Australian Domestic Gas Security Mechanism extension

Level 17, 2 Lonsdale Street
Melbourne Vic 3000
GPO Box 3131
Canberra ACT 2601
tel: (03) 9290 1800
www.accc.gov.au

19 July 2022

The Hon Madeleine King MP
Minister for Resources
Department of Industry, Science and Resources

By email: ADGSM@industry.gov.au
Copy: Shevaun.Fitzmyers@industry.gov.au; David.Lawrence@industry.gov.au

Dear Minister King,

Extending the Australian Domestic Gas Security Mechanism

Thank you for the opportunity to provide a submission to the Australian Government’s consultation on extending the operation of the Australian Domestic Gas Security Mechanism
(ADGSM) until 1 January 2030.

We welcome the proposal to extend the operation of the ADGSM until 2030. We also welcome the announcement on 9 June 2022 that the Australian Government will conduct an urgent review of the ADGSM and renegotiate the Heads of Agreement with the LNG exporters.

The important role of the ADGSM and Heads of Agreement

The ADGSM and Heads of Agreement together play a role in addressing potential supply shortfall in the Australian east coast gas market and ensuring Australia’s energy security:
• The ADGSM is an export control mechanism. It allows the Minister for Resources to
determine if the following calendar year is likely to be a shortfall year in the domestic
market and, if it is, apply export controls on the LNG exporters to limit the amount of gas
they can export as LNG. It is designed to encourage consultation with industry and
contemplates the possibility of a voluntary industry led solution to any forecast shortfall.
• Through the Heads of Agreement, LNG producers have voluntarily committed to offer
uncontracted gas to the Australian market with reasonable notice and on competitive
market terms before selling it to the international market.

As noted in your announcement, the ADGSM and current Heads of Agreement are currently due to expire on 1 January 2023. The gas supply outlook in the east coast market is expected to continue to deteriorate over the medium to longer term and domestic energy security will continue to be a risk. Given this, we support your announcement that the
ADGSM will be extended and reviewed, and the Heads of Agreement renegotiated.
There is a significant risk to Australian east coast energy security in 2023

Since 2017, the ACCC has been conducting a wide-ranging inquiry into the Australian east coast gas market. We have monitored and reported on gas prices and the gas supply, and provided insights into commercial and industrial gas user experience and the pricing and utilisation of gas transportation and storage services.

In our most recent July 2022 report, we found that:
• Australian east coast gas supply conditions are expected to deteriorate in 2023, with a
supply shortfall of 56 PJ now expected. This signifies a substantial risk to Australian
energy security.
• LNG exporters are also forecast to withdraw 58 PJ more gas from the east coast gas
market than they expect to supply into it and export most of their excess gas (167 PJ) as
spot cargoes or additional LNG sales. These are impacting on the current state of the
domestic east coast gas market.
• We continue to have concerns that under the current Heads of Agreement some LNG
exporters are not engaging with the east coast market in the spirit in which the Heads of
Agreement was signed.

It is very likely that to avoid the forecast shortfall in the east coast gas market in 2023, LNG producers will need to divert a significant proportion of their excess gas into the east coast market. As such, our July 2022 report recommends that the Minister for Resources initiate the first step of the ADGSM process, to:
• formally determine whether 2023 will be a shortfall year
• work with LNG exporters to supply more gas into the east coast market in 2023 over the
latter half of 2022, so that the east coast market does not commence the 2023 supply
year facing a material shortfall in supply.

We also strongly encourage LNG exporters to act immediately to increase their supply into the east coast market.

Recommendations to strengthen ADGSM as part the Government review

We recommend that the Australian Government strengthen both the ADGSM and Heads of
Agreement. There are a number of potential shortcomings in the ADGSM which we recommend be considered as part of the review:
• Flexibility in initiating or applying the ADGSM

Currently, the Minister for Resources can only initiate the ADGSM in the year before a
domestic shortfall year. The Guidelines and DISER indicate the timing of the Minister’s
notification will occur ideally by 1 July but no later than 1 October. This means the entire
duration of the ADGSM process could take between three and six months before any
export controls would take effect.
• The Total Market Service Obligation calculation

The Total Market Security Obligation (TMSO) is the proportion of a domestic supply
shortfall that the Minister considers should be met by imposing export controls on LNG
projects that are in net-deficit. In its 2020 review of the ADGSM, DISER found that the
TMSO may not be able to recover sufficient domestic gas to address a potential market
shortfall. This is due to the ‘net-deficit’ component only enabling export restrictions on

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volumes of gas where exporters are drawing more gas from the domestic market than
they are putting in.
• Treatment of gas as third-party export compatible gas

Prior to determining the TMSO, the Minister determines each LNG Project’s net market
position and whether each LNG Project is likely to be in net-deficit or a net-contributor to
the domestic market in the forthcoming calendar year. An LNG Project will be regarded
as being in net-deficit in the forthcoming calendar year if its Total gas used is greater
than the sum of its Own gas and Third-party export compatible gas. The current
application of the ADGSM could see export controls only applying to one LNG Project,
and this may be to the LNG project with the least amount of excess gas (requiring them
to breach their contractual obligations).

We recommend that the Government consider previous advice to government on the
ADGSM as it undertakes its review.

We look forward to assisting the Australian Government as it undertakes its review of the
ADGSM and renegotiates the Heads of Agreement, where appropriate.

If you have any questions, please contact Nicole Ross, General Manager, ACCC Gas
Markets Branch.

Yours sincerely

Anna Brakey
Commissioner

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