The government needs to better explain its gas supply fix

Gas exports from the east coast only began in 2015. Since then, exports have ballooned and domestic gas prices have increased dramatically. Price spikes have driven some manufacturers to the wall. Governments have had to intervene to prevent shortages.

The issue is that gas companies can get much higher prices exporting gas than selling it domestically. And some exporters have started buying gas from the domestic market instead of developing their own resources.

To fix this problem, the federal government plans to require gas companies to reserve gas for the domestic market. When first announced in December, the gas industry was broadly supportive. No longer. The backlash began after the detailed design was released in May. Growing dissent from industry now threatens to derail the plan.

As proposed, the government’s scheme does need some tweaks. But the core mechanics are sound and the key criticism is misplaced. It’s time for the government to explain it better.

What’s the policy meant to do?

The gas reservation policy is designed to force exporters to supply the equivalent of 20% of their exports to the domestic market. The government’s goal is to keep prices down and avoid looming shortages, especially in New South Wales and Victoria.

When the plan was announced, Australia’s oil and gas lobby group backed it. But the Australian Energy Producers group now calls the plan “fundamentally unworkable”.

Gas producer Senex called it “perverse in the extreme”, Beach Energy said the government was “trying to shut us down”, and Santos said it would “kill an industry”. Queensland treasurer David Janetzki said the plan would “undermine the foundations of our economy”.

What happened?

The major bone of contention is how much gas exporters would have to push into the domestic market.

East coast LNG exports are forecast to be about 1,400 petajoules (PJ) next year.

Reserving 20% of that as the government wants would be 280PJ – the equivalent of about 73 large LNG carriers.

But domestic demand is now falling. East coast demand is forecast to be only 441PJ next year, which should be met by existing supply. Adding 280PJ would be a huge oversupply.

For a domestic gas producer to make money, it needs to sell gas at about A$11–12 per gigajoule.

The industry is worried boosting supply could drive prices below the cost of production, potentially driving domestic-only producers broke.

If that happened, supply would fall and prices would rise. This would make matters worse long-term.

This concern is reasonable but overstated

Dire warnings of an oversupply are overstated. The reservation policy has been deliberately designed to manage this risk.

The 20% figure isn’t fixed. Rather, it’s an upper limit on how much gas will be reserved. Most years, the scheme will reserve much less.

Each year, the minister responsible will decide how much gas to reserve, based on two things. One, whether the domestic market faces a shortage. And two, whether forcing a domestic oversupply will keep a lid on prices.

While the final legislation is yet to be released and much could change, if the scheme applied in 2027, here’s how the current design might work.

Australian Energy Market Operator forecasts suggest the east coast will effectively face zero shortfalls until 2030, leaving no gap to fill in 2027. The government has suggested requiring delivery of 5% more gas than forecast requirements so domestic prices drop.

That would translate to an extra 22PJ in 2027, representing about 2% of exports – not 20%. The remaining gas would accrue as an obligation the minister can call on in future years.

The final figure might be smaller still. About 70% of this gas would have to be sold through long-term contracts, leaving 30% able to be offered to short-term trading markets. If exporters can prove this gas has no buyers, they can seek permission to export it. Any reserved gas approved for export remains as an future obligation able to be called on.

All up, this means the policy could require just 16PJ of gas to be delivered domestically in 2027. This scenario would hardly tank the market.

Little time to get it right

The 20% reservation figure is the biggest concern for industry. But it’s not the only one.

Gas companies are worried about too much ministerial discretion, the ability to set obligations across multi-year periods, and potentially massive accruals of “undelivered gas”. These issues are legitimate and need to be resolved.

Under the government’s model, the minister would have substantial discretion to set the annual volumes required. This leaves exporters with no certainty about how much they will be required to deliver each year. To solve this, gas volumes should be set in five-year blocks according to a predictable formula based on supply and demand.

Fixing these issues will be crucial to win over a sceptical industry. But the government wants the scheme to begin on July 1 next year. That doesn’t leave much time to get it right. Legislation would have to be introduced in the September sitting of parliament for the laws to be passed before Christmas.

None of these issues is a reason to back away. Over time, Australia will need to wean itself off gas, which is a potent fossil fuel. But for as long as we still need it, consumers in a gas-rich country should have access to gas at a reasonable price.