Reforming Australia’s Domestic Gas Security Mechanism: guidelines

KOGAS Australia Pty Ltd
ACN 130 065 682
Level 36, 32 Turbot St.
Brisbane QLD 4000

23 February 2023

Consultation Hub
Department of Industry, Science and Resources
GPO Box 2013
Canberra ACT 2601

Via email: adgsm@industry.gov.au

Dear Sir/Madam,

Concerns relating to Draft ADGSM Guidelines

Reference is made to the draft Customs (Prohibited Exports) (Operation of the Australian Domestic
Gas Security Mechanism) Guidelines 2023 (hereinafter referred to as “Draft Guideline”) and the
Australian Government’s consultation process in seeking feedback on reforms to the Australian
Domestic Gas Security Mechanism (“ADGSM”).

We submit our concerns relating to the Draft Guideline with the expectation that these be addressed and incorporated into a revised construction of the ADGSM and formally request that further engagement between ourselves and the Australian Government take place prior to advancing the implementation of the proposed ADGSM reform measures.

Introduction
KOGAS Australia (“KOGAS”, “Company”, “we” or “our”) is a company registered under the
Corporations Act 2001. The Company is a wholly-owned foreign subsidiary of Korea Gas Corporation, a state-owned enterprise incorporated under the laws of the Republic of Korea, and our business activities are carried out under the supervision and direction of the Korean Minister of Industry, Trade and Energy in accordance with the Korea Gas Corporation Act and any legislative instruments, regulations, rules, orders or Presidential decrees made thereunder.

KOGAS commenced business activities in Australia in March 2008 after having obtained all necessary governmental and administrative approvals from the Korean Ministry of Trade, Industry and Energy
(“MOTIE”) and the Ministry of Economy and Finance (“MOEF”). Our business operation mandate relates specifically to the investment and activities of the Gladstone LNG (“GLNG”) project in
Queensland, Australia which plays a vital part to the Korean Government’s long-term LNG procurement and import plan, and more broadly, its energy security policy.

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Since the Company’s formation, Korea Gas Corporation has invested a total of approximately AU$6.8 billion in the GLNG project which includes, inter alia, the Company’s acquisition capital in taking a 15% working interest in GLNG, and subsequent capital investments required in developing upstream reserves for the production of natural gas in Queensland.

The GLNG project is a joint venture established between KOGAS, Santos, Petronas and TotalEnergies and sells LNG produced from its liquefaction plant on Curtis Island under long‐term LNG sales contracts with Korea Gas Corporation and Petronas. Since commencement of GLNG operations, GLNG has delivered a total of 372 LNG cargoes to Korea Gas Corporation worth more than AU$15.3 billion in value.

Objective of the ADGSM
As specified under subsection 6(1) of the Draft Guideline, the objective of the ADGSM is to ensure that there is sufficient supply of natural gas to meet the forecast needs of Australian gas consumers. The
Draft Guideline (as is the case in the current 2020 version of the ADGSM guideline) proposes to achieve this objective by controlling LNG exports.

Our concern arising from the way in which the ADGSM is structured is that embedded in its objective is the premise that LNG exports are occurring at the sacrifice of the domestic market. From the introduction of the ADGSM in 2017, or perhaps even earlier when public views on potential gas shortage situations in the domestic East coast market arose mid-last decade, LNG exporters including
KOGAS and GLNG have been the easy target to blame for any foreseeable domestic gas shortages given the large volume of gas we deal with and do ultimately export to overseas markets. However, our view is that the narrative has been set incorrectly from the outset and that although LNG exporters may potentially be one of many solution providers to the gas shortage problem, we are certainly not the cause of the shortage situation which the domestic market encounters today.

Depleting production of ageing conventional gas fields, state government policy restricting and hindering development of unconventional onshore reserves, the relative small size of the East coast domestic gas market when compared to other international markets, the limited number of industry participants, the lack of exchange-based gas trades, and probably most importantly, energy policies that have favoured the move away from fossil fuels to cleaner renewable sources without detailed consideration on how to phase out and smoothen the ramp-down of fossil fuel use with clarity on the role of gas in the transition phase, have all contributed to the lack of gas supply that the East coast market has been dealing with for many years already – not the LNG export projects.

