Reforming Australia’s Domestic Gas Security Mechanism: guidelines

23 February 2023

Australian Domestic Gas Security Mechanism Consultation
Department of Industry, Science and Resources
Australian Government

Via electronic submission

To whom it may concern,

Reforming Australia’s Domestic Gas Security Mechanism: guidelines
The Australian Workers’ Union (AWU) welcomes the opportunity to make this submission to the consultation process for changes to the Australian Domestic Gas Security Mechanism
(ADGSM) guidelines.

The AWU represents around 70,000 members nationally in a diverse range of industries, representing nearly every part of the supply chain in Australia’s heavy industrial sector. In relation to gas, this covers the entire supply chain, from extraction onshore and offshore, through pipeline transmission, to ultimate use by Australian industry for heat, electricity and feedstock – be it in glass, cement, plastic, fertiliser, aluminium or others.

The AWU is a strong supporter of the Australian gas industry. Australia’s gas offers energy security not just domestically but to our trading partners in the region and is forming a critical part of the world’s decarbonisation pathway. However, domestic users have suffered from the rapid expansion of Australia’s LNG export industry, which has effectively floated gas prices to the world price. The AWU has warned of the consequences of this since the industry began to gain scale. However, the Russia-Ukraine conflict realised this risk in no uncertain terms as domestic gas prices more than tripled and affordable supply became unavailable to local manufacturers. The ACCC again warned in January that there is likely to be a 30PJ shortfall in gas supply this year, and a long-term shortage to meet demand by
2027.1

The AWU welcomed the Government’s intervention to cap domestic gas prices at $12/GJ late last year. However, this intervention dealt solely with price – not with quantity of supply available. And just one gas producer has made a significant open-market offer of gas under the cap – despite threats of action from the ACCC. Once the Government sets out the new

1https://www.accc.gov.au/system/files/Gas%20Inquiry%20-
%20January%202023%20interim%20report%20-%20FINAL_0.pdf
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mandatory code of conduct for the industry, there will be significantly more certainty for both producers and users about the operation of the scheme – and the ACCC will have additional regulatory tools to pursue gas producers for failure to offer gas in good faith to the domestic market.

However, securing domestic supply in the longer-term will also form a critical part of the picture for restoring energy security for Australian industry. The AWU identified issues with the current design of the ADGSM in the Department’s August 2022 consultation process. In effect, it was too weak to achieve its aims. The Government itself has assessed that no meaningful impact on local gas prices or supply could be assessed from the ADGSM.2 Our submission outlined the following issues:

• Lack of flexibility: Because a gas shortfall must be forecast in advance of the
following calendar year, the ADGSM is not responsive to present crises.
• Lack of price consideration: the ADGSM relies on an assessment of supply solely,
even if gas prices reach levels that would affect the ability of industry to make use of
the gas. In this sense, it puts the interests of gas producers ahead of the much
broader swathe of the Australian community reliant on that gas.
• Lack of impact on supply: given that the ADGSM has not been activated and that
the lucrative option of export remains on the table, it is by no means clear that even
the threat of the ADGSM being used has incentivised to gas producers to put greater
supply into the domestic market.

The key changes put forward in the draft guidelines are modest but meaningful reforms that go towards these concerns:

• By allowing the activation of the ADGSM to be considered on a quarterly basis, the
ADGSM has potential to respond to unexpected shocks to gas supply.
• By ensuring that all LNG producers contribute in equal terms (rather than by their
initial import or export contribution), and by permitting the trading of export licences
should the scheme be activated, a working market mechanism can be created that
ensures gas suppliers contribute fairly to making up any assessed gas shortfall.
• Appropriate protections are given to long-term export contracts that underpinned the
decision to invest in Australia, so long as commercial solutions are explored prior to
the gas being exported.

The AWU believes that these reforms will complement the gas price cap and mandatory code of conduct by offering a tool to government to manage supply as well as price. The

2 https://www.industry.gov.au/publications/australian-domestic-gas-security-mechanism-review-2019
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credible threat of the activation of the ADGSM must remain on the table to encourage producers to supply gas under the new regulatory framework.

But further steps are needed to secure gas supply in the long-run. The AWU continues to call on the Australian Government to establish a national gas reservation policy, and welcomes the Prime Minister’s announcement that this option is under consideration.3 The AWU began the ‘Reserve Our Gas’ campaign in 2014, calling for the Australian Government to adopt the
WA reservation policy. Queensland has since taken action to require some gas tenements to provide only domestic gas – but this is not enough.4 The AWU believes that only a national gas reservation policy in line with Western Australia’s, requiring producers to make gas equivalent to 15% of exports available to domestic consumers, will provide long-term relief for gas users such as the industries employing AWU members.

Gas storage capacity also needs to be examined to determine whether the capacity of current facilities is sufficient to meet gas users’ needs in peak periods. Despite a 2015 assessment that gas storage was adequate to meet user needs through to 2024,5 the
Newcastle LNG storage facility was completely depleted and not in use in winter 2022, while the Iona underground gas inventory in Victoria came dangerously close to depletion, avoided only by government intervention.6 In light of the flow-on effects from the Russia-Ukraine conflict, the AWU recommends that the Government look into new large scale storage facilities to ensure Australia’s energy security. This could complement the ADGSM in the event of its activation by providing new options for storage should large spot cargoes be diverted to the domestic market.

Australia also needs a sensible national gas supply policy, making genuine efforts to bring more gas online in consultation with state and territory governments (who undertake the primary approvals for gas projects). There is wide variation in the amount of available gas between states, and in the regulations applying to new gas projects, particularly onshore gas. Victoria, regrettably, has imposed a complete ban on onshore gas development in the state and has placed a moratorium on fracking in its state constitution. New South Wales, meanwhile, has limited the area available for gas exploration to only Santos’s Narrabri Gas
Project (which is nearly ready to begin extraction).

Moratoriums fail to apply a risk-based approach to resources development; the evidence and experience with onshore gas development demonstrates that the risks can be managed

3 https://www.skynews.com.au/australia-news/politics/anthony-albanese-stunned-by-peter-dutton- rejecting-energy-price-package-as-pm-flags-possible-domestic-gas-reservation/news- story/233fbfdf74f2874d0b6766e0a9df834a
4 https://statements.qld.gov.au/statements/92958
5 https://www.aemo.com.au/-/media/Files/Gas/National_Planning_and_Forecasting/GSOO/2015/Core-

-Gas-Storage-Facilities.pdf
6 https://www.smh.com.au/national/getting-away-with-too-much-aemo-intervenes-in-gas-market-to- stave-off-energy-crisis-20220719-p5b2ng.html
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effectively in practice.7 Every state and territory that has conducted a public scientific inquiry into the safety of fracking or onshore gas has reached the same conclusion.

The AWU recommends that the Australian Government work with state and territory governments to develop a national gas supply policy, encouraging onshore gas developments that meet industry-standard safety and environmental criteria.

The AWU welcomes further opportunities to discuss issues around Australian gas supply and the ADGSM with the Department.

Kind regards

DANIEL WALTON
NATIONAL SECRETARY

7 https://www.pc.gov.au/inquiries/completed/resources/report/resources.pdf
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