Otway Basin gas project at risk due to federal energy policy fight
The developer of an offshore gas project in Victoria’s Otway Basin with plans to supply utilities giant AGL from 2025 is calling on the federal government to provide assurances about the extent of its proposed market interventions before it makes a final investment decision.
Adelaide-based gas producer Cooper Energy last month signed a deal with AGL, the nation’s largest power and gas retailer, to supply it with up to 10 petajoules of natural gas a year for six years.
Cooper Energy’s Sole gas project off the coast of Victoria. Credit:
The supply deal is conditional on a final go-ahead decision on a new gas development at its Otway Basin project, known as OP3D, which Cooper is hoping to make within the next six months.
While initial engineering and design works on the project were under way, and a loan facility had been arranged, Cooper Energy chief executive David Maxwell said the federal government’s package of reforms unveiled on Friday to rein in soaring east-coast energy prices had raised issues that may imperil the economics of future developments.
“Given what’s just happened in the last few days, we would seek comfort that there won’t be step-in changes to undermine the value of the investment,” Maxwell said.
“Otherwise it’s not fundable – it’s not fundable from the bank’s point of view, from a Cooper Energy point of view, and we wouldn’t want to be spending shareholders’ money unless we had comfort that the framework through which we were investing … was going to be stable.”
The government last week announced a series of initiatives designed to reduce soaring power bills. They include temporary price limits of $12 a gigajoule on uncontracted wholesale gas and $125 a tonne on coal, and powers to influence the price of gas contracts beyond next year.
One part of the proposed legislation, section 53V, gives the government extreme powers to break contracts and dictate where, when, how much, and at what price a producer must supply gas in certain circumstances. Gas companies have pressed the federal government to ditch the clause, and were hopeful it may be removed before it is put to parliament, according to industry sources not authorised to speak publicly about the private talks
The government’s emergency intervention in the market has been welcomed by manufacturing industries, which have been struggling to absorb this year’s skyrocketing costs of gas for energy and as a raw material. Power and gas prices across the eastern seaboard have been pushed higher as the war in Ukraine deepens a global energy crunch by driving countries to ditch Russian coal and gas, and igniting 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.
But the government’s plan has sparked a furious response from gas producers, who warn the regulations constitute an unprecedented intervention in the market that will put at risk crucial investments to develop new local gas supplies to prevent fuel shortages in coming years.
As authorities issue warnings of an elevated threat of gas shortfalls emerging on peak winter days in Victoria and NSW in coming years, Maxwell said diverting additional supplies from Queensland’s large gas producers “can only do so much” because of pipeline capacity constraints. He said the situation left little choice but to develop new sources of supplies in south-eastern Australia that can offset rapid output declines from legacy fields in the Bass Strait.
“What we need is an environment where you are encouraging people to develop more supply and improve certainty around future supply, but the code that’s being written does the opposite of that,” Maxwell said.
“The one thing that is more mobile than anything else is capital – and people will spend their money in other places.”
Australia, for many years, had been a “fantastic place” for oil and gas companies to invest, he added, as it was widely seen as a stable and reliable jurisdiction.
“Our hope is that’s preserved,” Maxwell said. “But what we say on Friday shook us a bit.”
Analysts say Cooper’s OP3D gas sales agreement with AGL would not be immediately impacted by the proposed legislation, which only caps wholesale spot gas rather gas that’s sold on long-term contracts.
However, if the price caps are extended beyond 2023, as some in the gas industry expect, Cooper “may be forced to review its drilling program and go-ahead” for the project, Royal Bank of Canada analyst Gordon Ramsay said.
“In addition, AGL could also possibly request a review of the gas contract pricing,” he said.
AGL declined to comment.
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