Securing Australia’s domestic gas supply: issues paper

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INTERNATIONAL
ABN 73 004 301 517

22 August 2022

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

Re: Submission on options to improve Australian Domestic Gas Security Mechanism (ADGSM)

Dear Sir/Madam,

Background of our company and why we need natural gas at an affordable price

We are a small business that uses natural gas to carry out manufacturing operations in Young NSW. We are one of the largest and most consistent employers in Young with 29 employees and we support many contractors, transporters, suppliers and other small businesses. There is no renewable source of energy for our industry available as of today and we need natural gas to operate our factory.

False fears of sovereign risk

We have been trying to raise the awareness of both the NSW state and Commonwealth governments under both major political parties about the requirement to ensure supply of natural gas at affordable prices for almost ten years in vain. Instead of solutions, we have seen a monopoly in place by a few gas producers with no corporate social responsibility. We have read with incredulity claims made by gas producers and representatives of foreign governments (particularly the Japanese ambassador) about implications to
Australia’s sovereign risk if there is any action taken to limit export of natural gas and control prices. If a disaster of the type that the east coast of Australia has been facing for the last several months had occurred in
Japan, the corporate executives responsible for such a national crisis would have been held responsible by the
Japanese government for threatening their local manufacturing industry and livelihood of hundreds of thousands of workers, not to mention causing huge increases in energy costs for ordinary citizens. Japan actively promotes and protects its local manufacturing industries and has not been afraid of even taking on the might of the United States in the 1970s and 1980s to protect its automotive industry as an example. ABC News recented quoted the former WA Premier as follows: “In a rare interview since leaving politics in 2008, Mr
Carpenter said it defied belief that Australia had allowed itself to run short of gas supplies when it was the world's equal-largest producer. He said a succession of political leaders had been persuaded by false arguments against domestic obligations, lamenting that it was ordinary consumers who were paying the price.”

Failure to take difficult political decisions in the national interest

We need natural gas at an affordable price to sustainably manufacture our products. We are in a very difficult situation and we are struggling to survive every day. After coming to power in 2009, despite his party’s left- leaning policies and strong pro-environmental stance, President Obama allowed the development of gas fields in the United States, without compromising the environment. Today, that country is one of the

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largest producers and exporters of natural gas, and access to cheap gas has created hundreds of thousands of manufacturing jobs. We ask the politicians and policy makers in Canberra to take strong action and do the right thing to protect the national interest, and to work together in a united manner. There should be no unreasonable restrictions on development of gas fields and similarly gas producers should not be allowed to over-charge for gas.

We have also seen failure of leadership at the highest level as evident in the unprecedented exercise of power by the former Prime Minister in March 2022, a few months before the elections, to cancel the exploration permit of Asset Energy (PEP 11) in order to try and win a few seats in parliament. The ministers are bound by their oath to uphold the constitution and safeguard the public and national interest, and not to prioritise their election prospects. The indications were clear, and the ACCC had reported as far back as in January 2022 about what would happen in the east coast if no action was taken. In that report, the ACCC wrote: “LNG producers expect to take 27 PJ more gas out of the domestic market than they expect to supply into it. This has been driven by a continuing downward trend in quantities supplied into the domestic market by LNG producers since 2017. For 2022, 160 PJ is expected to be supplied by the LNG producers under domestic gas supply agreements, which is around 50% less than the quantities actually supplied in 2017 and 2018.” The ACCC also said in that January 2022 report that: “This rapid and significant reduction in domestic supply from the
LNG producers has contributed to the tight and uncertain conditions in the domestic market as well as the increase in their forecast excess gas.” The government should not ignore reports from its own regulators and waste time in taking suitable action.

Details about Causmag’s gas supplies and associated problems

The natural gas pipeline that supplies gas to Young was brought here at the initiative of Causmag and AGL in the 1980s. We are the largest user of gas in our region, currently using 60,000 Giga Joules (GJ) per annum.
Although this is miniscule compared to large commercial and industrial users, it is enough to justify the economic investment for operating and maintaining a pipeline in Young as compared to surrounding regional areas that do not have manufacturing industries to support the costs of piped gas.

We were forced to start purchasing natural gas from Weston Energy (Weston) from September 2017 based on the Sydney STTM spot market in which the gas price changes daily. Before then, we had been purchasing natural gas from our traditional retailer, Energy Australia (EA) for a number of years, at fixed prices. Accessing gas was a mere formality and we never imagined it would almost end our business one day and become a factor influencing our survival. EA could not source natural gas at an affordable price and increased our price from
$6.6/GJ to $10.4/GJ in August 2017. This is the same problem prevalent in the gas market today, albeit at a scale that is several times worse.

