Australian Domestic Gas Security Mechanism extension

Santos
GLNG

19 July 2022

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

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

Dear Sir/ Madam

Consultation on the Australian Domestic Gas Security Mechanism extension

We refer to your request for feedback relating to:

• Extending the ADGSM to 1 January 2030; and
• Other options to deliver the desired outcomes.

We note that submissions to this consultation will inform advice to the Commonwealth
Government on extending the ADGSM only and that the Government has also announced it will conduct a separate review of the ADGSM to consider possible changes or alternatives to the existing mechanism. Given the timing of this secondary review, GLNG does not support the extension of the ADGSM to 2030 given the future structure of the ADGSM is uncertain.

GLNG does not support the proposed long-term extension of the ADGSM to 2030
and believes better outcomes are likely to be achieved without it

GLNG does not consider the ADGSM to be the best mechanism to address the challenges in the gas market. However, if the Government insists on an extension to facilitate a better long-term policy solution, then GLNG recommends a 2-year extension of the ADGSM to 1
January 2025 because:

1. since 2017, the voluntary Heads of Agreement, not the ADGSM, has been the
effective east coast gas security measure, achieved without sovereign risk impacts;

2. a shorter extension will encourage gas and other energy development in the areas
its needed, particularly Victoria and NSW;

3. a shorter extension is less likely to heighten the existing level of concern around
future investment in Australia's energy and resources industry, especially in new
GLNG Operations Pty Ltd
ACN 132 321 192
P +61 7 3838 3000 GLNG is a Santos PETRONAS Total KOGAS venture

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Santos Place
F +61 7 3838 3350
E: glng.secretariat@glng.com
Level 22 / 32 Turbot Street
Brisbane Q 4000 Australia Sentos I I TOTA\. I Oicooas
Santos
GLNG
critical energy areas such as hydrogen, hydro-electric power, wind, solar and
batteries;

4. 2 years provides a prudent review timeframe to assess recently introduced and
pending electricity and gas regulatory reforms to determine their effectiveness;

5. a shorter extension will enable the ADGSM to be retained as a lever of last resort,
allowing market participants to continue to support the gas market and respond to
potential domestic gas supply shortfall including where necessary through the
assistance of existing mechanisms such as the HOA and Gas Supply Guarantee;
and

6. 2 years would allow sufficient time for stakeholders to consider an alternative option
to deliver the desired outcomes such as the ESB's 'capacity mechanism'.

The voluntary Heads of Agreement, not the ADGSM, has been the effective east coast gas security measure

The HOA (as updated) agreed between the LNG Exporters and previous Prime Ministers provided, and continues to provide, a further interim measure to ensure excess gas is available on commercial terms as an additional protection against a domestic gas shortfall.

GLNG contends that it is the HOA rather than the ADGSM that has proven largely successful with Australian domestic prices remaining at a discount to the ACCC LNG netback price for the vast majority of this period.

Importantly, because the HOA is entered into voluntarily, the HOA does not materially impact the sovereign risk perception for foreign investors in Australia.

New South Wales and Victoria need to develop domestic gas supply

In 2017, the Government established the ADGSM as a transitory measure of last resort that would stay in place until 2023. This 5-year timeframe was selected to allow Victoria and
New South Wales with sufficient opportunity to develop local gas supplies.

There has been sufficient time since the ADGSM and HOA were introduced for new gas developments to move from investment decision to the production stage, but there has not been a single onshore development in either Victoria or NSW to reach production stage.
Further, AGL's proposal to develop an LNG import terminal in Victoria failed because it did not obtain environmental approval.

GLNG is concerned that the backstop of ADGSM has had the unintended consequence of allowing State Governments to move slowly on securing domestic gas supplies. There has only been limited movements in these jurisdictions which, while encouraging, can only be properly viewed as tentative first steps

GlNG Operations Pty ltd
ACN 132 321 192
P: +61 7 3838 3000 6LN6 a Santo.I PETRONAS Tot,I KOGAS venture
Santos Place
F: +61 7 3838 3350
E: glng.secretariat@glng.com
level 22 / 32 Turbot Street
Brisbane Q 4000 Australia Sentoe I I () ToTA\. I OicoGas
Santos
GLNG
• from 1 July 2021, Victoria's ban on onshore conventional gas exploration was lifted;
• on 18 October 2021, the NSW land & Environment Court upheld the decision of the
NSW Independent Planning Commission to approve the 'Narrabri Gas Project"; and
• In November 2021, Victoria approved new Petroleum Regulations 2021 which now
enables operators to progress their regulatory approvals.

