What’s in the pipeline?
Australian Domestic Gas Security Mechanism to be retained until 2023, but changes recommended
The Australian Domestic Gas Security Mechanism (ADGSM) was established in 2017 as a temporary measure to ensure the sufficient supply of natural gas to meet forecast needs. This mechanism allows the Federal Energy Minister to implement export restrictions if there are forecast gas shortages for Australian users, with the aim of ensuring that sufficient gas remains in the domestic market.
The ADGSM regulations require that the mechanism be reviewed in 2020 to assess if it is still fit for purpose to deliver a functional domestic gas market. In August 2019, the Federal Government announced its decision to bring the review of the ADGSM forward with the Minister for Energy and Emissions Reduction, Angus Taylor, stating at the time that ‘the measures announced today [of bringing forward the review] recognise we need a comprehensive plan across the gas supply chain which deals with production, prices and market transparency’.
The results of the review (which can be read in full here: https://www.industry.gov.au/data-and-publications/australian-domestic-gas-security-mechanism-review-2019) have now been released and the following three key recommendations were made:
- that the ADGSM should be retained until its scheduled repeal in 2023;
- that a change to the calculation of the Total Market Security Obligation should be considered to ensure the ADGSM can recover domestic gas to address any shortfall; and
- that the ADGSM’s guidelines should be amended to reference the Australian Competition and Consumer Commission’s (ACCC) LNG netback price series in estimating a potential shortfall.
The second recommendation contemplates replacing the current ‘net deficit’ test with a hybrid arrangement, whereby half of any identified shortfall is allocated to LNG projects on a pro-rata basis according to their LNG production capacity and the remaining half of any shortfall is ‘split in a way that is inversely proportional to the domestic gas contributed by each project’. Any changes would only be implemented in consultation with industry and other affected stakeholders.
In relation to the third recommendation, although the ADGSM was not intended to be a mechanism to control gas prices, in its review the Government noted that if prices paid by Australian gas users are significantly higher than the ACCC’s netback price then this would serve as an indication that the domestic gas market is not operating efficiently. The review therefore concluded that including the ACCC’s netback price as a factor when considering the likelihood of a domestic gas shortfall should assist in securing domestic gas supply.
We anticipate that a price trigger would be welcomed by the sector, considering the criticism the ADGSM has received by only responding to a shortfall in supply, not rising prices. This issue has not gone unnoticed by the Government, with former Minister for Resources and Northern Australia Senator Matt Canavan stating ‘for too long we’ve seen some state and territory governments shelve onshore gas exploration for political purposes and the price we’ve paid is restricted supply and price creep.’ Senator Canavan had also indicated a desire to work with the States and Territories to consider implementing a national gas reservation policy.
Overnight it has been announced that Keith Pitt MP will become the new Minister for Resources and Northern Australia. Minister Pitt’s position in relation to the recommendations remains to be seen, however in any case we expect that the Government will now proceed to engage with impacted stakeholders on implementing the review’s recommendations. At the same time, it will be sure not to lose sight of the longer term structural reforms that are required to be implemented to address the domestic gas supply issue.
Please contact our team with any queries on how the implementation of the recommendations may impact you or your business.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.