Labor’s answer to high gas prices stands accused of legislative overreach for the way it plans to penalise financial contracts representing physical gas designed to minimise price swings and disruptions.
Scrutiny of the ALP reservation scheme has uncovered new and unsettling details that will rewrite the way gas is sourced and traded. Gas swaps will be treated as additional supply, rather than continuing obligations, potentially exposing producers to a bigger obligation when they calculate their mandated contribution to domestic pool. The scheme is anchored by a requirement to allocate 20 per cent of a producer’s uncontracted gas to local buyers.
The treatment of swaps highlights the unintended consequences of the government’s plan.
Swap arrangements could become commercially unviable unless exporters secure exemptions under a test that is yet to be defined.
Gas swaps are attractive because they allow LNG exporters to exchange supplies between projects, providing flexibility to ride out production shortfalls, scheduled maintenance or contractual risks.
In practice, they mean supplies can be redirected without having to source replacement gas independently or make more costly adjustments. And without the ability to swap gas, exporters could have fewer options to survive outages. Producers may even elect to shut in wells or flare gas if supplies cannot be reallocated.
The relevant draft legislation states: if an LNG exporter “acquires, and exports, non-additional gas from the domestic market”, that volume is simply added to its domestic supply obligation. The Australian Pipelines and Gas Association has raised concerns that sections of the bill could imperil gas swaps, arguing the legislation is unclear and that ambiguity could leave exporters worse-off.
“We support domestic gas reservation, but the government must get the policy settings right rather than pursue yet another intervention that will only add to future supply and price pressures,” said Energy Producers chief executive Samantha McCulloch. “This shortsighted approach will undermine investment confidence, weaken competition and discourage the development of new gas supply, ultimately putting further pressure on prices for Australian households and businesses.”
One senior industry executive said the ambiguity has to be fixed: “It is existential to the functioning of the industry. Swaps are fundamental to the functioning of the market. There is no way the government intended this and it has to be fixed,” the person said requesting anonymity.
The consequences will depend in part on an additionality test that is yet to be defined. It could determine whether particular swaps qualify for an exemption from the additional requirements.
The distinction is significant because a swap does not represent an increase in the amount of gas produced. But it may be interpreted that way.
The issue raises questions about whether the reservation framework is fit for the way Australia’s LNG industry operates, particularly when producers rely on commercial arrangements with other exporters to keep customers supplied.
Labor is seeking to address genuine concerns about future gas shortages on the east coast, where declining production from existing fields is expected to tighten the balance between supply and demand.
The government wants to ensure a greater share of gas is available to Australian customers rather than being committed to overseas markets, with the aim of improving domestic supply and reducing prices. But the industry has said the scheme, which will compel sales irrespective of price, goes too far. It could conceivably put future projects out of business.
Woodside, for example, has said it could be forced to scrap a proposed new drilling program should the scheme send prices so low that development cannot be justified.
Senex Energy chief executive Darren Stevenson even accused Labor of “taking control of the gas market” in a form of “nationalisation by stealth”.
The implications could be particularly pronounced when an exporter experiences an unexpected outage and needs to secure replacement gas quickly. Without commercially viable swaps, a producer may have to pursue alternative arrangements that are more expensive or less readily available.
The government’s challenge will be to ensure the scheme delivers additional gas to Australian customers without undermining energy security.
On this point, it is arguably failing, according to Ryan Stokes, the chairman of Beach Energy, who questioned the customer that the government has in mind.
“If you’ve got an LNG exporter having to push a portion of gas into the domestic market on a ‘must sell’ requirement. Well, how can any local producer compete? So you squeeze out local production, you lose local investment and you ultimately lose that supply. You lose that industry,” he told The Australian’s Energy Nation last month.
Labor’s answer to high gas prices stands accused of legislative overreach for the way it plans to penalise financial contracts representing physical gas designed to minimise price swings and disruptions.
Scrutiny of the ALP reservation scheme has uncovered new and unsettling details that will rewrite the way gas is sourced and traded. Gas swaps will be treated as additional supply, rather than continuing obligations, potentially exposing producers to a bigger obligation when they calculate their mandated contribution to domestic pool. The scheme is anchored by a requirement to allocate 20 per cent of a producer’s uncontracted gas to local buyers.
The treatment of swaps highlights the unintended consequences of the government’s plan.
Swap arrangements could become commercially unviable unless exporters secure exemptions under a test that is yet to be defined.
Gas swaps are attractive because they allow LNG exporters to exchange supplies between projects, providing flexibility to ride out production shortfalls, scheduled maintenance or contractual risks.
In practice, they mean supplies can be redirected without having to source replacement gas independently or make more costly adjustments. And without the ability to swap gas, exporters could have fewer options to survive outages. Producers may even elect to shut in wells or flare gas if supplies cannot be reallocated.
The relevant draft legislation states: if an LNG exporter “acquires, and exports, non-additional gas from the domestic market”, that volume is simply added to its domestic supply obligation. The Australian Pipelines and Gas Association has raised concerns that sections of the bill could imperil gas swaps, arguing the legislation is unclear and that ambiguity could leave exporters worse-off.
“We support domestic gas reservation, but the government must get the policy settings right rather than pursue yet another intervention that will only add to future supply and price pressures,” said Energy Producers chief executive Samantha McCulloch. “This shortsighted approach will undermine investment confidence, weaken competition and discourage the development of new gas supply, ultimately putting further pressure on prices for Australian households and businesses.”
One senior industry executive said the ambiguity has to be fixed: “It is existential to the functioning of the industry. Swaps are fundamental to the functioning of the market. There is no way the government intended this and it has to be fixed,” the person said requesting anonymity.
The consequences will depend in part on an additionality test that is yet to be defined. It could determine whether particular swaps qualify for an exemption from the additional requirements.
The distinction is significant because a swap does not represent an increase in the amount of gas produced. But it may be interpreted that way.
The issue raises questions about whether the reservation framework is fit for the way Australia’s LNG industry operates, particularly when producers rely on commercial arrangements with other exporters to keep customers supplied.
Labor is seeking to address genuine concerns about future gas shortages on the east coast, where declining production from existing fields is expected to tighten the balance between supply and demand.
The government wants to ensure a greater share of gas is available to Australian customers rather than being committed to overseas markets, with the aim of improving domestic supply and reducing prices. But the industry has said the scheme, which will compel sales irrespective of price, goes too far. It could conceivably put future projects out of business.
Woodside, for example, has said it could be forced to scrap a proposed new drilling program should the scheme send prices so low that development cannot be justified.
Senex Energy chief executive Darren Stevenson even accused Labor of “taking control of the gas market” in a form of “nationalisation by stealth”.
The implications could be particularly pronounced when an exporter experiences an unexpected outage and needs to secure replacement gas quickly. Without commercially viable swaps, a producer may have to pursue alternative arrangements that are more expensive or less readily available.
The government’s challenge will be to ensure the scheme delivers additional gas to Australian customers without undermining energy security.
On this point, it is arguably failing, according to Ryan Stokes, the chairman of Beach Energy, who questioned the customer that the government has in mind.
“If you’ve got an LNG exporter having to push a portion of gas into the domestic market on a ‘must sell’ requirement. Well, how can any local producer compete? So you squeeze out local production, you lose local investment and you ultimately lose that supply. You lose that industry,” he told The Australian’s Energy Nation last month.