The investments made in bringing into production Queensland’s CSG fields have had to rather depend on LNG export projects and their respective long-term LNG buyers in order to achieve economies of scale and bring into existence a new industry capable of monetizing unconventional gas resources.
Such investments and transactions entered into by many multinationals, whilst having secured LNG cargos from projects in QLD, have also played a positive effect in filling the gas supply gap in the East coast market, and but for the development of LNG export projects in QLD, the East coast gas market would have already been in a much dire situation.

Consequently, when we analyse the impacts of the ADGSM and other governmental regulations introduced recently, we cannot help but feel how underappreciated our investments and long-term
LNG buy position has had on the positive effects of the East coast gas market, and more broadly, bringing into existence a new industry based on advanced gas production methods.

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In achieving ADGSM’s objective in ensuring that there is sufficient supply of natural gas to meet the forecast needs of Australian gas consumers, we view the proposed Draft Guideline as having little to no effect given that it merely controls LNG exports and does not introduce a clear system in addressing the real gas shortage situation by offering an alternate source of gas supplies to fill the shortfall gap if the ADGSM was ever activated. As such, our suggestion is to work with the Department of Industry,
Science and Resources (“DISR”) in constructing a revised mechanism that eliminates LNG export controls and replaces this by a mechanism which offers alternate gas supplies in a forecast shortfall period in the amount of an LNG exporter’s shortfall alleviation contribution – this is gas that otherwise would have been exported. This clearly addresses the gas shortfall issue by exhausting any capability an LNG exporter may have by offering to divert gas supplies to domestic wholesalers. The purchasing of such gas and the supply of molecules to domestic gas consumers remains the responsibility of other market participants, all of whom will need to play their respective parts in avoiding a shortfall.

Protecting long-term contracts
The Draft Guidelines proposes to define protected long-term contract as those that have underpinned the final investment decision of LNG projects, however, qualifies this by effectively placing a 12-month post LNG project’s final investment decision period in order for LNG sales and purchase agreements
(“SPAs”) to be construed as a protected long-term contract.

We view the above-mentioned qualification to be problematic given the contracting nature of LNG
SPAs and how they evolve from a non-binding to binding arrangement, and then onto a fully-term definitive agreement with each stage of such commercial discussions playing a crucial role in the LNG project progressing towards final investment decision.

On protection of long-term contracts, we request that we engage in discussions with DISR so that in respect of the LNG SPAs which Korea Gas Corporation has entered into with GLNG there are no ambiguities as to whether if such LNG SPAs are to deserve protection.

Minimum supply volume of long-term contract gas
KOGAS questions the intended purpose of subsection 10(2) of the Draft Guideline where Long-term contract gas is defined as “the minimum supply volume the LNG project must supply under a protected long-term contract” and expresses its concern given that a difference in statutory interpretation may result in varying outcomes when determining how much gas volume deserves protection under the Draft Guideline.

Korea Gas Corporation’s LNG SPAs with GLNG have been purposefully structured in a way where consideration and flexibility has been given to the ramp-up nature of upstream operations and the need for GLNG to produce or otherwise secure incremental feedstock gas without having to enforce contractual penalties if a certain level of LNG production was not achieved by the LNG project.
Nevertheless, from an LNG importers perspective and for all purposes of managing Korea’s energy mix portfolio, annual delivery of GLNG cargos has been modeled based on what Korea Gas Corporation as
LNG buyer has contractually agreed to buy under its LNG SPA with GLNG. We view this volume as being what is required to be construed as long-term contract gas under the proposed Draft Guideline.

Accordingly, KOGAS requests that discussions with DISR take place so clarification can be sought on the exact volume of gas that shall be construed as Long-term contract gas when considered in the

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context of Korea Gas Corporation’s LNG SPA and that clear language which is not subject to varying interpretations be adopted into a revised version of the Draft Guideline.

Conclusion
KOGAS appreciates the need for a mechanism that ensures sufficient supply of natural gas is made available to meet Australian gas consumers’ demand in order to support a sound domestic industry and market. This however cannot be at the risk and sacrifice of prior investments and long-term business positions taken by KOGAS and companies alike where the cause and responsibility of the fundamental gas shortage issue within the domestic gas market cannot be placed solely on LNG exporters.

We strongly suggest and invite further discussions with the Australian Government and DISR representatives on the concerns raised in this submission and sincerely hope that we will be able to come to an agreement on a mechanism that achieves its proposed purpose without causing unintended impacts and consequences to a long-standing trade partner and company.

Sincerely,

Hakmook Son
Acting Managing Director
KOGAS Australia

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