In a recent report by EnergyQuest, questions are raised in regards to how the introduction of the Federal Government’s draft guidelines for the Australian Domestic Gas Security Mechanism (ADGSM) would affect Australia’s reputation as a reliable energy supplier.
The draft gives the Minister for Resources the power to prohibit exports of LNG when the Minister has reasonable grounds to believe that there will not be a sufficient supply of natural gas for Australian consumers.
Under the new rules:
- Foundation LNG sales contracts, once considered sacrosanct, are explicitly in play with government making it clear it will, if necessary, force gas produced for LNG export to be diverted to the domestic market.
- Exporters who are then short of gas and wish to avoid breaching their LNG sales contracts will be expected to seek alternative commercial solutions, including the purchase of LNG on the global market to meet their contractual obligations.
- Activation of the ADGSM will be considered on a quarterly basis rather than annually. (This conflicts with LNG shipping programs which are generally agreed on an annual basis.)
As per the existing rules, the new ADGSM will apply to all LNG exports and the western, northern and eastern gas markets. The only LNG project spared is Prelude as it is physically unable to divert production onshore, a situation that may change if an LNG import terminal is constructed in Australia.
In its Australian LNG Monthly January 2023 report, EnergyQuest states that the only thing government cannot do is force the industry to keep investing in maintaining Australian production, and decisions to no longer invest may be an unfortunate outcome of the government’s new policies.
“The new market controls will certainly be a material factor in investment decision making going forwards.
“It is noteworthy that the Brookfield/EIG bid for Origin Energy appears to have gone quiet since the Government announced its gas market plans.”
EnergyQuest says the case for ongoing investment in CSG production in Queensland will also be under review.
“In its submission to the government on the ACCC’s new powers to set east coast gas prices, ConocoPhillips noted APLNG (just one of the three Queensland CSG – LNG exporters) spends over $2 billion each year and the pricing intervention will be a significant factor in whether investment continues to flow – and that was prior to the new ADGSM rules.
“Government has also created a new rationale for Sunrise gas to be piped to Timor rather than Australia. It may also give cause for a review by the Darwin LNG partners for the development of Barossa-Caldita, which is still struggling to gain approvals.”
The gas industry has for some time called for governments to open up new supply as the answer for east coast market issues.
EnergyQuest says for many years the industry has been spending millions in its efforts to increase east coast gas supply, notably in NSW and Victoria, but has been consistently blocked from doing so.
“State-based moratoria and approval go-slows are unlikely to change in the foreseeable future so the normal market driven supply response to elevated prices hasn’t materialised.
“Geology and declining reserves are further challenges in the jurisdictions that continue to approve development. In that context, the question to which there is no obvious answer is where would significant new supplies of domestic gas come from? LNG import terminals are the obvious answer, as has been the case in many other countries but AGL lost over $100 million when its proposed Victorian import terminal was rejected.
“What seems clear is that anyone still hoping for the government to put its weight behind new gas supply and pull back from market intervention and control will be disappointed. Government has brushed off strong industry criticism of the December 2022 market intervention and doubled down with even more far-reaching powers.”
EnergyQuest states that even if the Government is happy to ignore gas industry criticism, it is more difficult to brush off the concerns of major trading partners, like the Japanese, Chinese and Koreans.
“The Japanese and Koreans have already been vocal about potential limits on LNG exports. Australia is also counting on both countries to invest in Australian hydrogen export projects.
“Minister King says on her website that ‘the [ADGSM] changes will balance the need to guarantee sufficient domestic gas supplies while safeguarding Australia’s global reputation as a stable and reliable supplier of energy to regional partners’. Just how stable and reliable Australia is remains to be seen.”
The new ADGSM guidelines are due to commence on 1 April 2023 and are currently in draft form for consultation.
