Australia's new gas pricing framework paves way for future market intervention

Highlights Government passes bill on temporary price caps on domestic gas supply No impact on LNG export commitments and contracts Longer term "reasonable price provision" triggers backlash from gas industry Australia's new energy bill that puts a temporary price cap on domestic natural gas and coal supply is unlikely to have any immediate impact on LNG exports, but its provisions allow the government to conduct future market interventions to bolster domestic energy security, according to market participants. Receive daily email alerts, subscriber notes & personalize your experience. Register Now The legislation underscores stronger policy making in the energy sector under Prime Minister Anthony Albanese's administration that has included bolder domestic price controls despite backlash from the fossil fuel industry, a stronger push for decarbonization and climate change, and a move towards a more cohesive federal approach to energy policy that has often been left to individual states to handle.

Australia said it will impose an emergency, temporary cap on wholesale gas prices for 12 months of around $12 per gigajoule to curb energy price hikes for households and businesses. The cap is intended to commence in December 2022 and reviewed in mid-2023 to assess the impact on contracting behavior, the government said. "The price cap will only apply to gas supply contracts signed with east coast producers in 2023 for delivery in 2023.

It will not impact existing contracts, spot markets (Brisbane, Sydney, or Adelaide), the Victorian Declared Wholesale Gas Market, or new sources of supply from undeveloped fields," Logan Reese, research and analysis associate director at S&P Global Commodity Insights, said. "The largest impact of the price cap will likely fall to trades at the Wallumbilla and Moomba Gas Supply Hubs. With less than 25 active market participants, volumes at the two hubs historically have only accounted for about 4% of east coast domestic supply but reached a high of roughly 11% of average daily demand in August 2022," Reese said.

One of the concerns raised by LNG importers such as Japan was the impact on supply. Reese said the government does not want to intervene in international agreements signed by Australian exporters, or any existing contracts for that matter, but instead is directing short-term market intervention towards new agreements signed by Australian consumers for supplies produced in the country. "If the government applies the price caps as publicly stated then there should be no tangible impact on upstream gas supply or LNG exports because the price caps are expected to be in effect for only 12 months, have been set at a level that can still provide incentive for further upstream investment, and are well above historical prices," Reese added.

"In addition, the government has and will continue to ensure long-term LNG export contracts are not affected by any interventions while providing reassurance to international stakeholders that Australia will remain a reliable supplier of energy and a safe place to invest," Reese said. Permanent measures In addition to the price caps, the new legislation comprises of "a mandatory code of conduct to address systemic issues within the market and guide behavior, which includes a reasonable price provision." Under this provision gas producers and consumers will be able to negotiate gas contracts at "reasonable prices" to reflect the cost of production and a reasonable return on capital. This provision will remain in place until price and domestic gas supply objectives are met.

While the consultation for the temporary price caps ended Dec. 15, the consultation for the broader code closes Feb. 7.

The petroleum industry has called the legislation a dismantling of the gas market across the whole of Australia and an instrument that gives the government extraordinary new powers to control the market on both the east and west coast, damaging investment confidence across the entire energy market. The proposed legislation opens the door for future market interventions, strengthens measures for low-cost domestic supply, creates uncertainty in the market and reverses broader reforms that were put in place to facilitate an open and competitive market, Reese said. "The significance of the legislation is not necessarily in the price caps for 2023, but rather the legislative framework that clears the way for more timely and consequential market interventions in the future, the extent of which will depend on the provisions in the final legislation," he added.

Graeme Bethune, chief executive of energy consulting firm EnergyQuest said that while the temporary price cap will expire after 12 months, it may be renewed, and the Reasonable Pricing Provision (RPP) is likely to be permanent. "The bigger issue is what the RPP will do to domestic development," Bethune said. He said if it suppresses domestic supply projects, like the Narrabri gas project in the state of New South Wales and LNG imports, it increases the probability of the Australian Domestic Gas Security Mechanism being triggered, which would harm Australia's standing.

The ADGSM is an emergency mechanism that can be triggered by the government to divert exported gas to the domestic market. "The reasonable price provisions look like something for utility price regulation, rather than high risk oil and gas. I'm not confident that the regulator would or could get this right," Bethune added.