Securing Australia’s domestic gas supply: issues paper

Submission
August 2022

Securing Australia’s domestic gas
supply: options to improve the
Australian Domestic Gas Security
Mechanism

CONTENTS

KEY POINTS ...................................................................................................................................... 3
INTRODUCTION ............................................................................................................................... 5
THE AUSTRALIAN UPSTREAM OIL AND GAS INDUSTRY .................................................................... 5
THE INDUSTRY SUPPORTED ECONOMIC GROWTH DURING COVID-19 AND CAN SUPPORT THE
ECONOMY IN INCREASINGLY UNCERTAIN TIMES ............................................................................. 7
ADGSM EXTENSION ......................................................................................................................... 8
RECENT ENERGY MARKET DEVELOPMENTS AND THE ROLE OF NATURAL GAS ................................ 9
REGULATORY STABILITY AND THE IMPORTANCE OF AUSTRALIAN TRADING RELATIONSHIPS ......... 9
THE NEED FOR INVESTMENT TO BRING ON FUTURE NATURAL GAS SUPPLY ................................. 10
COMMENTS ON KEY ISSUES RAISED AND QUESTIONS ASKED IN THE ISSUES PAPER ..................... 11
COMMENTS ON THE ADGSM REVIEW PRINCIPLES ......................................................................... 11
1. ENSURE SUFFICIENT SUPPLY OF GAS TO THE DOMESTIC MARKET TO SUPPORT
MANUFACTURING AND ENERGY SECURITY ........................................................................... 11
2. PUT DOWNWARD PRESSURE ON DOMESTIC GAS PRICES ...................................................... 11
3. MAINTAIN AUSTRALIA’S POSITION AS A LEADING CONTRIBUTOR TO GLOBAL ENERGY
SECURITY ............................................................................................................................. 12
4. RESPECT THE TRUST TRADING PARTNERS AND INTERNATIONAL INVESTORS HAVE SHOWN IN
AUSTRALIA’S RESOURCES AND ENERGY SECTORS ................................................................. 13
5. SUPPORT ENERGY TRANSITION IN LINE WITH CLIMATE ACTION GOALS ................................. 13
6. ENHANCE TRANSPARENCY AND PROCESSES THAT SUPPORT COMPETITIVE PRICING
OUTCOMES FOR GAS CONSUMERS ....................................................................................... 14
7. MINIMISE IMPLEMENTATION COST AND COMPLEXITY FOR GOVERNMENT AND INDUSTRY... 16
COMMENTS ON THE OPTIONS AND ADGSM REVIEW QUESTIONS ................................................. 16
1. STRENGTHEN THE ADGSM.................................................................................................... 16
2. STATE AND TERRITORY MEASURES TO INCREASE SUPPLY ...................................................... 19
CONCLUSIONS/NEXT STEPS ........................................................................................................... 20
ATTACHMENT 1: RECENT ENERGY MARKET DEVELOPMENTS AND THE ROLE OF NATURAL GAS ... 22

