The Australian Labor Party (ALP) has committed to a Domestic Natural Gas Interest Test if elected to Government at the Federal election on 2 July 2016.
The Federal Coalition Government has previously ruled out implementing domestic gas reservations, indicating instead that other market reform measures would result in better outcomes for industry and end users.
Australia’s natural gas industry has undergone rapid expansion over the past decade, driven by the development of three major LNG export facilities in Queensland and existing LNG projects in Western Australia and the Northern Territory. Australia is now the world’s second largest LNG exporter, and is forecast to become the largest by 2020.
The commencement of exports from the three Queensland LNG projects exposes Australian domestic gas consumers to world pricing, with a resultant spike in wholesale prices leading to increased costs to end users. In addition, it is forecast that demand from export facilities will drive up Australian natural gas production over the next decade, with a potential supply shortfall for domestic use.
Against this background, the ALP policy follows policy positions of major trade unions, led by the Australian Workers Union, who have called for gas reservation to be implemented as a way of protecting employment in gas-intensive manufacturing industries.
Gas reservation in Australia
Western Australia is the only Australian state that has a domestic gas reservation policy. The WA policy, in place since 2006, requires LNG producers to reserve the equivalent of 15% of production from each export project for domestic use. It is important to note that the WA gas market is significantly different to the East Coast gas market.
The WA Economic Regulatory Authority reviewed the policy in 20151, recommending that it be removed as, in their view, the costs to the State economy outweigh the benefits to consumers.
In its review of the East Coast Gas Market2, released in April 2016, the Australian Competition and Consumer Commission (ACCC) said that:
In the short term, 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.
Domestic Natural Gas Interest Test
The ALP policy3 includes the establishment of a new Domestic Gas Review Board to administer the proposed National Interest Test. Projects will trigger the Test if they are:
A new liquefied natural gas export facility.
A significant expansion of an existing natural gas export facility.
A significant material expansion of supply, including from existing domestic supply, to an existing natural gas export facility.
Similar to the process of the existing Foreign Investment Review Board (FIRB), the Domestic Gas Review Board will consider a range of factors in reaching their determination, which will then lead to a formal recommendation to the Treasurer.
The Australian Petroleum Production and Exploration Association (APPEA)4 describes the policy as:
Poor policy that will discourage rather than stimulate investment in developing Australia’s gas reserves.
Independent think tank The Grattan Institute’s energy program director Tony Wood5 describes the policy as another
form of protectionism:
I can’t imagine any of the manufacturers that use gas would be very happy if they were required to provide a portion
of their product at subsidised prices to domestic consumers.
While Federal Resources Minister Josh Frydenberg6 pointed to the competition regulator’s review of the East Coast
Gas Market when he said:
The ACCC looked at this issue in depth and its findings were unequivocal: that domestic reservation policies would
reduce the likelihood of new gas projects being developed.
Large industrial gas users have welcomed the interest test, but not necessarily the concept of a gas reservation
policy. Dow Chemical says the policy will reduce unintended consequences of LNG exports, while Manufacturing
Australia executive director Ben Eade said he did not support gas reservation, because the nation needed more
supply and more suppliers7.
This policy announcement could drive additional focus during the remainder of the election campaign on resource
industry investment, commodity pricing and employment in intensive industries.
The Coalition is yet to release a formal resources policy. We expect that the policy will outline alternative market reform proposals, and will provide a briefing when detail is known.
If the ALP wins the election and the policy is implemented, project proponents will need to satisfy the Domestic Gas Review Board that their project is in the national interest. While the composition of the Board and the exact process they will follow is not yet known, we would expect that the approval process will be similar to that used by FIRB.
Early planning for submissions, including stakeholder engagement, will be critical to success.
Sarah Brown is a Managing Director in the Strategic Communications segment of FTI Consulting and based in Melbourne, Australia.
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