The Australian government on Monday began the formal process to determine whether 2018 will be a "gas shortfall year" and whether the country's LNG exports will be restricted as a result.
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Under the Australian Domestic Gas Security Mechanism, announced June, the government can, from January 1, force exporters to limit LNG shipments or find new sources of gas supply to prevent a domestic gas shortage.
A conclusion is to be reached between September 1 and November 1, according to the Department of Industry, Innovation and Science.
If export controls are invoked for 2018, each LNG exporter will be granted either unlimited or restricted volume permission.
The former would typically be granted to projects that are net-contributors of gas to the domestic market, and are unable to deliver gas at a reasonable price to a market experiencing a shortfall. As the name suggests, it would allow the project to export an unlimited amount of LNG.
The latter would be granted to all LNG projects connected to markets experiencing a shortfall, and will provide a maximum volume of LNG which they may export.
'DOMESTIC MARKET FIRST'
As a first step, the government will consult competition watchdog Australian Energy Market Operator, and its major gas producers and end users.
"I am committed to working closely with the gas supply industry and domestic gas users to address potential gas shortfalls through a non-regulatory approach as part of the ADGSM consultation process," Minister for Resources Matt Canavan said.
The ADGSM "is a mechanism of last resort," Canavan said, and the government's long term goal is to increase domestic gas supplies. A total of A$90 million ($71.4 million) have been allocated to bringing new gas supplies and promoting gas market reform, he added.
"We are working with states and territories that want to develop their own gas resources through the [A]$26 million Gas Acceleration Program (GAP) to fast track new gas to the east coast market," he said.
'EXPORTERS UNDER PRESSURE'
Australian exporters have already come under pressure to restrict export volumes.
LNG producer Santos cut its third-party purchases for the Gladstone LNG export project from 228,000 mt in the January-March quarter to 222,300 mt in the April-June quarter.
The company also lifted its gas supplies to the domestic market from 3.3 petajolues in January-March 2017, and from 4.6 PJ in April-June 2016, to 7.9 PJ in April-June 2017.
The Department of Industry, Innovation and Science also earlier in July lowered its fiscal July 2017 to June 2018 LNG exports forecast to 63.8 million mt, less than the previous forecast of 67.6 million mt in March.
LNG export restrictions and intensifying global competition were cited as primary drivers for the lower volumes.
'DEFEATS THE PURPOSE'
Gas industry spokesman Malcolm Roberts said the ADGSM risks exacerbating the problem it is meant to solve.
"Export controls are a sovereign risk issue for Australia, threatening the [A]$50 billion in new investment needed to maintain current supply.
Restricting exports will only redistribute existing gas supply -- it will not deliver new supply," he said.
The issue came to a head earlier this year following AEMO forecasting potential gas shortages on the country's east coast by the end of the decade, which prompted the government to act.
Roberts argues the answer lies not in cutting of exports, but in encouraging new supply.
"The government should be working with industry on regulatory reforms that reduce the cost of developing new supply," he said.
"And it should continue to pressure state and territory governments to immediately remove their bans and moratoriums and consider all new projects on their merits," he added.
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