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KEY POINTS

• The Australian Petroleum Production & Exploration Association (APPEA) welcomes the
opportunity to provide comment on the Securing Australia’s domestic gas supply: options to
improve the Australian Domestic Gas Security Mechanism (the Issues Paper). APPEA is the
peak national body representing Australia’s oil and gas exploration and production industry,
which directly and indirectly employs more than 80,000 people and will deliver an estimated
$84 billion in LNG export revenue in 2022-23.
• Australian gas will play a pivotal role in achieving net zero emissions by 2050 while ensuring
energy security. Australian LNG exports provide a reliable alternative to the use of higher-
emitting fuels, particularly coal for power generation, in our region. The flexibility and reliability
of gas also make it a natural partner to support the increased uptake of renewable energy. This
was evident in May this year, where domestic gas supply ramped up by 55 per cent to meet
high levels of demand during a period where coal-fired power generation and renewable
output was limited.
• APPEA recommends the Australian Government exercise significant caution when
considering additional regulatory interventions in the gas market. Ongoing interventions put
Australia’s reputation as a secure, stable and reliable supplier of LNG at risk and sends worrying
signals to both domestic and international investors and major trading partners. These include
investors and trading partners with whom the Australian industry has spent a generation
building relationships. These trading partners are also, in many cases, significant investors in
Australian LNG projects and will be the same partners we will look to as a nation to support our
efforts to build a commercial scale hydrogen industry.
• There has never been an actual shortfall of gas in the Australian domestic market and the
industry is working to ensure there will not be one next year. The Australian Domestic Gas
Security Mechanism (ADGSM) was introduced to allay market fears of a gas shortfall in the
domestic market. With no shortfall experienced in 2017-2022 and the industry already
responding to ensure that no shortfall will occur in 2023 and future years, it can be argued the
ADGSM has served its purpose. The industry has responded by investing in new supply and by
working constructively with government on voluntary, industry-led solutions – including the
Heads of Agreement – to ensure ongoing and secure supply to the domestic market.
• Changes to the ADGSM that undermine investor confidence will make new investment in gas
supply even more challenging. This will only exacerbate the very problem the ADGSM purports
to address. As APPEA, the ACCC and others have repeatedly argued, the best and most
enduring solution to potential gas supply shortfalls is increased investment in new supply.
• The ADGSM is not the appropriate mechanism to address short-term or infrequent energy
market disruptions. The significant and wide-ranging adverse consequences that would flow
from any activation of the ADGSM mean it should only ever be considered as a ‘last resort’
measure. The ADGSM does not operate in isolation, but alongside a range of other policy,
legislative and regulatory arrangements, including extensive new transparency arrangements
that will come into effect between June 2022 and April 2023 to fundamentally increase the
range of information available to gas market participants and a broad range of stakeholders.
APPEA recommends that the government continue to work with the industry on these
regulatory reform processes already underway.
• The introduction of a price “trigger” into the ADGSM would be an unprecedented distortion
of the domestic gas market. Not only would this send a very poor signal to the industry and its
investors, but it would also fundamentally disrupt and distort the operation of the entire east

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coast domestic gas market. Furthermore, determining the appropriate reference price for any
price controls would be problematic. For example, in any given period around 90 per cent of
gas traded on the east coast gas market is traded through longer-term bilateral gas supply
agreements (GSAs). The ACCC has consistently noted that these GSAs are priced significantly
lower than prices observed in the thinly traded and illiquid short-term trading markets that
have been the focus of recent attention. Both markets trade at lower levels that the ACCC’s
LNG netback price series.
• Removing regulatory barriers to exploration and development is the clearest and most
effective recommendation the ADGSM review could make to increase the competitiveness of
Australia’s domestic gas market. For over a decade, it has not been a lack of natural gas but
onerous regulatory restrictions in some jurisdictions (notably New South Wales and Victoria)
that have impeded gas development and supply and continue to adversely affect both
upstream competition and the timeliness of supply. Removing these unnecessary constraints
would be the single most important step governments can take to stimulate supply, put
downward pressure on prices and enhance competition.
• APPEA will continue to participate in the review of the ADGSM and looks forward to ongoing
consultation with the Government and with the Department. APPEA remains committed to
working with the Australian Government. We continue to encourage the industry and all
governments to work constructively and collaboratively to ensure more natural gas
development takes place on the east coast, particularly in the southern states.

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INTRODUCTION

The Australian Petroleum Production & Exploration Association (APPEA) is the peak national body representing Australia’s oil and gas exploration and production industry. It has more than 60 full member companies. These are oil and gas explorers and producers active in Australia. APPEA members account for an estimated 95 per cent of the nation’s petroleum production. APPEA also represents about 140 associate member companies that provide a wide range of goods and services to the upstream oil and gas industry.

