Australia ring-fences domestic gas supply amid energy security concerns

Sydney — Australia took steps to ring-fence domestic natural gas supply with its regulator recommending the extension of an agreement with LNG exporters to prioritize local markets and the gas-producing state of Western Australia limiting onshore gas exports to the east coast and overseas.

The steps do not pose an immediate threat to Australia's LNG exports, which are rivaling Qatar to be the world's largest, but they did signal that energy security remains high on the agenda for policy makers.

The measures also came in the midst of a crisis for the oil and gas industry that has been shaken up by COVID-19 and the subsequent demand destruction and asset writedowns running into billions of dollars in Australia.

The Australian Competition and Consumer Commission, a competition watchdog, recommended the extension past its expiry at the end of 2020 of an existing heads of agreement (HoA) with LNG exporters that was meant to prioritize natural gas for local use.

"To address the risk of a potential shortfall in the East Coast Gas Market in the short term, the ACCC recommends that the Commonwealth Government extend its HoA with the LNG exporters," ACCC said in its Gas Inquiry 2017-2025 report published Aug. 17.

The HoA was initially signed in 2017 as a voluntary step by LNG producers to offer gas to the east coast market that was facing shortages, and stave off a government measure that could force them to divert LNG exports called the Australian Domestic Gas Security Mechanism (ADGSM).

Expensive local gas

The ACCC also raised concerns about local consumers paying significantly higher prices than exported gas.

"We suggest the Government also consider strengthening the commitments in the HoA around the pricing of offers to domestic gas users in the HoA, so that there is more clarity around what is meant by 'competitive market terms'," the ACCC report said.

ACCC chair Rod Sims said those prices referred to the opportunity cost of selling the gas into the domestic market, which is the difference between LNG netback prices and the LNG price in overseas spot markets.

While domestic prices in late 2019 and early 2020 of A$8($5.7)-A$11/Gj were down from the A$9-A$12/Gj observed earlier in 2019, the price decline was not in line with the drop in LNG netback prices, which for 2021 delivery was below A$6/Gj by early 2020 and have been below A$$5.50/Gj since May, he said.

"I am yet to hear a compelling reason from LNG producers as to why domestic users are paying substantially higher prices than buyers in international markets," Sims said.

Trade body Australian Petroleum Production and Exploration Association chief executive Andrew McConville said the industry will consider any request to extend the HoA.

The minister for energy and emission reduction, Angus Taylor, said the government was taking the ACCC's concerns seriously. Australia's Liberal-National Coalition government has been touting a gas-led economic recovery in response to the COVID-19 crisis.

Australia's east coast LNG exporters are Santos' Gladstone LNG, ConocoPhillips' Australia Pacific LNG and Shell's Queensland Curtis LNG.

Gas export ban

Natural gas produced from onshore projects in Western Australia will be prevented from being exported to eastern states or overseas -- with the exception of Mitsui's Waitsia project, the state government said Aug. 17.

The LNG power-house of Western Australia is not connected to eastern gas markets, but this new decision could make a proposed west-east pipeline increasingly unlikely.

"We have seen what's happened on the east coast with local gas supplies being prioritized for export and we won't let that happen here," WA's premier Mark McGowan said in the release.

There will be no change in policy for traditional LNG offshore projects such as Browse or Scarborough, the government noted.

APPEA's WA director Claire Wilkinson said in a statement the added restriction may have the opposite effect than intended and reduce future gas developments.

"Cutting off a potential market for any gas developed is a sure way to signal that WA is not open for business," she said. "A project that could be viable if developed for both the domestic and export market may not be commercially viable if developed for the domestic market only."

She said the decision was made without industry consultation.

The Western Australian government also said gas used to power ships will not be considered domestic gas, leaving scope for LNG bunkering to develop.

Meanwhile, the east coast's LNG import projects proceeded amid projected future gas shortages. LNG trader Vitol's Viva Energy said Aug. 17 it expected to complete expressions of interest and progress through the FEED stage of its regasification project near Melbourne by the end of 2020.