A shorter extension of the ADGSM out to 1 January 2025 would keep the pressure on the
States to structurally alleviate future gas supply issues by developing the gas reserves they are sitting on in their own jurisdictions.

Long term extension of the ADGSM would unnecessarily heighten sovereign risk that
Australia is not a reliable destination for foreign investment

Reputable LNG buyers and investors such as PETRONAS (a substantially Malaysian government owned entity) and KOGAS (a substantially South Korean government owned and controlled entity) invested ~AU$14 billion in GLNG to secure energy security for their respective countries.

Unlike other LNG projects where most of the participants are multinationals and most of the supply goes into their portfolio, GLNG's production is taken by KOGAS and PETRONAS predominantly for domestic consumption in South Korea and Malaysia. If GLNG's production is curtailed through ADGSM, the energy security of these two countries will be put directly at risk. This is why, since 2017, these entities and countries have been watching the Government's position on this issue very closely.

More broadly, we understand that Japan's Government is meeting with the Australian
Government to discuss, among other topics, securing its LNG supply. We believe this is a serious concern that is shared more broadly by international investors. We do not want to see Australia's reputation damaged as a location for low-risk international investment.

The GLNG joint venture partners continue to support the HOA as the most effective gas security measure and remain committed to working with governments, industry and customers to avoid any shortfall in the east coast domestic gas market.

Extending the ADGSM to 1 January 2030 may have the unintended consequence of damaging Australia's reputation as a reliable low-cost LNG supplier, at a time when both state and federal governments are actively promoting and seeking investment in renewable energy projects.

In the years to come, both South Korea and Malaysia will be important foreign trade and investment partners in not only LNG but also clean fuels such as hydrogen and ammonia.

GLNG Operations Pty Ltd
ACN 132 321 192
P: +61 7 3838 3000 GLNG is e Santos PETRONAS Total KOGAS \llnhlre.

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Santos Place
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F: +61 7 3838 3350 Level 22 / 32 Turbot Street
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Santos
GLNG

The ADGSM is unlikely to fix the problem of spiking wholesale electricity prices, and will likely detract from other meaningful reforms currently being implemented.

The imposition of LNG export controls is unlikely to avoid a repeat occurrence of the challenges in the wholesale electricity and gas markets in 2022. This is because the timing and quantity of peaking gas fired generation is difficult to predict, and annualised LNG controls will not prevent large spikes in wholesale electricity and gas prices, particularly where a significant proportion of coal generations is offline at the same time there are peaks in demand for electricity.

However, there are a number of initiatives in progress that have a far better chance to address the issue, and these must be given sufficient time to work, such as:

• the Gas Market Transparency Rules, made on 23 June 2022 and being implemented
now, which will increase transparency in industry reporting and give additional
powers to the AER and AEMC relating to intervene in the gas industry;
• the Gas Supply Guarantee, initiated in March 2017 and reviewed by the AEMC in
2021, where gas producers and pipeline service providers made voluntary
commitments to the Australian Government to supply gas-fired generators to regions
under system stress;
• Government support for renewable energy projects including investment in hydrogen,
hydroelectric power, EVP, wind farms, import terminals and batteries; and
• the ESB's proposed capacity mechanism.

The Australian Energy Council Chief Executive, Sarah McNamara, also suggests that simple changes to increase AEMO's dispatching powers could provide a better response in a future crisis. In her analysis, when the price cap is applied to the market, it has a counterproductive effect and actually makes the market worse - "The answer is to either remove the automatic price cap and let the market solve (as it was doing), or at least increase its value, or agree on conditions that trigger AEMO dispatching all generation, so that it can co-ordinate market dispatch under extreme conditions."