APPEA works with Australian governments to help promote the development of the nation’s oil and gas resources in a manner that maximises the return to the Australian community and industry.
APPEA aims to secure regulatory and commercial conditions that enable member companies to operate safely, sustainably, and profitably. Further information about APPEA can be found on our website, at Energy for a Better Australia | APPEA.

APPEA welcomes the opportunity to provide comment on the Securing Australia’s domestic gas supply: options to improve the Australian Domestic Gas Security Mechanism (the Issues Paper) released by the Department on 1 August 2022. In addition to the APPEA submission, a number of
APPEA members have made individual submissions on the Issues Paper. This response should be read in conjunction with submissions from individual APPEA members.

APPEA’s submission addresses specific aspects of the Issues Paper, focussing on those areas that are particularly important for the upstream oil and gas industry.

APPEA recommends the Australian Government exercise significant caution when considering additional regulatory interventions in the gas market. Ongoing interventions puts Australia’s reputation as a secure, stable and reliable supplier of LNG at risk and sends worrying signals to both domestic and international investors and major trading partners.

These include investors and trading partners with whom the Australian industry has spent a generation building relationships. These trading partners are also, in many cases, significant investors in Australian LNG projects.

Changes to the Australian Domestic Gas Security Mechanism (ADGSM) that undermine investor confidence will make new investment in gas supply even more challenging, exacerbating the very problem the ADGSM purports to address.

THE AUSTRALIAN UPSTREAM OIL AND GAS INDUSTRY

It is important to place our views on the issues raised by the Issues Paper within the context of the current state and potential future contribution of the upstream oil and gas industry to the
Australian economy and to the welfare of all Australians.

Reliable, secure and competitively priced energy is crucial to our everyday lives in Australia. Within this framework, oil and gas plays a key role in meeting many of our energy needs.

Our abundant natural gas resources in particular, place Australia in an enviable position to maintain long-term, cleaner energy security domestically and internationally.

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Natural gas makes it possible for Australia to meet the world’s growing energy needs over the coming decades while incorporating a strategy to curb emissions and address the risks posed by climate change.

Australia’s oil and gas industry is a key and ongoing contributor to the Australian economy. The industry:

• Invested an estimated $473 billion in the Australian economy, including around $305 billion
invested in Australian LNG projects, since 20101.
o This investment will deliver returns for Australia for decades to come, through
increased gas supply for Australian customers, export revenue, jobs, royalties and
taxes.
• Supports 80,000 jobs directly and indirectly in Australia and hundreds of thousands more in the
manufacturing sector rely upon natural gas. Average wages in the industry are more than
double the national average.
• Supports a vast supply chain of businesses in manufacturing, services and construction.
o This is in addition to the hundreds of thousands of jobs in electricity generation,
manufacturing, transport and other industries which rely on our outputs.
o Businesses ranging from national firms to local cafés all share in the economic benefits
generated by the oil and gas industry2.
• Contributed around 4 per cent of Gross Domestic Production (GDP) in 2021-22.

Maintaining and enhancing the economic contribution of the oil and gas industry will be vital as
Australia looks to its recovery from the COVID-19 and the challenging economic circumstances and uncertain global economic, energy and geopolitical environment.

Liquefied natural gas (LNG) is now Australia’s second largest export commodity after iron ore, with export revenue of $70 billion in 2021-22, expected to rise to over $84 billion in 2022-233.

This export industry is also a key enabler of domestic gas supply. As was noted by Geoscience
Australia in its recent Australia’s Energy Commodity Resources 2022 report4, overall gas production increased substantially over the last decade, primarily driven by the expansion of the Australian
LNG industry on both the west and east coasts. Importantly, Geoscience Australia noted:

These gas projects feed into the domestic market as well as into the international export
market.

In 2021, Australian LNG was exported to ten destinations (Japan, China, South Korea, Malaysia,
Singapore, Taiwan, Thailand, United Arab Emirates and Other Asia-Pacific). Many of these nations are also significant investors in Australian LNG projects.

