Pull the gas trigger – and levy a super profits tax too

The report identifies serious concerns in four areas: a potential east-coast supply shortfall in 2023, high and increasing domestic prices, ineffective competition in pipeline transmission and between gas producers, and breaches of compliance with competition legislation.

In the face of these concerns the ACCC’s recommendations are a mixture of the good, the bad, and the OK. The federal government should implement the recommendations, and go further.

The ACCC report is focused on the east coast market in 2023. LNG producers are expecting to produce 167 petajoules more than required to meet their long-term contracts. If the producers decide to export all the surplus, the east-coast gas market will be undersupplied by 56 petajoules (10 per cent of demand).

There are no domestic alternatives to address this potential shortfall. Therefore, the ACCC has recommended that the Minister for Resources should initiate the first step of the Australian Domestic Gas Security Mechanism (ADGSM), to determine if 2023 will be a “shortfall year”.

Under the Heads of Agreement between the government and the producers, the latter would then be required to offer their uncontracted gas to the domestic market first.

The need for these interventions is itself a sorry reflection on the gas industry and its relationship with Australian consumers.

The minister has already acted on these recommendations, and they should address the potential shortfall. The ACCC has also endorsed the government’s intention to strengthen both mechanisms, particularly in areas where gas exporters are not engaging in the spirit of the Heads of Agreement. The need for these interventions is itself a sorry reflection on the gas industry and its relationship with Australian consumers.

Gas prices are high and going higher. The ACCC is very concerned that quoted prices, up to twice already-high levels, will be reflected in long-term domestic contracts with industrial consumers and gas retailers. There have already been business closures directly linked to higher gas prices.

Over the past few years, the ACCC has referenced export parity prices (i.e., what the producer could expect to receive from exporting the gas) as the primary benchmark for domestic prices. Unfortunately, international developments, notably Russia’s war on Ukraine, have driven benchmark international prices from $3-$10 per gigajoule to well above $40, and prices offered by LNG producers have largely followed that rise.

The ACCC recommends nothing to address this problem. Among alternatives canvassed over the past couple of months, the most effective government action would be a windfall profit tax on gas producers.

The ACCC identifies competition and compliance issues with the gas pipeline and producer markets that must be addressed even though they would not delver dramatic solutions to the above problems.

Gas transmission pipelines have long been a source of tension between owners and gas shippers. The ACCC report indicates there will be sufficient transmission capacity to transport gas from Queensland to meet the possible 2023 shortfall.

It is more optimistic than the Australian Energy Market Operator, primarily because the ACCC uses different projections for electricity demand.

However, the ACCC is concerned that pipeline pricing reflects a lack of competition, and Ministers have already agreed to some incremental changes.

A better solution would be to subject these monopoly businesses to economic price regulation.

Beyond the issues around the Heads of Agreement identified above, the ACCC has identified more evidence of an ineffective gas-producer market. Its analysis indicates that the three LNG producers and their associates were, in 2021, able to “exert their influence over close to 90 per cent of the 2P east coast reserves”.

In its view, the joint ventures that cover LNG exports are in effect engaging in joint marketing without ACCC authorisation. If so, they risk breaching the Competition and Consumer Act.

The producers can be expected to strongly reject this allegation, at least on the basis that some joint venture partners have no interest in the Australian domestic market. Regardless of these arguments, the ACCC should implement its proposal that separate marketing be the default position.

The findings of the latest Gas Inquiry Report make for depressing reading. The concerns identified are severely harming both gas and electricity consumers, and we have not yet seen the worst.

The federal government has most of the levers it needs. It should act on the ACCC’s recommendations and, in some areas, go further if we are to avoid catastrophic consequences.