For your information, here are the prices paid by us in $/GJ for gas procured from Weston:
2017: 6.82
2018: 8.74
2019: 9.07
2020: 4.79
2021: 8.84
2022 (12 months to April 2022): 10.57
May 2022 (average price from 01-23 May): 30.01
May 2022 (from 24 May onwards): 44.60 as advertised for default rates

A number of our customers, who are large gas users themselves, such as Incitec Pivot, have announced closure of their manufacturing operations in the last one year due to unaffordable prices of natural gas. How can we survive when our large customers cannot get gas at an affordable price? No efforts are being made to persuade companies like Incitec to change their mind and maintain their manufacturing operations in Australia by bringing affordable supplies of natural gas to them.

Since 23rd May 2022, we have been using gas from our Retailer of Last Resort (RoLR), AGL, due to the demise of Weston. Although AGL is trying to help us, despite being a company with significant heft and influence in
Canberra, it itself can’t source natural gas from gas producers at an affordable price, and has repeatedly told us that it is buying gas for short periods with no long-term supplies available unless we are

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ready to pay several times the historical price. Other gas retailers have either declined to offer gas due to shortage or have quoted very high prices that are not affordable. When large gas retailers like AGL are helpless in front of gas producers, what is the option available to small businesses?

We were forced to introduce a gas surcharge to pass on the increased costs of the default rates which are equal to nearly 80% of the cost of our product. Please view an ABC 7.30 television report on this problem at: https://www.abc.net.au/7.30/calls-growing-for-restrictions-on-gas-exports/13917480

Since the above forced introduction of a gas surcharge, our customers have cancelled/deferred orders for 1183 tonnes worth $790,018. Our losses are more than the profit earned by us over a number of years. If and when the gas prices become normal, we may never recover the business lost from customers who have switched to supplies from overseas, particularly, from China.

Our major customers who buy more than 90% of our Magnesium Oxide output have stopped buying from us, as explained by the enclosed letters from our largest customers. In 2011, our gas price was $4.75 per GJ. Today we are paying $44.60 per GJ for gas, or an increase of over 800% in 11 years. The prices of our products in comparison have increased by 30% only in the same period. Gas users in Western Australia are paying less than $6 per GJ due to that state’s reservation of gas for its local use, something that we have advocated for the last 10 years in vain.

Figure 7 (North – South gas flows) on page 6 of the AER report for 08-14 May 2022 which shows how gas was being shipped north for export in the months before Weston collapsed. This is opposite of what the gas producers have claimed. We have provided that figure below with the period of interest circled for emphasis.

Submissions on questions mentioned in issues paper

1. Would a short term activation power effectively address sudden shocks or shortfall risks?

We agree that a short term activation power will effectively address sudden shocks or shortfall risks.
However, despite its current limitations, the ADGSM as legislated could still have been used to alleviate
the present crisis. We have seen that in 2017 when it was first introduced and also during the middle of
2021, the-then government was able to control gas prices by threatening to invoke the ADGSM. Using an
imperfect tool at the right time would have been very useful as compared to trying to make it perfect over
a long span of time and not using it to prevent ongoing distress to manufacturing industries.

2. What timeframes and limitations should apply to shorter-term activation powers?
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There should be no timeframe or limitation that restricts the activation of the ADGSM. This is because the gas producers raised prices in the market within a few weeks. The ADGSM must also be similarly agile to quickly respond should the gas producers attempt the same thing in future.

3. How would short-term activation interact with other energy security measures, like the Gas Supply
Guarantee?

The Gas Supply Guarantee can be scrapped. If the ADGSM includes a reference price and can be activated in a matter of days, there should be no need for a Gas Supply Guarantee.

4. What should be the threshold for a short-term activation mechanism?

The threshold can be set at a trigger price of say $6/GJ. Whenever the gas producers allow the market prices in Australia to cross this figure, the government should have the option of activating the ADGSM, within a notice period of a fortnight.

5. What factors should a reference price take into account? How should each factor be measured or
monitored?

The reference price should take into account the market prices prevalent in other regulated markets where there is significant production of natural gas such as Western Australia, Qatar and United States. The lowest cost at which gas is exported, cost of production of gas, transportation cost, and other costs applicable in the east coast should also be taken into consideration.

6. Which entity is best placed to determine the price, and what should that process include?

There are a number of regulators such as the ACCC, AER, AEMO and others. A single regulator should be given the authority to determine the price and formulate the process. There should be independent audit and verification of the data supplied to the regulator. The data should be available on a weekly basis to the regulator, or as is seen with Customs data, available for each transaction for exports.

