The government’s ugly choices on gas are not over yet - Grattan Institute

Last week, the federal Minister for Resources, Madeleine King, announced she would not trigger the Australian Domestic Gas Security Mechanism (ADGSM).

This decision followed agreement with Queensland-based liquefied natural gas (LNG) producers to avoid a supply shortfall in the east coast domestic gas market. Yet, the news was not all good.

The ADGSM was introduced five years ago by the Turnbull government to address concerns that the domestic market was being sacrificed by the exporters to meet overseas contracts and opportunities.

Under the ADGSM, if the gas market operator identifies a potential shortfall, the Minister can trigger intervention to compel the companies to supply the domestic market.

Since 2017, and following the signing of an associated Heads of Agreement (HoA), gas forecasts of supply and demand on the east coast have been sufficiently matched to avoid a shortfall. The trigger has not been pulled.

Alongside the ADGSM, the ACCC was asked to report every six months on the supply and pricing of gas.

In July this year, the ACCC advised of a potential shortfall in 2023 if the producers directed gas surplus to export contracts overseas rather than to the domestic market.

After much sabre-rattling from the Minister and protests of innocence from the producers, both sides took credit for avoiding a shortfall. The revised HoA includes some welcome changes to increase information and transparency around available volumes and that should assist customers.

Self-interest should drive the gas industry to deliver fair prices without further government intervention

The HoA now includes the seemingly comforting commitment that domestic gas customers will not pay more than international customers, and prices offered to customers will have regard to the prices LNG exporters could reasonably expect to receive overseas for uncontracted gas.

The accepted benchmark to meet the latter requirement has been the LNG netback price, published by the ACCC under its regular reporting.

Over the past few years, the LNG netback price had been generally below $10 per gigajoule (GJ), much higher than historical long-term east coast prices and the $4 price targeted by the Morrison government to revitalise gas-based manufacturing.

Moving into 2022, the benchmark had been increasing and prices offered for domestic supply had largely followed.

Everything changed this year. The big, long-term LNG contracts are generally linked to global oil prices, while LNG spot prices are often referenced for short-term offers of two to three years.

Global demand for LNG, notably due to the Ukraine war, has resulted in a significant divergence between short-term and medium-term netback prices.

On September 1, the ACCC reported short-term netback prices averaged around $53/GJ over a two-year forward period. In contrast, oil-linked netback prices were around $12/GJ over a five-year forward period.

Gas consumers are very concerned about producers’ offers justified on the short-term LNG netback price. There are reports of offers of $30/GJ and more.

The consequences would be dramatic. A medium-size domestic gas consumer in Sydney or Melbourne would respectively see an annual gas bill increase of $550 and more than $1,400.

For a small business such as a drycleaner using 500 gigajoules per annum, the increase would be about $11,000.

While some cost pass-through may be possible, these businesses will otherwise absorb a relatively large cost or take the expensive decision to switch to electricity. For large industrial users, the closure of operations becomes a very real possibility.

It may be that such concerns are overly dramatic, and the reality will be far less so. Yet, the failure to directly address the problem potentially creates a big issue for ministers Chris Bowen and Ed Husic.

There will also be an impact on electricity prices, as is being seen in Europe and as we saw in June when expensive gas sets the market price.

This is a challenging bind for the government. LNG netback may be a theoretically accurate reference price in a well-functioning market, and we should aim to retain that ideal when the global disruptions subside.

And governments should consider programs to support the transition from gas as a fossil fuel over the medium term. Yet, that is not where we are today.

The government has a choice.

It can stick with the market, unprecedented prices, and consumer pain while gas companies make windfall profits, or it can intervene in the market to provide price stability at fair profits and accept that in rare circumstances such as these, market intervention is necessary.

Self-interest should drive the gas industry to deliver fair prices without further government intervention.

But if not, the government should not hesitate to intervene – in its own self-interest and that of Australian businesses and households.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.

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