Australian Industry Group backs domestic gas reservation policy

Arguments that a domestic gas reservation system on the east coast would lead to the collapse of oil and gas investment are “absurd”, according to the Australian Industry Group.
  1. Arguments that a domestic gas reservation system on the east coast would lead to the collapse of oil and gas investment are “absurd”, according to the Australian Industry Group.

    It said a gas reservation system could be combined with other options to provide long-term security to domestic gas users, including extending control of LNG exports and imposing a national interest assessment test on new gas export developments.

    Ai Group, which represents more than 60,000 businesses employing more than 1 million people, pointed to the example of Western Australia, which has seen billions of dollars invested in new gas supply despite having a domestic gas reservation system in place for several years.

    “Western Australia’s reservation policy has clearly not been incompatible with immense investment by the oil and gas sector over the years,” Ai Group said in its submission to the Morrison government’s review on a proposed national gas reservation scheme.

    “The idea that an eastern or national reservation would necessarily lead to the collapse of oil and gas investment is absurd.”

    The federal resources minister, Keith Pitt, is considering feedback to a discussion paper released in October canvassing views on the design of a gas reservation system that would apply only to future developments, not existing ones.

    The review comes as some manufacturers and industrial users of gas on the east coast are calling for further government intervention, to ensure affordable gas for local users, some of whom are paying about $10 a gigajoule even after spot gas prices slumped earlier this year on weaker demand during the COVID-19 pandemic.

    The Morrison government is also in discussions on a revised heads of agreement with the three Queensland LNG exporters to ensure adequate supply of gas to the east coast domestic market.

    The gas industry lobby group has argued against domestic gas reservation, saying it would deter investment in new supply. Research commissioned by APPEA also says evidence from overseas shows government intervention through domestic gas reservation systems and price setting does not guarantee lower prices.

    Ai Group said it was important to be more clear about the purpose of any domestic gas reservation system: to put in place a long-term safeguard against the risk of a shortfall of available supply, or as a means to decouple local gas prices from international influences to keep them below export parity. The latter could require producers to supply a mandated share of gas to domestic customers, even if it wasn’t as attractive as exporting gas and “might evoke fears of an inefficient allocation of resources”, it said.

    The industry group called on the government to consider a domestic gas reservation scheme in combination with other options including extending powers to control LNG exports that are currently due to lapse in 2023, and making new gas export developments subject to a national interest assessment test.

    This comes as new research from the University of Melbourne shows sky-rocketing east coast gas prices could have been averted by reserving about 6 per cent of Australia’s gas exports for the domestic market.

    The findings show a direct connection between LNG exports – which started for the first time from Curtis Island at Gladstone in Queensland in 2015 – and increased gas and electricity prices.

    “The linkage to export markets has transformed Australia’s east coast gas industry, almost tripling demand from an average of 1780 terajoules (TJ) a day prior to 2015 to around 76 5000 TJ/day in late 2017,” observed Dr Dylan McConnell and Dr Mike Sandiford in their paper Impacts of LNG Export and Market Power on Australian Electricity Market Dynamics, 2016–2019 published in the scientific journal Current Sustainable and Renewable Energy Reports.

    As new fields were developed to supply LNG overseas, the Queensland coal seam gas supply available for the traditional domestic markets declined with demand from exports over the four years – at times – exceeding production and pushing up domestic prices.

    The research shows the effect of high gas prices on electricity prices was significantly exacerbated by the outsized market control gas-fired power stations have in setting electricity prices, especially via the practice of “shadow pricing”.

    “The absence of mandated reservation has effectively allowed gas exporters to defer some of the risk of meeting export production schedules onto domestic electricity consumers,” Dr McConnell and Dr Sandiford said in their paper.

    Source: Financial Review