The federal government is reviewing policy mechanisms designed to ensure that a country blessed with enough gas to be a significant global exporter also supplies domestic needs at a reasonable price.
This should be a no-brainer yet, sadly, there is little agreement on how this objective should be achieved. Natural gas has been a major energy source for Australian homes and businesses since the 1960s. For most of that time the east coast domestic gas market has been internally focused, with demand and supply in balance.
Two developments upset this balance. In 2015, liquefied natural gas exports began from Gladstone, Queensland. By 2024, export volumes of more than 1400 petajoules were 75 per cent of total east coast demand. Concern arose that the LNG terminals would suck the market dry.
The Turnbull government introduced the Australian Domestic Gas Security Mechanism to avoid this. Its threat of direct intervention in the export contracts was enough to ensure that demand has been met since then.
In 2022, Russia’s invasion of Ukraine lifted global demand for non-Russian gas, driving up the price, including for Australian exports. Wholesale gas prices on the east coast soared from $10 a gigajoule to $30. The Albanese government had to act.
It imposed a $12 price cap and established a heads of agreement with the exporters. Central to the agreement is that the domestic market gas will be supplied at prices no greater than what international customers pay. The government also introduced a Gas Market Code that imposes $12 a gigajoule as a “reasonable price” for wholesale contracts.
The central and critical focus of the current review will be on these three instruments with the simple objective to ensure Australian consumers have sufficient supplies at a reasonable price while supporting Australia’s position as a reliable trading partner.
So far the gas industry has been unable or unwilling to put forward a politically acceptable solution. It pleads for removal of government interventions, arguing that unfettered exploration for more gas will solve all problems. Governments and regulators, as well as consumers and environmental groups, will reject such positions outright.
The review’s consultation paper seeks proposals on options for change. Considering previous attempts and mixed results on both the west and east coasts, there are two conceptual alternatives worth considering.
Some form of policy to reserve gas for Australians is an attractive idea and recent statements by the Prime Minister were interpreted as him supporting the idea. Since 2006, Western Australia has had a reservation policy that mandates LNG producers reserve 15 per cent of their LNG exports for the state’s domestic market. The reserved volume has been enough to keep prices low. The policy was highly contentious at the outset but suppliers and consumers generally learned to work with it, although recent price increases suggest tensions are re-emerging.
Reservation brings two problems. First, determining a target volume seems arbitrary and static in a rapidly changing market. While the consultation paper says national gas demand is expected to remain steady across the next 20 years, that is debatable.
Climate change policy, including the quest for new-zero emissions, will have substantial consequences for gas demand that will vary across gas usage sectors and lead to a more seasonably volatile demand. Second, reserving enough gas on the east coast to drive down the price significantly would require volumes of production well beyond what is currently available or envisioned.
A different approach would be to retain but streamline the current instruments into a single framework. After all, they have demonstrably worked on supply security for the past eight years.
Instead of an imposed reasonable price, with exemptions that render it almost irrelevant, a better approach would be to impose a wholesale price obligation based on export parity. Governance could be tightened by giving the regulatory monitoring role to the Australian Energy Regulator, with powers of contract price discovery and penalties for breaches.
The debate will be heated. Gas consumers would prefer a closed domestic market. Gas producers would prefer no export controls.
But a combination such as the above could provide the clear and predictable market arrangements under which both could make their long-term investments with confidence. The Coalition’s intervention idea put to the election in May even suggests potential for bipartisan support.
A sharp review should be followed by broader strategic considerations that will flow from climate change targets and related policies. Australia’s energy transition to net zero will include a critical, albeit diminishing, role for gas. The government’s immediate challenge is to make that role clear and compelling.