, a fresh concern for producers given the mechanism has never been triggered before since its introduction in 2017, with enough supplies made available to avoid a shortfall year.

“We expect the government could use the timely ACCC report as ammunition to heighten regulation on the east coast gas market, including by toughening up the ADGSM through a price trigger and shorter notice,” Credit Suisse analyst Saul Kavonic said.

Canberra may also “review the industry heads of agreement to make offers of spot cargoes to domestic customers first more customer-friendly and consideration of a domestic reservation policy may remain ongoing.”

Shell pointed to the “heavy lifting” achieved by gas producers in the power grid this winter after a string of coal plants broke down, with its QGC business pumping 70 petajoules of gas into the domestic market so far this year and supplying 15 per cent of the east coast market in 2021.

Critics accuse the Queensland LNG producers of sucking gas away from the domestic market but Shell said it was now supplying four times the level of gas locally than before it sanctioned the project.

“In 2009, a year prior to a final investment decision being taken on our LNG facility in Curtis Island, QGC supplied just 20 petajoules a year to the domestic market, compared with 92PJ in 2020,” Shell said.

The energy major also pointed to customer uncertainty over the ADGSM as an “unintended consequence” of intervention.

“Anecdotally, the feedback from customers at the time (in the 12 months preceding May 2022), indicated they were holding off from contracting at less than $10 per gigajoule as the ‘signal’ the market was receiving from some at the time was the ever-present ‘threat’ of triggering the ADGSM or more intervention,” Shell said.

“Signalling an extension of the ADGSM to the next decade has sent a confusing market signal to local and overseas customers. Enacting it would risk the ability of gas producers to supply contracted quantities to the very customers who have underpinned Queensland’s gas industry.”

The ADGSM was due to expire at the end of 2022 but Resources Minister Madeleine King announced in July it would be extended to 2030 to “help secure ongoing gas supplies to the next decade”. A separate review of the gas trigger is also continuing, given questions about its effectiveness and how quickly it can be deployed to fix shortfalls.

Shell is one of the dominant players in Australia’s booming energy sector, operating the QCLNG export plant in Queensland with China’s CNOOC as a partner, the Prelude floating LNG project off northern Australia along with stakes in Western Australia’s North West Shelf, the Gorgon and Browse LNG ventures and gas business Arrow.

Australia’s east coast faces a renewed gas supply crunch this winter, particularly in Victoria, where several generators have been told to restrict their gas use to ensure enough supplies are available for the state.