Gas producers eligible for exemptions from longer-term price curbs

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Unprecedented caps on Australia’s domestic gas prices could be extended until at least 2025 under the federal government’s proposed code of conduct for the industry, but producers will be eligible for exemptions if they strike agreements to boost supplies into the east coast market.

Following a surge in global energy prices due to Russia’s invasion of Ukraine last year, the Albanese government introduced emergency laws in December to cap the domestic gas price at $12 a gigajoule for 12 months in a bid to shield homes and businesses from the biggest possible future bill hikes.

Gas producers face the extension of a $12-a-gigajoule price cap for at least another two years, but some companies will be exempt.Credit: Bloomberg

However, the government on Wednesday released the details of a new plan for consultation that would keep the temporary price restriction in place for longer to act as a “price anchor” before being reviewed in July 2025.

Under the proposal, smaller gas producers that supply the domestic market only and do not ship the fuel overseas as liquefied natural gas (LNG) will be exempt from the price cap.

LNG companies will be eligible for exemptions if they make a “satisfactory”, court-enforceable commitment to boost supplies into the domestic market, the government said.

In a sign of compromise following weeks of drawn-out talks between the government and the gas industry, the draft code no longer contains a “reasonable” pricing mechanism – a controversial proposal that would have required gas contracts to be struck at prices that reflect production costs plus a margin allowing for a specified rate of return.

The industry had argued a reasonable pricing mechanism would have ignored the significant and unique risks involved in oil and gas projects, such as unsuccessful exploration activity, development costs, power costs and extensive decommissioning requirements, and warned it would have deterred investment in new sources of supply needed to ease the threat of east coast shortfalls and keep a lid on prices in years to come.

In a joint statement on Wednesday, Treasurer Jim Chalmers, Energy Minister Chris Bowen, Resources Minister Madeleine King and Industry Minister Ed Husic said the government would consult the industry on its updates to the proposed mandatory code of conduct until May 12.

“The gas code will ensure sufficient supply of Australian gas for Australian users at reasonable prices, give producers the certainty they need to invest in supply, and ensure Australia remains a reliable trading partner by allowing LNG producers to meet their export commitments,” they said.

Since their introduction in December, the government’s price caps $12 a gigajoule for natural gas and $125 a tonne for coal have driven down wholesale electricity prices from last year’s record highs by reducing the cost of fuelling Australia’s largest power stations.

LNG companies will be eligible for exemptions if they make a “satisfactory”, court-enforceable commitment to boost supplies into the domestic market, the government said.Credit: Getty

“In response to unprecedented power price rises as a result of Russia’s illegal invasion of Ukraine and a decade of energy policy chaos under the Liberals and Nationals, the Albanese government took immediate action to shield Australian gas users by temporarily capping the price of gas in December 2022,” the ministers said.

“Coupled with action to cap coal costs for power generators, gas price caps under the government’s energy price relief plan nearly halved wholesale energy prices.”

While exemptions from the caps will be welcomed by domestic-only gas producers, the changes risk causing ongoing uncertainty among Queensland gas producers, which export LNG as well as supply the east coast market.

“The entire health of the east coast gas market now comes down to a case-by-case discretion by the government to award exemptions or not,” Credit Suisse energy analyst Saul Kavonic said.

“Smaller producers being exempt is welcome, but isn’t going to move the dial for supply, which is almost all in the larger producers’ hands.”

Kavonic said the changes appeared to be a recognition by the government that it may have “bit off way more than they can chew” in trying to regulate prices.

“Policy uncertainty and risks to exports remain as large as ever – at least until further guidelines on the basis for exemptions are developed,” he said.

Major domestic gas users, such as manufacturers that use gas for energy or as a raw material in their factories’ processes, have strongly supported the government’s efforts to bring down what they say are “unreasonably and unsustainably” high prices that have risen disproportionately to exploration and production expenses.

A peak industry group led by the CEOs of ASX-listed manufacturing giants such as Incitec Pivot, BlueScope Steel and Brickworks, has been pushing for reforms to help “decouple” domestic gas from the soaring international prices producers are earning for export shipments of LNG.

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