Securing Australia’s domestic gas supply: issues paper

CEMENT INDUSTRY FEDERATION
SUBMISSION

Securing Australia’s Domestic Gas Supply

August 2022

The Cement Industry Federation Limited ABN 59 008 468 639 ███ PO Box 4178 Manuka ACT 2603
Telephone +61 2 6260 7222 ███ www.cement.org.au
SUMMARY

The CIF is the national body representing all Australian integrated cement manufacturers and comprises the three major Australian cement producers – Adbri Ltd, Boral Cement Ltd and Cement Australia Pty Ltd.
Cement is a critical input for Australia’s residential and commercial construction industry, as well as for major infrastructure projects.

Portland cement (cement) is the critical material required to produce most concrete types used in Australia.
After water, concrete (including cement) is the most used material in the world and will continue to be crucial in supporting a modern world.

Natural gas is a critical fuel source for domestic cement manufacturing. Gas will also continue to play an important role as a transition fuel over the longer term as coal-fired electricity generation is replaced by lower or zero emission technologies.

In the absence of ideal market conditions, targeted policies and measures will be required to address the needs of both gas exporters and domestic users – both in terms of supply and affordability. This should include consideration of suitable short and long-term strategies, including broader domestic gas field development as well as domestic reservation.

INTRODUCTION

The CIF welcomes opportunity to contribute to the review of the ADGSM.

Australia has sufficient gas reserves to serve both the domestic and export market. However, the balance needs to be restruck. Gas market reforms are clearly required to ensure that domestic gas users are at the centre of policy and regulatory design.

The Australian Domestic Gas Security Mechanism (ADGSM), in conjunction with the Heads of Agreement
(HoA) and Gas Supply Guarantee (GSG), were introduced to address issues associated with the supply of gas to the domestic market – namely the forecast for a potential shortfall in supply over the short-medium term.

The ADGSM, as it currently operates, is a reactive policy mechanism. It does not address supply and affordability issues over the very short-term (days/weeks/months) or the long-term supply and affordability of domestic gas in Australia.

The recent extreme surge in gas prices, partly due to global events, highlights the underlying problem of linkages between the domestic gas market and the volatile global gas market. It also shows that the
ADGSM has limited, if any, influence over price.

This review offers an opportunity to consider including a price trigger alongside supply obligations as part of the ADGSM.

These mechanisms would not be required if there was a sufficient supply of gas to serve both the domestic and export markets – underpinned by appropriate levels of exploration and subsequent development of identified reserves across and within all Australian jurisdictions.

All Australian jurisdictions should take steps to incentivise exploration and the safe development of natural gas resources – particularly on the east coast of Australia.

However, until this occurs, the existing ADGSM will need to be adjusted to ensure the sufficient supply of affordable gas to the domestic market now and into the future.

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CIF COMMENTS

1. Principles

The CIF supports the seven principles underpinning the ADGSM review. There should always be a sufficient supply of affordable gas to the domestic market, underpinned by a well-functioning market to reduce price volatility and support long-term investment.

Australia’s position as a trusted and leading contributor to global energy security should be maintained, while recognising the role of gas in Australia’s transition in line with climate goals. Transparency and processes that support competitive price outcomes for gas consumers will also be essential, as well as ensuring the identified pathway forward provides all Australians with the most efficient use of this natural resource.

2. Including a price trigger

The ADGSM was primarily designed to address forecast supply shortfalls, without any direct reference to price. However, sufficient supply to the domestic market at an unaffordable price has the same effect as a supply shortfall - impacting overall economic stability.

Consideration should therefore be given to including a price trigger in the revised ADGSM to sit alongside supply obligations. Determining an appropriate price trigger will require further consideration, however, linkages with a revised gas market Cumulative Price Threshold and Administered Price Cap should be considered.

The setting of a reference price should also consider costs of production, reasonable profit margins for gas suppliers, as well as and the capacity of users to pay (based on the most recent, stable price period).

Any intervention into the market - such as a short-term activation power - should be strictly limited and have clear rules on the trigger, as well as the subsequent implementation and duration of the intervention.

3. Short-term Activation Power

While the existing ADGSM appears to have some limited success in ensuring sufficient gas was available in the early years of its inception, the Australian Consumer and Competition Commission (ACCC) has found that LNG exporters will take more gas out of the domestic market than they will put in in 2022 and
2023, resulting in forecast shortfalls- see Figure 1.

The ACCC identified the lack of flexibility in initiating or applying the existing ADGSM as a key limitation of the ADGSM, with the potential for between three to six months to pass before any export controls would take effect.