7. What implications or unintended consequences could price-base activation have, including on new
supply and the competitive functioning of the market?

There will be no more exploitation of the domestic market to meet export commitments by gas producers once price-based activation is implemented. There is such a large demand for natural gas overseas that there will be no shortage of investors and international companies willing to set aside an adequate amount of affordable natural gas for Australians before being allowed to export gas. There is zero negative consequence on new supply and competitive functioning as can be seen in the case of Western Australia which has a domestic gas reservation policy and a thriving gas industry.

8. How could the ADGSM be amended so that during a shortfall year, stronger incentives exist for LNG
exporters to increase domestic supply?

If there is a shortfall year, the LNG exporters should not be allowed to export gas until the market price falls to the threshold or trigger price of say, $6/GJ.

9. How could the TMSO be improved?

The TSMO would not be necessary once an improved ADGSM is in place including price triggers and steps that would discourage gas producers from attempting to divert supplies overseas and creating an artificial shortage and price spikes in the domestic market.

10. What features would effective LNG export permits have?

LNG export permits should honour the letter and spirit of their approval conditions, particularly to

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ensure that the export of gas has no negative effect on the price or supply of gas in the domestic market. A violation of
this condition should trigger regulatory action culminating in cancellation of the permit if the violation is not stopped.

11. Should contracted gas be exempt from the ADGSM? If so, how could this exemption be designed to ensure the
objectives of the mechanism are met?

No, contracted gas should not be exempt from the ADGSM.

12. What can the states and territories do to ensure their gas needs are met during the energy transition? a. How can
the Commonwealth support the states and territories to do this?

States should not place restrictions on development of new gas fields once all the environmental conditions have been
met. Australia has some of the world’s strictest environmental regulations and the gas producers should not be restricted
once they have satisfied these regulations. The states need to let their environmental regulators process applications
from gas producers on merit, without influence or interference from political considerations.

The Commonwealth should not bar companies like Asset Energy from utilizing their exploration permits for off-shore
drilling. Off-shore drilling is a common practice internationally to access gas without damaging the environment.

Should there be any queries or requirement for additional information, we would be only too pleased to cooperate with the ministry and assist its efforts in improving the ADGSM.

Thanking you,

Yours faithfully,

(Aditya Jhunjhunwala)
Managing Director
Causmag International

We would like to provide additional feedback below on your query about the trigger price proposed by us at $6/GJ:

1. Incitec decided to close down their Gibson Island plant last year when there was no war between Russia and
Ukraine. Incitec was our biggest customer in fertiliser and we have been unable to replace the business lost from
them. They use hundreds of times more gas than us.
2. The average gas prices in the east coast were below $6/GJ until the export terminals in north QLD started to export
gas. If these terminals are removed, we may again have gas available at less than $6/GJ. This is corroborated by the
fact that in the last few weeks, a maintenance shutdown at just one of the three export terminals has resulted in a
huge drop in the spot price. We can therefore imagine the effect of a threat of a ban.
3. Information from companies like Asset Energy indicates that gas from offshore drilling off the Newcastle coast
would be priced under $8/GJ. We assume this method is more expensive than the type of production method used
to traditionally supply the east coast.
4. A number of reports from independent bodies such as the AER, ACCC, and others have established the link
between spot prices and behaviour of the QLD export terminals. Figure 7 (North – South gas flows) on page 6 of the
AER report for 08-14 May 2022 shows how gas was shipped north for export during the eight months (Sept. 2021 till
May 2022) before Weston Energy collapsed. Please see below with the period circled in black. The same diversion
happened in 2016 and the first half of 2017, and led to the introduction of the ADGDM in 2017. This can be seen
below with the period circled in red.
5. We are providing below the average yearly gas prices in $/GJ from the Sydney spot market from 2017 till 2021 after we
switched over to the spot market in 2017. The maximum price is $9.07/GJ and the minimum price is $4.79/GJ. The
average price is $7.65/GJ. These prices would be obviously lower if there was an effective ADGSM in place that
guaranteed both price and supply. A trigger price of $6/GJ can be achieved by reducing this average price of $7.65/GJ
by 21.6%, and this should be the outcome expected after investing so much effort into reforming the ADGSM.

We would like to invite you to visit our manufacturing operations located just two hours away from Canberra. We pray that you can devise a robust modification to the ADGSM to prevent any more supply and price shocks to the manufacturing industries in the east coast. We can provide any other details you may require.

Best wishes,

Aditya Jhunjhunwala

Managing Director
Causmag International
Young Mining Company Pty. Ltd.