1 See Wood Mackenzie (2020), Australian Oil and Gas Industry Outlook Report, page 4 (available at Australia-Oil-and-Gas-Industry-
Outlook-Report.pdf (appea.com.au)).
2 As an example, work for APPEA by Lawrence Consulting, released in 2019 found the natural gas industry contributed around $55 billion to Queensland’s economy over a seven-year period. $5 billion was spent on wages state-wide during the period with the industry employing around 4,600 full-time employees, according to the Economic Impact of Queensland’s Petroleum and Gas Sector 2011-18 report. The industry spent around $50 billion on goods and services from local community contributions and payments to local government as well as royalties, stamp duty and tax, the report found. See Natural gas powering Queensland’s economy | APPEA for more information.
3 See Resources and Energy Quarterly: June 2022 | Department of Industry, Science and Resources for more information.
4 See Gas | Australia’s Energy Commodity Resources 2022 for more information.

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The continued expansion of Australia’s oil and gas industry provides incredible opportunities to all
Australians. The economic advancement in our region is overwhelmingly positive for the nation, playing to our comparative advantages as a secure and reliable energy exporter.

Going after a vigorous reform agenda, ensuring open and competitive markets and a tax system that helps us maintain our international competitiveness can see industry and governments work together to support the positive role the Australian oil and gas industry can play in contributing to
Australia’s economic recovery.

The stakes are high in realising the industry’s economic, social and energy security benefits. The decisions the Australian Government makes on any changes to the ADGSM will play an important role in determining whether the industry can realise its potential and whether the Australian economy benefits from new upstream oil and gas investment opportunities.

THE INDUSTRY SUPPORTED ECONOMIC GROWTH DURING COVID -19 AND CAN
SUPPORT THE ECONOMY IN INCREASINGLY UNCERTAIN TIMES

Australia’s oil and gas industry helped shield the country from more damaging economic fallout from COVID-19 by delivering steady export income, supporting jobs and preserving energy security.

Our ability to secure the next wave of investment in oil and gas exploration and production has strong foundations but faces intense challenges. The investment landscape is riskier, with higher hurdle rates, and global competition for mobile capital is fierce.

This means there is an urgency to address Australia’s competitive position through effective and nationally cohesive policy settings. There is heightened risk that undue regulatory and tax imposts deter long-term investment.

Australia’s reputation as a reliable supplier of LNG is a vital component of the industry’s competitiveness and has been a key factor in the industry’s ability, across Australia, to establish stable long-term relationships with customers and to attract investment into the industry in a fiercely competitive global environment.

Significant caution needs to be exercised when considering additional regulatory interventions that risk the attractiveness of Australia as a destination for upstream oil and gas investment and which send worrying signals to both domestic and international investors and major trading partners.

These include investors and trading partners with whom the Australian industry has spent a generation building relationships. These trading partners are also, in many cases, significant investors in Australian LNG projects.

The real challenge – and the real opportunity – is how to return the industry to growth so that it can be the enabler for Australia’s broader economic recovery.

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ADGSM EXTENSION

As APPEA noted in its submission to the consultation on the proposed ADGSM extension, and when the review itself was announced5, APPEA recognises the challenges faced by Australian manufacturers and residents because of energy price rises in eastern Australia.

Action by the industry, including through the Heads of Agreement (HoA, a voluntary industry-led solution signed by the three east coast LNG projects and the Australian Government in 2017 and updated in both 2018 and 2020 and to again be updated later in 2022), together with significant investment in new supply by the industry, has ensured that adequate supply of gas has been available to domestic customers at competitive prices (particularly for longer-term new gas supply agreements).

The ADGSM has already been in operation for over five years6. There have been no shortfalls in the east coast gas market during the period the ADGSM has been in operation. This outcome is not the result of the ADGSM, but investment and supply by the industry.

