On 6 June, the Commonwealth Government released, for consultation, the draft regulation and guidelines for its proposed new control of LNG exports - the Customs (Prohibited Exports) Amendment (Liquefied Natural Gas) Regulation 2017 and Customs (Prohibited Exports) (Operation of the Australian Domestic Gas Security Mechanism) Guidelines 2017. The Regulation is set to come into effect on 1 July 2017.
In accordance with prior indications, the regime looks to solve shortfalls not on the basis of “all hands to the pump”, but by effectively penalising Projects that could be regarded as “at fault”. LNG Projects taking gas from the domestic market will be stopped from exporting the amount of LNG which equates to the domestic gas shortfall, irrespective of their export contract commitments. Presumably, this gas is redirected to the domestic market. Projects which are “net contributors” to the market (that is selling more gas into than they are taking out of the market) will be “light touch” regulated; their volumes will be limited but to their own export forecast for the relevant year. That forecast could include anticipated spot volumes on top of contract commitments. As currently drafted; the forecast exports of a net contributor Project cannot be reduced.
The Minister (currently Matthew Canavan) decides whether a domestic market shortfall exists. He must do so on advice (AEMO and the ACCC) and after consultation, but while the Guidelines set out considerations, his discretion is broad. Once the decision (which could have material commercial impacts) has been made it cannot be subject to a review of the merits, only judicial review of the process.
Structure of proposed regime
The structure of the proposed new regime is:
- If the Resources Minister is concerned that a domestic gas market may experience a shortfall the following calendar year, he or she is to issue a “Declaration” to that effect. This Declaration triggers an information seeking process where the Minister is to consult with market bodies (i.e. AEMO and the ACCC), LNG Projects, relevant Commonwealth Ministers, and any others they see fit. It is likely the Department will call for submissions.
- “Where practical”, Declarations are to be made by 1 July in a year, but can be made as late as 2 October.
- The market bodies are to provide formal advice on the likelihood and quantum of a domestic market shortfall and whether export controls are likely to assist. The LNG Projects are to provide advice on gas production, consumption, purchases, sales and reserves, as well as LNG exports, for previous, current or future years, (as may be requested by the Minister).
- If, upon consideration of the submissions, the Minister forms the view that a domestic market will be in shortfall for the coming year, he or she will make a “Determination” (notified in the Federal Register) to that effect.
- Determinations for a year must be made on or before 1 November the previous year, but can be made in one year for several future years. A Determination cannot be made for a year during that year (providing some certainty to industry), but can be revoked at any time (e.g. if an anticipated shortfall does not eventuate).
What happens if there’s a shortfall?
The Determination triggers the application of the LNG export controls Australia-wide. A permit is required for all LNG exported from Australia during a year for which a Determination is in place.
Two types of permits may be issued:
- Unlimited volume permits will be issued for the export of LNG from an LNG Project connected to a domestic market which is not in shortfall. So, in the current market the new regime is an administrative burden, but not a business constraint for the Western Australian LNG Projects.
- For export of LNG from an LNG Project connected to a domestic market in shortfall (in the current context, the three Queensland LNG Projects) the permits will be for a specified maximum volume.
- The maximum export volume permitted from an LNG Project will be determined by an assessment of the LNG Project’s “net market position”, that is, whether it is a “net contributor” or “in net deficit.”
- The maximum allowable volume of LNG exports from a “net contributor” LNG Project will be the Project’s forecast of exports for the year as advised to the Minister during the consultation process.
- Those LNG Projects that are “in net deficit” will be required to make up the domestic shortfall. If there is one LNG Project in net deficit, the full amount by which the domestic market is in shortfall will be deducted from that LNG Project’s forecast exports and the result will be the maximum volume of LNG that can be exported from that Project. If there is more than one LNG Project in net deficit, the market shortfall volume will be apportioned between them based on the extent to which they are in net deficit.
- The Regulation includes a sunset date: the regime will expire on 1 January 2023.
The “net market position” test
The “net market position” test becomes a crucial concept for an LNG Project. If an LNG Project either:
- buys more gas from the domestic market than it sells into it; or
- consumes gas from non-dedicated sources,
then that LNG Project will be “in net deficit”. Otherwise it will be a “net contributor.”
- Gas will count as dedicated if:
- it is from tenements owned by the LNG Project; or
- the gas is contracted directly to the LNG Project and was either contract prior to the Project’s FID or was developed primarily to meet the export market.
This test is intended to encourage development of new fields for export purposes, rather than redirection of gas from existing supplies. Interestingly, it places a premium on direct contracting without intermediaries such as market agents or aggregators.
Redirection to the domestic market
What happens to gas that a “net deficit” LNG Project has contracted to buy but can no longer process and export as LNG is not addressed? Presumably, it will be redirected to the domestic market. The imposition of export controls on LNG will not necessarily be an event of Force Majeure under the relevant gas supply agreement, it will depend on the GSA. It may be the supplier or the LNG Project which suddenly has gas on its hands, and is looking to enter into new agreements for its sale, swap or transportation. Unless Determinations and export permits are made for several years at a time it is likely such new arrangements would be short term.
Future gas sales to an LNG Project
Projects with limited own gas supplies can still count third party gas.