LNG Export Reforms Spook Australian Producers

Planned changes to Australia’s policies restricting LNG exports to avoid a domestic gas shortfall are creating fresh regulatory and investor uncertainties, which could discourage new projects and potentially restrict additional supplies coming on line to alleviate the deficit. Australian gas and LNG producers, as well as Northeast Asian importers of Australian LNG, say the proposed export rule changes are risking Australia’s credibility as a reliable LNG exporter. The usually discreet head of Mitsui Australia, Masato Sugahara, recently warned of the risk of “unintended consequences” from the proposed reforms.

The Australian government is planning to introduce reforms on Apr. 1 to the Australian Domestic Gas Security Mechanism (ADGSM), which since 2017 allows Canberra to restrict LNG exports to ensure that enough gas is available for domestic use. The ADGSM reforms are a cornerstone of the proposed Energy Price Relief Plan presented in December to ensure long-term reliable gas supply at a fair price into domestic markets on Australia's east coast following a major power crisis in the middle of last year. The east coast is facing a shortfall of 30 petajoules (28 billion cubic feet) in 2023 if LNG producers there export all of their uncontracted gas, the Australian Competition and Consumer Commission (ACCC) said in a January report.

The main concern comes from a provision in the reforms, which states that if the government activates the so-called “gas trigger,” export contracts signed to support the development of an LNG plant will be protected as long as producers have exhausted all available commercial solutions. However, it is not clear what the government accepts as having used up all potential solutions. Producers expect this to be clarified soon so they will not be required, for instance, to buy spot cargoes at double the price of their contractually binding LNG sales contract obligations in order to comply with the ADGSM, law firm Allens said in a note.

Government Reassurance

However, extensive consultations with the federal government seem to have appeased some concerns since an initial consultation document released in December. “I think there is an understanding of the complexity of the market,” Woodside CEO Meg O’Neill said, adding that she feels “pretty positive” about the comments from the government recognizing that its Bass Strait project will continue selling to the domestic market. “And we're keen to continue to support that market. We know households and small businesses depend on it,” she said.

Santos CEO Kevin Gallagher was “pleased” that the government was supporting contract sanctity “very consistently and very loudly” in recent comments they’ve made. “I think it's very unlikely you'd ever be forced to do anything that's uneconomic,” Gallagher said.

Code of Conduct Worries

A voluntary industry-led code of conduct designed to create greater pricing transparency by regulating pricing talks between gas producers and consumers has also caused concern. Introduced in 2021, the code of conduct is set to become mandatory from early 2023 with the possibility for the government to review it depending on the market's structure and conduct. Producers have expressed discontent with the measures as the new code could create an unstable investor landscape and could ultimately lead to the government imposing on them a sales price to their own gas.

The revamped code will add a new "reasonable pricing" provision, which requires producers and buyers to negotiate contracts at prices which reflect the cost of domestic gas production, allowing for a reasonable return on capital. This reasonable price is to be assessed with reference to operating expenditure, depreciation, return on capital and an allowance for taxation and royalties, Allens said. In absence of an agreement, a price may be determined via arbitration.

The provision will apply to undeveloped fields, such as Santos' Narrabri project in New South Wales, while producing fields are already covered by a one-year price cap of A$12 per gigajoule ($9.05 per million Btu) for wholesale gas.

The price cap and the code of conduct will both be enforced by the ACCC, which could impose "significant civil penalties" on companies failing to comply. The government says all these measures are necessary as electricity costs were on track to increase by 36% over 2023-24 on the east coast, while gas prices were set to increase by up to 20%. “Clearly these increases were unsustainable,” minister for resources Madeleine King said, adding that “the social license for gas companies was — and still is — very much at stake here.”

Projects on Hold

Producers are adamant that increasing gas supply is the most effective way to alleviate the projected shortfalls in the domestic gas market. But the uncertainties in the reforms have already resulted in the revision of some of their investment plans and in the pausing of some projects.

Cooper Energy announced last week its decision to indefinitely postpone its Otway Phase Three development. “We deem it prudent to be cautious and do all we can to ensure the stability and certainty before making any new development investment decisions,” Cooper Energy Managing Director David Maxwell said. The company was slated to sanction the project in April or May this year for first production by the winter of 2025.

Viva Energy said a decision to sanction its LNG import terminal in the state of Victoria will depend upon “clarity over new federal regulation of gas markets” as well as environment approval. In December, Senex Energy also suspended a A$1 billion ($680 million) investment to expand its gas production in Queensland until the scope of future government intervention has been clearly defined.