Australia advances gas export restrictions

21 June 2017, Week 24 Issue 580

Australia has set a date for the introduction of gas export restrictions as the country struggles to deal with an energy crisis that has sent retail gas and power prices soaring. The only problem with these new export limits, though, is that not even the federal government seems convinced they will work as advertised.

On June 20, the Coalition government announced that the proposed curbs would be in place on July 1and would come into effect on January 1, 2018.

Speaking to reporters in Canberra on June 20, Australian Prime Minister Malcolm Turnbull blamed the previous Labor government for granting too many export licences. He said: “Australian businesses and households are paying the price and what we’re doing is taking strong action, decisive action, to address that.”

But the prime minister was more circumspect when commenting on when gas and power users might begin to feel the benefits, saying “time will tell”. Turnbull said: “How they translate into retail prices or prices for industrial users is another thing, but on the wholesale market, on the spot market, you’ve seen prices come down.”

The restrictions are part of a two-pronged initiative that will see the “limited merits review” process scrapped, thereby blocking electricity distributors from appealing against regulated rates. The idea of preventing utilities from passing on gold-plated costs to their customers comes just days after retailer EnergyAustralia announced that it would hike power prices by close to 20% for customers in South Australia and New South Wales from July 1.

Tough times

On the export front, Canberra intends to introduce an Australian Domestic Gas Security Mechanism (ADGSM) that will restrict sales from LNG projects that are not in “net deficit” to domestic markets. This means that the ADGSM, which is anticipated to run until 2023, will only apply to the Santos-led GLNG project.

But few within the industry are confident that export curbs will necessarily translate into lower retail prices in the coming years, the reason being that such measures will not lead to a sudden boom in upstream spending, but are more likely to deter investors from entering the upstream.

On the same day as Turnbull’s announcement, Business Council of Australia president Grant King warned that producers could not simply switch on supply and that several years of “challenging times” were inevitable.

King was managing director of Origin Energy, which runs the Australia Pacific LNG (APLNG) export in partnership with ConocoPhillips, for 16 years.

Addressing a conference at the Australian National University (ANU), the council head said investment in gas production was a long-term proposition. He said: “What people need to understand about gas is you just don’t go out and turn it on. You’ve got to invest a lot of capital, and that gets all the way back to this question about creating the right decisions in Australia for people to invest.”

King added: “[W]e’re up for a couple of years of quite challenging times. That’s not going to change. It’s not going to open up quickly.”

The problem for the government now is that opening up new gas supplies is becoming an increasingly difficult proposition.

Closed for business

The Australian upstream has seen spending plummet in line with a global slump in exploration and production following the oil price crash of late 2014.

But perhaps more importantly, government and energy sector messaging on the benefits of unconventional resource development has landed spectacularly poorly with the general public. Australia has seen a rising tide of public opposition to new CBM schemes, which were used to underpin Queensland’s three world-class LNG export projects.

New South Wales has wrestled with moratoria and restrictions, opting to buy back CBM exploration licences. Victoria has banned all onshore exploration permanently while also proposing its own ban on exports. Tasmania introduced a five-year ban on hydraulic fracturing in 2015, while Western Australia has flirted with a similar state-wide ban.

Hurdles to new production and greater gas demand from export projects that received federal contracts just a few years ago have put Turnbull in a tricky position.

Needing to tackle the issue of soaring utility bills from another angle, Turnbull has said his government will seek Parliament’s approval to scrap the limited merits review, which allows power companies to appeal against the Australian Energy Regulator’s (AER) decisions on power pricing before the Australian Competition Tribunal. The tribunal has ruled in the power companies’ favour in 31 of their 52 appeals.

Australian Energy Minister Josh Frydenberg said nixing the review would put “downward pressure on electricity prices”, without pinning  a figure on its impact on power bills.

Frydenberg, however, did note that past reviews had added an extra A$6.5 billion (US$4.92 billion) to power costs.

Edited by

Andrew Kemp

Editor

Any questions? Please get in touch