The Commonwealth Government announced today that it will be putting in place extraordinary measures in order to increase domestic gas supply to the East Coast. The measures will be implemented by way of a temporary licensing framework for LNG exports, dubbed the Australian Domestic Gas Security Mechanism (ADGSM).

Background

The introduction of the ADGSM is the latest development in a series of events related to the East Coast gas and power markets. It follows the recent increase of the Australian Competition and Consumer Commission’s (ACCC) investigative powers with respect to gas prices, including the power to collect confidential market information from gas suppliers. Both measures are a response to gas buyers’ concerns that the LNG export demand, together with restrictions on natural gas exploration and development, is causing shortfalls of gas in the domestic market and has contributed to gas price increases as domestic prices rise to export price levels.

The ADGSM is expected to come into effect on 1 July 2017 and, according to Prime Minister Turnbull, is intended to be a “targeted, temporary measure of repair”.

We understand that the intention is for the ADGSM to apply only to the East Coast LNG projects. That is, it is not expected that LNG projects in Western Australia or the Northern Territory will be affected by these measures.

The framework

The ADGSM does not impose licensing requirements on LNG exporters outright. Rather, for the licensing system to be triggered, the Minister for Environment and Energy (with advice from the Minister for Trade and the Minister for Industry and Science) will have to formally certify that the Minister has reasonable grounds for believing that there would not be a secure supply of gas available for the Australian domestic gas market over a forthcoming period. The Minister may make such a determination annually, or if the market conditions justify it. The ACCC and the Australian Energy Market Operator (AEMO) will advise the Government on whether a shortfall exists or if a shortfall may be distorting domestic prices above comparable export prices.

If the Minister forms the view that he or she has reasonable grounds for believing that there would not be a secure supply of gas available for the Australian domestic gas market over a forthcoming period, the Minister would also need to make a determination on the amount of gas required to guarantee an adequate supply to the domestic market – a Total Market Security Obligation (TMSO).

All LNG exporters would be requested to submit their forecast LNG production and gas supply schedules for the coming period. Any LNG exporter that was not drawing down (i.e. having a no effect or a positive supply impact) on the market would receive an export licence for their forecast shipments.

Any exporter that was in net deficit would be asked to either reduce their use of gas by a pro rata amount of the TMSO (where there was more than one deficit exporter) or by the production of new gas for the market. The Minister would then issue a licence for the revised LNG schedule.

Implications

Export commitments reliant on Ministerial discretion

The fact that the licensing regime will not be triggered unless the Minister makes a determination will likely be of little comfort to LNG exporters. The ADGSM will also affect perceptions of Australia’s sovereign risk generally. The ADGSM, and the discretion reserved for the Minister, will be perceived as introducing a high level of uncertainty into Australia’s LNG projects (particularly, where LNG exporters rely heavily on long-term LNG off-take agreements). That the Ministerial discretion may be exercised whenever the Minister considers that market conditions justify it will add to that perception.

Uncertainties as to application

At this stage, it is not exactly clear whether the ADGSM will apply to individual exporters or to each project’s joint venture (as an export counter-party). It is also unclear how it will affect upstream producers and joint ventures.

We understand that there are meetings scheduled between the Commonwealth Government and the major gas producers in upcoming weeks to finalise the details of how the ADGSM will be implemented.

Further comments

We expect that gas producers and exporters may seek to challenge the ADGSM. Based on the information provided thus far and depending on the manner in which the ADGSM is implemented, we believe there may arise bases upon which to do so.

With the lack of policy cohesion between Commonwealth and State Governments (most notably the onshore gas exploration moratoria in New South Wales, Victoria, the Northern Territory, and the power related energy security issues in Eastern Australia), measures such as the ADGSM have been discussed for some time. However, the broader question of implementing a comprehensive national energy policy across Australia that seeks to achieve clearly articulated energy security, economic and environmental goals remains elusive.