It is therefore clear that the ADGSM and associated mechanisms are no longer fit for purpose and therefore unable to be triggered in time to ensure the adequate supply of competitively priced gas to the domestic market.

A short-term activation power could be included in the ADGSM to minimise the potential for a market shortfall and subsequent impact on prices. However, this power would need to be carefully designed to minimise potential unintended consequences for LNG producers and exporters – both in terms of existing contracts and future investment.

As an example, a two-stage process could be implemented where once a shortfall year has been forecast by the ACCC and determined by the Minister (as per the current process), then the short-term activation power would become available (but not necessarily activated) in case a short-term supply shock eventuates.

If a supply shock then occurs, then the short-term activation power would be applied for a specified duration. At the end of this specified period and if specific requirements are met – the short-term activation

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Figure 1: LNG exporters’ net contributions to the east coast gas market

Source: ACCC Gas inquiry 2017-2025 Interim Report, July 2022 power would be lifted. Producers would still be required to undertake measures to ensure sufficient supply is available for the identified shortfall year.

However, any intervention into the market - such as a short-term activation power - should be strictly limited and have clear rules on the trigger, as well as the subsequent implementation and duration of the intervention.

Setting clear rules around what level of supply or price would trigger a short-term activation power will also be essential. These rules would need to be reviewed frequently to ensure they reflect existing market conditions.

4. Interaction with other measures

The Gas Supply Guarantee (GSS) was designed to ensure adequate supply to gas-fired generators to regions under system stress (i.e., demand spikes during heat waves). The GSS includes voluntary commitments by gas producers and pipeline service providers to the Australian Government - but has not yet been activated.

The proposed design and inclusion of a short-term activation power under the ADGSM should alleviate the need for the GSS through increased supply across the market, however the voluntary commitments under the GSS should remain in place to address any region-specific system stresses that may arise.

5. Threshold for a short-term activation mechanism

Several options exist for setting an activation threshold, including:

- AEMO announcement of a potential gas supply shortfall in any gas market for a period of at least 5
days.

- A specific price trigger. For example, where the average price in the Victorian Declared Wholesale
Gas Market (DWGM) or Adelaide, Sydney or Brisbane STTM exceeds a specific level (e.g. $15) over
a specific period (say 30 days).

- The implementation of price caps in one or more key markets due to wholesale gas price rises could
be used as a trigger for a short-term activation mechanism. Recent examples in 2022 include where

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three of the four east coast domestic gas markets were being administered by the Australian Energy
Market Operator (AEMO) under imposed gas price caps.

- Gas storage shortfall - for example where the level of gas storage at Iona or the Cooper Basin falls
below an agreed minimum level.

6. Amending the ADGSM to incentivise increased domestic supply

The ADGSM makes provision for the Minister to consider the availability of an industry-led solution to provide more gas to the domestic market in an identified shortfall year over.

While this approach has appeared to have worked up until 2021, recent ACCC data indicates that this is no longer the case – with shortfalls predicted for 2022 and 2023 as things currently stand.

The reality is that while international gas prices remain at relatively high levels, LNG exports are likely to be preferred over supplying the domestic market.

Strengthening the ADGSM, for example by including a price trigger as well as a short-term activation power, would ensure that producers are incentivised to find on industry-led solution rather than face export controls.

Giving the Minister more powers to direct producers and LNG exporters to redirect non-contracted gas to the domestic market if an industry-led solution is not found within a certain (short) period should also be considered.

7. Exempting contracted gas from the ADGSM

It would seem prudent that existing contracted gas should be exempt from the ADGSM due to issues around sovereign risk. Australia’s position as a trusted and leading contributor to global energy security should be maintained, while recognising the role of gas in Australia’s transition in line with climate goals.

However, care needs to be taken to ensure that sufficient uncontracted gas remains available to the domestic market into the future.

8. What can Governments do?

Additional policy measures will be required to address the long-term supply of competitively priced gas in
Australia. Examples include a potential domestic gas reservation policy as well as policies and measures aimed at encouraging broader domestic gas field development within all Australian jurisdictions.

A carefully designed domestic reservation scheme (looking at prospective as well as retrospective options) and policies to increase domestic gas field development have the potential to ensure the secure supply of reliable and affordable supply of natural gas to all Australian consumers without compromising existing and future investment in the development of Australia’s LNG industry.

Gas will continue to play an important role as a transition fuel over the longer term as coal-fired electricity generation is replaced by lower or zero emission technologies. As such, ensuring the adequate supply of affordable energy in all forms, including natural gas, must be a key priority for all Australian governments to ensure a strong, growing manufacturing industry and economy in general.

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