GlNG Operations Pty ltd
ACN 132 321 192
P +61 7 3838 3000 GLNG is a Santos PfTRDNAS fatal KOGAS vanwre.
Santos Place
F: +61 7 3838 3350
E: glng.secretariat@glng.com
level 22 / 32 Turbot Street
Brisbane Q 4000 Australia Santos I I :.) ToTAL I 0KOGas
Santos
GLNG

GLNG proposes an alternative option

The current east coast energy issue was an "electricity crisis" not a problem with
the domestic gas market and the Energy Security Board's proposed 'capacity
mechanism' provides an alternative option to deliver the desired outcomes

The domestic gas market has been working well as reported by the ACCC and AEMO, and as evidenced by Australian domestic prices trading below the ACCC LNG Netback series the vast majority of the time. In its January 2022 Interim Report, the ACCC concluded that whilst gas reserves were sufficient to meet demand across the east coast in 2022, it forecast a 10 PJ shortfall for Victoria and NSW.

Between January and July 2022, the Queensland LNG exporters have contributed approximately 8.2 PJ into the domestic market. However, this number excludes GLNG project gas supplied from Santos, meaning that the total contribution is more like 35 PJ.

The current volatility in the broader east coast energy market has been primarily caused by planned and unplanned coal generation outages (about 25-30% of total capacity off-line).
Gas has been called on to replace this coal generation outage without notice and without planning. Gas-fired generation in May 2022 increased 55% compared to May 2021. This has had the effect of disrupting an otherwise orderly gas market, with peaking gas power out-bidding manufactures for any available gas and driving prices up above ACCC LNG netback levels.

The ESB has released a high-level paper that proposes a capacity mechanism to manage the orderly transition of the NEM as the power system decarbonizes and maintain reliability during the transition. A key part of this is reliance on dispatchable energy to firm the significant expansion of variable renewable energy and gas fired peaking generation has a cornerstone role to play. This capacity mechanism would pay providers of capacity to keep capacity available during certain periods (such as periods of system stress) to ensure there is a sufficient energy mix to deliver affordable and reliable power to consumers. The ESB
Capacity Mechanism Paper does not consider fuel procurement for the vital gas fired peaking generation.

GLNG contends that with the implementation of this mechanism, gas-fired peaking generators participating in the capacity mechanism should be required to use capacity payments to reserve peaking gas supplies to support the power market. This would underpin gas-fired peaking generation at pre-agreed price levels, thus enhancing the delivery of reliable power to consumers whilst eliminating the need for peaking gas generators to out-competing manufacturers for gas supply.

GLNG Operations Pty Ltd
ACN 132 321 192
P: +61 7 3838 3000 GLNG is I Santo, PETRONAS Total KOGAS venture
Santos Place

I I ? ToTA'- I
I': +61 7 3838 3350 Level 22 / 32 Turbot Street
E: glng.secretariat@glng.com Brisbane Q 4000 Australia Sento.!i 01<0 as
Santos
GLNG
This could occur, for example, by the use of:

• A gas call options market where the generators enter into options from the wholesale
gas market, funded by the capacity payments received by the generators. The shape of
the volume under these options would need to be able to respond the expected periods
of system stress.
• An industry managed gas market (offering a variety of contracts such as firm positions,
swaps, peaking positions and options) that operates in parallel to the capacity market
mechanism and ties into the proposed ESB timetables. This should give gas fired
peaking generators confidence to make capacity submissions under the ESB's capacity
mechanism.

GLNG is committed to working with the government to ensure continued gas supply for the country, while preventing sovereign risk arising from market intervention. As such we are always willing to discuss this with the relevant government stakeholders.

If you have any questions regnse or wish to meet more broadly about this matter, please contact me on ..........

Yours sincerely,

Risk & Regulatory Manager
GLNG Operations

GLNG Operations Pty Ltd
ACN 132 321 192
P: +61 7 3838 3000 GLNG is e Santos PETllONAS Total KOGAS venwre
Santos Place

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F +61 7 3838 3350 Level 22 / 32 Turbot Street
E: glng.secretariat@glng.com Brisbane Q 4000 Australia Sentoe ToTA'- I OKoGas