Natural gas has played an important role in Australia’s domestic economy for more than 50 years and contributed to our exports for more than 30 years. For most of that time the east coast market has been domestically focused, with supply and demand in balance.
Two developments upset this balance. In 2015, liquefied natural gas (LNG) exports began from Gladstone, Queensland. By 2024, export volumes of more than 1,400 petajoules (PJ) were 75 per cent of total east coast demand. At the same time, production from the traditional south-eastern gas fields has been declining.
In 2017, worried about potential domestic gas shortfalls, the Turnbull Government introduced the Australian Domestic Gas Security Mechanism (ADGSM) and a voluntary supply agreement with the major gas exporters. In 2021 the Morrison Government subsequently codified this voluntary agreement into a Heads of Agreement (HoA). When Russia’s invasion of Ukraine caused a spike in gas prices in 2022, the Albanese Government imposed a temporary $12/GJ price cap. It also revised the HoA, and introduced a mandatory Gas Market Code to facilitate the operation of the market. Central to the new agreement was that the domestic gas market should be supplied at prices no greater than what international customers pay.
The current framework – particularly the threat of ADGSM activation and HoA obligations – has helped avert shortfalls since 2017.
These instruments were developed individually over several years. Their operation requires continual regulator and government intervention, and the domestic contract market lacks transparency and predictability. The current review aims to provide predictable and stable policy to guide gas supply and affordability in an economy committed to net-zero emissions.
Integrating the existing instruments to operate continuously without continual need for government intervention would provide producers and big consumers with confidence to invest and contract. LNG exporters should be subject to an ongoing obligation, embedded in export licences, to supply the domestic market.
The ACCC’s gas market monitoring role should be transferred to the Australian Energy Regulator (AER), informed by the Australian Energy Market Operator (AEMO), so that all monitoring is done within the energy market. And the AER should make the market more transparent, including by aggregating and publishing price and contract terms and market imbalances more frequently.
With a sufficiently predictable, consistent, and transparent market, price intervention may be unnecessary. Otherwise, the government could benchmark to an external reference price such as export netback parity, linked to a stable measure such as the international oil price.
The south-east of Australia faces a more structural, longer-term gas shortfall than this framework can solve. South-east Australia is at risk of seasonal shortfalls by 2027, and structural shortfalls after 2028. Unless substantial new supply is identified or demand falls dramatically, new supply, storage, and transport will be needed.
Without a clear plan for the role of gas in the transition to a net-zero economy, gas suppliers, investors, and large gas users will not have the confidence they need to invest in the right technologies and infrastructure in the right places and at the right time. Australia’s current Future Gas Strategy should be revised to include clarity over demand and supply outlooks over the next 25 years, consistent with reasonable industry and community demands and Australia’s climate commitments.