In its most recent publication, no shortfalls were identified by the Australian Energy Market
Operator (AEMO) through the Gas Statement of Opportunities (GSOO)7. AEMO in its GSOO 2022 said

… existing, committed and anticipated gas supply, including anticipated LNG imports, will
meet declining gas consumption until 2033, based on the ‘step change’ scenario …

In contrast, the Australian Competition and Consumer Commission (ACCC) through the Gas inquiry
July 2022 interim report8 identified that a shortfall of 56 petajoules (PJ) in 2023 was a possibility.
This conclusion was based on the forecasts and assumptions contained in the report (particularly the significant 54 PJ increase in gas-fired power generation demand), and the very unlikely assumption that all the 167 PJ of uncontracted gas would be exported. This assumption is not consistent with the actual outcomes observed since LNG exports commenced and the fact that sufficient supply has always been available for the domestic market. It is clearly the case, as APPEA noted9 when the interim report was released on 1 August 2022, that the 167 PJ of uncontracted gas is available for supply into the domestic market, and this is more than enough to ensure that no shortfall occurs next year.

There has never been an actual shortfall in supply and the industry will work to ensure there will not be one next year.

5 See Media Release: ADGSM review must maintain global investment confidence in Australia | APPEA for more information.
6 The ADGSM also sits alongside an extensive market-related legislative and regulatory framework, including (but not limited to) ongoing
(2017-2025) ACCC review of gas market supply (Gas inquiry 2017-2025 | ACCC and Review of upstream competition and the timeliness of supply | ACCC); the Gas Supply Guarantee (AEMO | Gas Supply Guarantee); the 2021 ACCC review of LNG netback pricing (LNG netback price series review | ACCC); a Code of Conduct for negotiations with customers (Media release: Code of Conduct finalised | APPEA); new gas market transparency measures (Regulatory amendments to increase transparency in the gas market | energy.gov.au); company reporting on a range of supply factors to the ACCC and to inform AEMO’s daily spot markets (AEMO | Short Term Trading Market (STTM),
AEMO | Gas Supply Hub (GSH) and AEMO | Declared Wholesale Gas Market (DWGM)), the Gas Bulletin Board (AEMO | Gas Bulletin
Board (GBB)) and the Gas Statement of Opportunities (AEMO | Gas Statement of Opportunities).
7 See AEMO | Gas Statement of Opportunities for more information.
8 See July 2022 interim report | ACCC for more information.
9 See Media release: Sufficient gas available for domestic supply | APPEA for more information.

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RECENT ENERGY MARKET DEVELOPMENTS AND THE ROLE OF NATURAL GAS

The review of the ADGSM, and its extension, follows recent disruptions in the east coast energy, primarily electricity, market in May and June 2022. To provide a fact base to inform decision-making, an independent assessment, prepared by EnergyQuest, was commissioned to examine the factors leading to those market disruptions. An overview of that EnergyQuest report can be found at Attachment 1.

The EnergyQuest assessment found that it was gas-fired power generation – and the actions of the gas industry to ramp-up supply at extremely short notice – that ensured energy security when coal- fired and renewable power generators were unavailable or unable to respond to high demand.

The assessment also shows that price outcomes in the domestic energy market during May and
June 2022 were a result of these factors and had little to do with LNG exports, which were largely unchanged during this period.

REGULATORY STABILITY AND THE IMPORTANCE OF AUSTRALIAN TRADING
RELATIONSHIPS

APPEA appreciates the recognition by the Australian Government, particularly the Minister for
Resources and Northern Australia, of the value of Australia’s LNG customers in Asia and the international trading and investment relationships that have been formed with Australia and
Australian firms.

APPEA notes the high value that customers place on reliability and security of LNG supply. It is also the case that many of these trading partners will be same partners that we will look to as a nation to support our efforts to build a commercial scale hydrogen industry.

The ADGSM – particularly if there are adverse changes to its operation as a result of this review – can be seen as undermining that reliability and should be seen as a “last resort” measure.

The industry understands its important role in supplying energy to Australians and the importance of a secure and competitive natural gas supply for households and businesses.

