East-coast gas supply pact at risk as price controls loom

The Albanese government’s emergency plan to cap east-coast fossil fuel prices is threatening to shatter a landmark agreement it struck in September with gas exporters to boost domestic supplies and prevent possible shortfalls on the east coast next year.

Energy producers have reacted angrily to a series of market interventions unveiled by the government last week, including temporary price limits of $12 a gigajoule on uncontracted gas and $125 a tonne on coal, and a long-term “reasonable price provision” that would give Canberra influence over the price of gas contracts beyond next year. The reforms aim to reduce retail power bills by suppressing the costs of generation and running manufacturing plants.

The Albanese government has faced mounting pressure to intervene in the gas market and lower energy prices for companies and households.Credit:AP

But the proposed price caps have raised concerns among Queensland’s three liquefied natural gas (LNG) exporters – Origin Energy-backed APLNG, Shell’s QCLNG joint venture and Santos’ GLNG – about a deal they reached earlier this year to deliver an extra 157 petajoules of gas to the domestic market in 2023.

The “heads of agreement” with the federal government was struck in September in response to the national consumer watchdog’s forecast of 56-petajoule east-coast shortfall next year, but had been agreed on the premise the gas would be made available at market prices, not regulated prices.

The three LNG ventures are expected to hold a meeting this week to discuss whether the agreement still stands.

“The circumstances have changed, and we are all trying to work out what happens now,” said an industry source, not authorised to speak publicly about the matter.

If the agreement falls over, Resources Minister Madeleine King may be forced to step in and trigger for the first time the Australian Gas Security Mechanism – a policy that would force producers to hold back certain volumes for domestic sale only – to avert fuel shortages or blackouts.

King said she would soon be holding her quarterly meeting with the gas producers to discuss their respective actions to boost local supplies, much of which had already been contracted.

Although a clause in the heads of agreement allowed signatories to reopen negotiations in the event of a “material change in circumstances”, King it was her expectation producers would uphold their commitments made in September.

“Given the global energy crisis, and their important role in the community, the government expects that producers would continue to honour their commitment to supply 157 petajoules of excess gas into the domestic market in 2023,” she said.

“Industry has a seat at the table here, and we encourage their constructive engagement in the months ahead.”

Credit Suisse energy analyst Saul Kavonic said the gas industry had been cooperative in preventing several “near misses” from turning into actual energy crises in the past few years.

“Now that Labor has violated industry trust, they are going to see how hard it is to keep the lights on without industry cooperation,” Kavonic said. “Any collapse of the heads of agreement is a sign that industry cooperation cannot be assumed any longer, raising the prospect of a ‘Bowen blackout’ before the next election.”

Prime Minister Anthony Albanese on Monday blasted the gas industry for “jumping at shadows” in its objections to the new price controls , but Opposition Leader Peter Dutton seized on the industry’s concerns to step up his attacks on the plan.

Dutton said the price controls on gas would discourage investment and cut supply when he believed more gas was the answer to rising prices.“We’re not going to support a plan that is going to have devastating impacts in the medium and long term on our economy,” he said.

As power and gas bills continue to surge across the eastern seaboard, Energy Minister Chris Bowen has been in talks with state counterparts on ways to shield consumers from the worst price shocks. Wholesale prices have been pushed higher as the war in Ukraine causes buyers to ditch Russian coal and gas and scramble for any spare cargoes, which has ignited fierce competition for Australian exports. Left unchecked, electricity prices are tipped to rise by more than 50 per cent in the next two years, and gas prices by more than 40 per cent, according to federal Treasury.

“This is Australian gas under Australian soil and Australians should pay a fair price for that,” Bowen said on Sunday. “They shouldn’t be paying a wartime price leading to very high profits for a few companies and endangering industries right around the country.”

The manufacturing sector, which relies on gas for energy and as a raw material, has been pressing the government to cap wholesale rising gas prices as factories are struggling to stay viable under prices exceeding $20 in the nation’s south-east.

Manufacturing Australia, representing firms including BlueScope Steel, CSR and Cement Australia, on Monday said the suggestion that the federal government should sit idly by while spiking bills hollowed out the economy was either “naive or wilfully ignorant” to the profound damage prices were inflicting around the world.

“Governments the world over are intervening to protect customers from an extraordinary global energy crisis – the Australian government is right to do the same,” chief executive Ben Eade said.

“We congratulate the Australian government on a package of reforms that responds to concerns raised by industrial and residential customers over several years, and which have been analysed time and again in successive reports from the Australian Competition and Consumer Commission.”

In 2019, Dow Chemical cited rising gas prices as one of the reasons for closing its plant in Altona in Melbourne’s west. Last year, fertiliser manufacturer Incitec Pivot openly blamed gas prices when it announced it would shut down its 50-year-old Gibson Island plant in Brisbane.

The gas industry has sounded alarm at the extent of the government’s proposed energy market interventions, arguing that elements of the package would drive investment away from critical new projects needed to boost gas supplies to replace the rapidly declining offshore gas fields in the Bass Strait, and see the government take control of gas prices indefinitely.

The energy ministers’ proposed reforms contained a provision that would force producers to fix sales contracts based on the cost of production plus a “reasonable” profit margin after the temporary caps on wholesale gas expired in 2024.

Morné Engelbrecht, chief executive of Adelaide-based Beach Energy, said the “reasonable price provision” went far beyond the impact of the temporary price cap.

“How can the government expect to impose a regulated price on gas exploration and development where significant upfront capital investment, exploration success risk and the multi-decade nature of projects are par for the course?” he said.

Origin Energy chief Frank Calabria said the company understood the desire to manage the impact of rising energy prices on homes and businesses who could least afford to pay. However, he said Origin was concerned that the price caps would discourage much-needed investment in new gas resources, raise concerns about future gas supplies and drive up longer-term prices.

“We note the clear direction that price caps will be temporary, and while over the course of the next week there appears limited opportunity to engage with governments, we will look to participate in consultation where there is an opportunity for genuine, constructive dialogue on a package of legislation that will have wide-ranging impacts on the functioning of Australia’s energy markets,” Calabria said.

Most Viewed in Business

From our partners

Source: Read Full Article