Reforming Australia’s Domestic Gas Security Mechanism: guidelines

CSR Limited
Level 5, Triniti 3
39 Delhi Road
North Ryde NSW 2113

02 9235 8000 csr.com.au
ABN 90 000 001 276

23 February 2023

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

Submitted online and via email to: adgsm@industry.gov.au

Dear Minister King,

Reform of the Australian Domestic Gas Security Mechanism (ADGSM)
CSR Limited (CSR) welcomes the opportunity to respond to the Australian Government’s consultation on the guidelines for reform of the Australian Domestic Gas Security Mechanism (ADGSM).
Headquartered in Sydney, CSR Limited is an ASX 200 company with operations in Australia and New
Zealand. CSR employs over 2900 people, principally in the manufacture of building products. We operate low-cost manufacturing facilities and a strong distribution network to service our customers across
Australia and New Zealand. CSR is a Wholesale Market Participant in both gas and electricity markets and has retail energy contracts for smaller sites.
Energy security and energy affordability are key prerequisites to make manufacturing feasible over the long run in Australia. CSR continues to make significant investment in improving the energy efficiency, however, economically priced gas remains a critical resource in manufacturing process technologies at this time.
The supply-demand balance in the east coast domestic market over the past 10 years has been vulnerable. With material price spikes in the winter and supply difficulties 2021, the most significant turmoil hit the Australian gas users in 2022. A combination of potential supply shortfall threat and significant and sustained price pressures convinced the government to introduce a temporary gas price cap to wholesale contracts in 2023.
Despite the crisis in domestic gas markets, the much-anticipated ADGSM was not triggered and the alternative Heads of Agreement approach with LNG exporters, who control 90% of gas reserves and output, appeared to cause available supply to be reduced prior to the Heads of Agreement being signed, and then contractual supply, if available, was offered at much higher prices.
To mitigate further pressure on already tight supply-demand in the east coast gas market, CSR submitted a detailed pragmatic response to the ADGSM consultation process conducted in August 2022. We emphasised that “a forecast shortfall of gas is no longer the only trigger that should be considered” and suggested “other triggers in the domestic regulated markets such as: administered price periods (in gas markets)”.
Where there is a shortfall due to volatile conditions, such as the combination of events that has been observed in winter 2021 and 2022, being able to respond quickly will benefit the domestic market.
Accordingly, we suggested that “timeframes of activation should be kept to the minimum, i.e., activated when a shortfall is forecast and a return to business-as-usual as soon as practicable”. We also supported
“a domestic reservation to ensure adequate supplies are available to the domestic market.”
Responding to the current consultation process, we would like to share our view on planned reforms to
ADGSM and the draft guidelines to implement them.
We do not find the draft reforms adequate to address the issues concerning the domestic gas security and affordability for Australian gas users. Also, the published guidelines do not seem to be sufficiently effective to achieve the targeted reforms.
We acknowledge some improvements introduced as part of the draft reforms:
1- We agree that shorter timeframes for activating the mechanism is a positive outcome.
Moving from an annual basis to quarterly basis consideration provides tangible progress on
this mechanism.
2- A shared liability among all LNG projects for any domestic shortfall as opposed to individual
responsibility for LNG projects depending on their net position, is also an improvement to
the mechanism.

However, we would find the shortcomings of the proposed reforms to outweigh the positives and reduce the effectiveness of the instruments available to the Minister to put the domestic gas market first:
1- Despite all reasonable grounds and expectations, the much-needed price trigger is not
introduced to the mechanism. That deems to be a major weakness as the affordability is tied
to security when it comes to domestic energy market. Recent Federal Government measures
have recognised the need for Reasonable Price provisions which recognised the importance
of affordability. High domestic gas price implies instant shortfalls in a non-competitive
market and has to be a trigger for ADGSM.
2- The market disrupting events in 2021 and 2022 occurred without regulators being well
prepared to manage the shortfall. In an extremely tight market, any unexpected demand
increase (e.g. Callide and Yallourn plants outages in June-July 2021 and coal price spike and
unscheduled power plant outages in May-July 2022 as well as weather related challenges)
would result in immediate demand hike, price turbulence and risk of load shedding events.
2021 saw the reopening of international markets, with pressures of revived demand.
Regulators need to be prepared to manage unanticipated events domestically, as well as
following developments internationally that may also lead to pressures.
3- ADGSM could be beneficial in securing the physical supply of gas. However, the draft does
not address the price affordability of natural gas. The minister should consider the offered
prices both in the spot markets and wholesale contract pricing as important indicators of
sufficiency of supply. It is crucially important to maintain some level of normality in the
market at all times with sufficient supply available to domestic markets in medium to long
term unlocking a more competitive contract price for buyers.
4- Successive ACCC Gas Inquiry Interim Reports have noted that LNG exporters and associates
control 90% of gas reserves and production on the east coast of Australia. Consequently, for
the purposes of Ministerial decisions under the ADGSM in Section 8, it is reasonable to
presume that LNG projects have a deep understanding of domestic and international, and
are well placed to anticipate and respond to those conditions, particularly in entering into
new contracts. We are concerned to see provisions that provide for the Minister not to
declare a shortfall even when one is apparent (for example, 8(11) and 8(14)). Also of concern
is the subjectivity of 'reasonable grounds' in 8(10)). It is also relevant to section 10 in respect
of future contracts.
5- The draft provides for domestically purchased third party gas to be considered in supply,
without qualification 8(7). This provision means domestic gas users are competing with
export consortia for the relative small level of production not directly in their control. Supply
through new third party gas contracts should be disregarded.
6- A transparent and robust framework for determining a shortfall quarter is not introduced.
As always, we need to introduce much more transparency in the gas industry such that
responsible organisations could achieve more reliable findings as the basis of shortfall
declaration.
7- The effective timeframes would be much longer than a quarter with the proposed
communication procedures defined between the Minister and LNG exporters, before the
mechanism is triggered. In practice, a shortfall should be identified at least six months prior
to the quarter to allow for the notification and negotiation processes before a shortfall
quarter is declared 90 days before its occurrence.

CSR supports more effective and agile reforms and guidelines in a transparent framework to enable a strong ADGSM with multi aspect trigger thresholds to secure supply of affordable natural gas to domestic gas markets.
Thank you for considering this submission. If you would like to discuss this submission, please contact
Dr. Amin Gholami at agholami@csr.com.au.

Yours sincerely,

Amin Gholami Marion Johnstone
Energy Manager, CSR Limited General Manager, Treasury
& Strategic Capital