Australian Domestic Gas Security Mechanism extension

19 July 2022

Consultation Hub
Department of Industry, Science and Resources
CANBERRA ACT 2601

Copy to: Hon. Madeleine King MP, Federal Minister for Resources

Consultation on the Australian Domestic Gas Security Mechanism extension

Thank you for the opportunity to provide a submission in response to your request for feedback relating to:
• extending the Australian Domestic Gas Security Mechanism (ADGSM) to 1 January 2030
and
• other options to deliver the desired outcomes.

Over 70 per cent of Santos’ total Australian gas production is supplied to the domestic market.
Santos is Australia’s second biggest domestic gas supplier, predominantly on the west coast. On the east coast, Santos has committed 100 per cent of gas from the Narrabri Gas Project to the domestic market, potentially supplying up to half of NSW’s natural gas demand and adding desperately needed new supply to a tight market.

As an Australian company with a long history of supplying the gas needs of the nation, Santos supports the government’s objectives to ensure the domestic market has access to adequate and competitively-priced domestic gas supply.

However, Santos does not support the long-term extension of the ADGSM, which is currently under review, as it will increase sovereign risk and will not solve the issues present in the national electricity market today.

Extension before review

The Minister for Resources is conducting a review of the ADGSM to consider whether it is ‘fit for purpose’. Santos notes the review aims to increase transparency around how much gas is contracted for long-term exports compared to what is available for domestic use. We also note

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the government appears to be considering basing the mechanism on price instead of supply and seeking to ensure a more immediate impact from the ‘triggering’ of the mechanism.

Santos does not support the long-term extension of the ADGSM before it is reviewed because the mechanism currently targets Santos and our GLNG partners. No other exporters would be materially impacted. The ADGSM, if implemented, would intervene in long-term gas contracts with GLNG customers in Korea and Malaysia, countries with which Australia has free trade agreements. Conversely, the ADGSM, if implemented, would not restrict the export of spot LNG cargoes by other Gladstone LNG projects which have gas excess to their contractual requirements.

However, Santos is committed to working with other exporters and the government to renegotiate the Heads of Agreement, which is a voluntary, industry-led agreement that has negated any need for the ADGSM to be used since 2017.

Santos contends that extension of the ADGSM would not solve current issues in the national electricity market and east coast gas market but will seriously damage Australia’s reputation with investors and customers in Asia, and with Asian countries with which Australia has free trade agreements.

LNG investors and customers are the same investors and customers that Australia will need for the huge capital inflows needed to underpin the energy transition, in particular, for hydrogen investments and markets.

Sovereign Risk

Any changes to the ADGSM, including extension, need to be carefully considered to maintain investment confidence in Australia and the key trade relationships we have developed over generations with customers in Asia.

While Santos agrees with the need to increase domestic gas supply, extended and increased government intervention in the gas market would have a negative effect on supply. The only sustainable way to increase domestic gas supply is to encourage investment in new gas supply developments, preferably as close as possible to east coast markets in order to keep supply costs as low as possible for customers.

It is not sustainable to intervene in long-term LNG contracts after final investment decisions have been taken and could impact the ~A$1 billion Santos and our GLNG partners are investing year on year drilling more wells and developing more gas fields in the Surat and Bowen Basins to supply long-term international contracts.

Santos’ French, Korean and Malaysian investors in this joint venture are already cautious about investing in new supply following the 2017 introduction of the ADGSM which they regard as having raised sovereign risk in Australia. Extension of the ADGSM will continue to damage Australia’s reputation as a safe place to invest.

Prevent state inaction

The ADGSM was brought in as a temporary measure while new gas supplies were developed for the domestic market. However, in the last five years, state and territory governments have implemented a variety of policies which have prevented or delayed the development of gas. They include:

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• In 2017, the Victorian Government moratorium on onshore conventional gas production
until 20 June 2021.
• In 2020, the Victorian Government ban on unconventional gas extraction in the state’s
constitution, which includes hydraulic fracturing and coal seam gas.
• In July 2021, the NSW Government’s Future of Gas Statement, which effectively
compulsorily acquired exploration acreage, including areas where contingent resources
existed. The Statement effectively limits any new gas projects in NSW to the Narrabri Gas
Project.
There has been sufficient time since the ADGSM and HOA were introduced for new gas developments to move from investment decision to production, but there has not been a single onshore development in either Victoria or NSW to reach production stage.

The government’s extension of the ADGSM runs the serious risk of states and territories continuing to believe they can rely solely on Queensland LNG producers and/or federal government intervention to solve their energy needs.

Australian electricity market

Current electricity market issues are primarily a result of unexpected, unplanned coal outages, including tight coal supply. Gas has been filling the gap left by coal in the electricity market with gas usage for power generation jumping 55 per cent in May 2022 compared to the same time last year. High wholesale electricity prices have meant that generators have been able to bid gas prices up to levels at which manufacturers and small businesses cannot compete. Despite only
10 per cent of the east coast market being sold on spot, this has caused significant problems for gas buyers and small retailers exposed to spot pricing.

Santos is willing to work with government and industry participants on sensible proposals to ensure the efficient operation of the gas and electricity markets and help to resolve recent pressures in the energy system. In addition, we continue to work to support the domestic market through ongoing investment in new supply, through trading and through time and location swaps to help other producers get gas to market efficiently.

However, extending the ADGSM will not fix current issues with the electricity market. In the short term, getting coal generators back online is essential to free up gas for businesses and manufacturers who are exposed to high spot gas prices and cannot afford the prices that electricity generators can. In the longer term, the development of more gas is critical to support the electricity market as renewables increase and more gas is needed for peak demand periods and firming of renewables.

Santos believes the best way to bring more gas to market is to remove bans or restrictions on gas developments, such as in Victoria and New South Wales, and foster a supportive policy environment which gives companies certainty and enables them to bring gas to market more quickly.

Santos is committed to developing local gas supplies in NSW. Since 2012, Santos has spent more than A$1.5 billion on getting the Narrabri Gas Project approved and developed – a project that is 100 per cent committed to the domestic gas market.

More low-cost supply is always the best way to put downward pressure on prices and the cheapest gas supply will always be the gas on your doorstep because it reduces transport, storage and other handling costs.

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Santos is working with the NSW Government to get the project to a final investment decision as soon as possible. Santos is very keen to get Narrabri developed and we will try to exceed our base case of 2026 for first gas to southern domestic markets.

Conclusion

Santos does not support the long-term extension of a mechanism which is currently under review, will increase sovereign risk and will not solve the issues present in the national electricity market today.

Both the domestic and international markets are undergoing a period of significant turmoil and change. Santos encourages the government to take time to assess the current and future market conditions, consult meaningfully with market participants and fully canvas policy options before making substantial reforms.

Santos will work constructively with the government to navigate a pathway with industry to achieve the dual outcomes of increased domestic supply and investment certainty.

It is vitally important to now rebuild public confidence in the upstream gas industry which has been demonised by government(s) for a number of years, whether in relation to gas price, supply volumes or carbon emissions. The industry has a very important role to play in guaranteeing domestic energy security, enabling the energy transition to occur in an orderly way and in maintaining Australia’s reputation as a country that can be relied on to meet the international contracts that we have entered into to support the energy security of our customers in Asia.

Please contact Rob Malinauskas at Robert.Malinauskas@santos.com for more information.

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