• The Australian Labor Party has proposed a new national gas reservation policy if it wins the upcoming federal election.
  • Any new LNG export facility, significant expansion of an existing natural gas export facility or a significant material expansion of supply will need approval from a new FIRB-styled Domestic Gas Review Board.
  • The Domestic Gas Review Board will assess if the project is in the “national interest”.
  • Western Australia is the only state with an active domestic gas reservation policy of 15% LNG equivalent for a project. The ERA has recommended it be rescinded.
  • The new national policy will, if implemented, impose additional regulation on investors and has the potential to act as a disincentive to foreign investment, exploration and innovation. Even though it is likely to see lower East Coast domestic gas prices in the short term, there is potential for it to increase prices and lessen supply in the long-term.
  • This proposed policy raises issues around Australia’s energy security for all industries.

Overview

With the accelerated development of the LNG industry in Australia and more recently, the new phase of LNG exports from Queensland, the issue of national gas reservation has re-emerged with the announcement of Labor’s proposed national gas reservation policy.

The current position

The Commonwealth Government has previously stated that it does not support a domestic gas reservation policy as it would have negative consequences for the economy. The ACCC has recently supported this assertion in the East Coast Gas Inquiry Report. A key finding was recommending against domestic gas reservation policies. The report stated that in the short term, although such policies may reduce prices for domestic users as additional gas is forced onto the domestic market above efficient market demand, these artificially reduced prices weaken the economic incentives for further gas exploration and appraisal.

Labor’s proposed national gas reservation policy

Labor has outlined a domestic gas reservation policy that it proposes to implement if it wins the Federal election in July.

Under this policy a project proponent of:

  • any new LNG export facility;
  • significant expansion of an existing natural gas export facility; or
  • a significant material expansion of supply,

will need to apply to the newly established Domestic Gas Review Board for approval of the proposed project.6 No further details have been provided at this stage. It is likely that “export facilities” would extend to floating LNG facilities and “significant expansion” would include the construction of additional LNG trains.

The Domestic Gas Review Board will consider a project proponent’s application, having regard to whether the application is in the “national interest”.7 “National interest” is currently defined as taking into account a cost-benefit analysis that considers economic, strategic, social, regional, industrial and employment impacts, as well as the maintenance of a strong and viable natural resources industry.8 There are obvious parallels between this process and an application to the Foreign Investment Review Board which also makes determinations as to what is in “the national interest”.9

The policy also notes that the Domestic Gas Review Board will take into account State based regulations and determinations, including decisions in those States that already have reservation policies in place.10 It is not clear whether a commitment to provide domestic gas pursuant to a State policy will offset a national commitment or what level of commitment will in fact be required. It also raises interesting questions for the future of offshore floating LNG facilities, which are purpose built for LNG offshore with no domestic gas infrastructure. Will these projects be required to transport gas onshore for input into the domestic gas network or will a gas swap system be implemented for these types of projects?

The Domestic Gas Review Board will make recommendations to the Treasurer, who shall seek advice from the Minister for Industry and Minister for Resources before making a decision.11

The debate

APPEA is strongly opposed to the idea of a domestic gas reservation and Labor’s proposed policy, stating that it will discourage rather than stimulate investment in Australia’s gas reserves.12

Although opinions on the policy are generally divided between gas producers and major gas users, Fortescue Metals Group has come out against the policy and instead supports a stricter interpretation of offshore petroleum retention lease rules.13

The opposing view is that the LNG export industry has contributed to rising gas prices, has the unintended side effect of placing domestic gas supply at risk and increasing the price of gas for Australian manufacturers and households.14

The essence of the debate is a choice between letting the market decide the price of domestic gas (where the East Coast market is now pegged to an international LNG net-back price), or government intervention to secure domestic gas for Australian industry and households at a subsidised price.

It is also noted that as a member of the World Trade Organisation, Australia is a party to the General Agreement on Tariffs and Trade (GATT) and questions have been raised previously as to whether a domestic gas reservation policy would in fact be in breach of GATT.15 If the national gas reservation policy were to be implemented, the limits of the policy and Australia’s GATT obligations may be subject to scrutiny.

The Western Australian experience

Western Australia introduced a domestic gas reservation policy in 2006 to ensure that sufficient supplies of gas were available to underpin Western Australia’s long term energy security and economic development.16 LNG participants are required to reserve the equivalent of 15% of LNG production from each export gas project (which can be offset from sources other than the fields producing the exported gas).17 This requirement to provide domestic gas is tied to a project proponent’s access to land. The North West Shelf, Gorgon and Pluto projects currently provide domestic gas to Western Australia and when completed, the Wheatstone project will also provide domestic gas. Prelude and Ichthys, although offshore Western Australia, operate in Commonwealth waters and are outside the scope of Western Australia’s domestic gas obligations. The Browse project (currently on hold due to project economics)18 has also made domestic gas commitments.

In 2014, the Economic Regulation Authority reviewed the operation of the WA policy,19 and recommended that it be rescinded as soon as practicable.20 The ERA stated that policy intervention can only be justified if there is some market failure that has been identified and that higher prices are a function of free market dynamics, and not in themselves, a market failure.21 It also stated that the policy reduced the incentive for investment in the gas industry, inhibited efficiency and innovation and assisted uncompetitive industries at the expense of investment in other sectors.22

Legislation was introduced in Queensland in 2011 that requires acreage to be reserved for gas to be supplied to the domestic market, although this has not been utilised.23 No other states or territories currently have domestic gas reservation policies.24

Conclusions

In the current era of low commodity prices and increased international competition for investment capital, the increased regulatory burden of a national gas reservation policy appears to be a risky move. This is particularly so given the subjective nature of the FIRB-style “national interest test” and potential for projects that have already taken FID to have economics reassessed.

Bringing more gas into the market is considered by both sides of the debate to be an effective way to keep gas prices down. However, the reservation policy may be a disincentive to explore for new gas fields.

It must also be noted that continual subsidising of uncompetitive industries may not encourage established industries to innovate, which is at odds with Australia’s current focus on innovation and the benefits it can bring to the economy.25 Even though a domestic gas reservation policy will see lower domestic gas prices in the short term, it may increase prices and lessen supply in the long-term.

What is certain, however, is that a discussion over gas supply in the broader context of energy security is an important issue for all sectors of the Australian economy.