At the time of its development in 2017, and during the 2019-20 review, APPEA argued against the need for the ADGSM because fundamentally, Government intervention in the market, whether real or perceived, can undermine confidence, create risk for investors and discourage new entrants into the market. APPEA has worked constructively with governments to shape policy and regulatory reform process aimed at improving the efficiency and transparency of the gas market and its operation and will continue to do so in the future.

APPEA remains committed to working constructively and collaboratively with the Australian
Government to ensure more natural gas development takes place on the east coast, particularly in the southern states.

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THE NEED FOR INVESTMENT TO BRING ON FUTURE NATURAL GAS SUPPLY

As APPEA has consistently argued for many years, and as the ACCC (most recently in its Gas inquiry
January 2022 interim report) and others have repeatedly argued, more supply and more suppliers are the best means of ensuring security, reliability and competitive gas supply.

While there has been no gas shortfall in the east coast gas domestic market, the industry has, responded to government and market concerns. Since 2012, almost 120 gas supply agreements have been publicly announced in Australia. Billions of dollars in new investment has been announced to bring more gas to market in recent years, supporting domestic gas consumption and export projects that will continue to underpin Australia’s economic growth for decades to come.
This is notwithstanding the ongoing restrictions on supply in New South Wales and Victoria 10, the two states with the largest natural gas demand and the two states that have been under the most pressure in recent months.

The ADGSM was introduced to allay market fears of a gas shortfall in the domestic market. With no shortfall experienced in 2017-2022 and the industry responding to ensure no shortfall will occur in
2023 and future years, it can be argued the ADGSM has served its purpose.

Proposing significant changes to the ADGSM, and its extension out to 2030, risks locking in place adverse policy and regulatory settings that, as recent developments have underlined, can quickly become outdated. In addition, the detailed and extensive new market transparency and reporting arrangements recently introduced11, with more agreed during the recent Energy Ministers
Meeting12, will provide significant new market information to inform decision-making and provide early warning signs of supply pressure. By improving information flows to all market participants, these measures further lessen the need for the ADGSM over the longer-term.

The entire industry has been and remains committed to ensuring Australia continues to have secure, sustainable and competitive supply of natural gas for households and businesses and will continue to work constructively and collaboratively with the Government on the proposed energy market reforms announced in June and August 2022.

The industry has demonstrated over many years that it works constructively with government on voluntary, industry-led solutions to ensure ongoing and secure supply to the domestic market.

The focus of all stakeholders must now be to continue to build confidence in the oil and gas sector and support further investment. Investment, not ongoing regulatory intervention, is key to increasing supply and will underpin future industry growth.

10 APPEA has been warning for more than a decade that the ongoing regulatory restrictions, including bans and moratoriums, will have adverse consequences for energy security and competition in southern energy markets, including gas markets. See Rude energy shock awaits NSW | APPEA for example, in the case of New South Wales and Victoria stalls on economic progress and regional development |
APPEA from in the case of Victoria. The adverse consequences of these decisions have now become apparent in both jurisdictions.
11 See Regulatory amendments to increase transparency in the gas market | energy.gov.au for further information.
12 See Meetings and communiques | energy.gov.au for more information.

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COMMENTS ON KEY ISSUES RAISED AND QUESTIONS ASKED IN THE ISSUES PAPER

The following sections set out APPEA comments on key areas of the Issues Paper, particularly the seven principles outlined on pages 4-5 of the Issues Paper and answers to some of the eleven questions posed on pages 6-7 Issues Paper.

COMMENTS ON THE ADGSM REVIEW PRINCIPLES

1. ENSURE SUFFICIENT SUPPLY OF GAS TO THE DOMESTIC MARKET TO SUPPORT
MANUFACTURING AND ENERGY SECURITY

The industry understands its important role in supplying energy to Australians and the importance of a secure and competitive natural gas supply for households and businesses.

As noted above, at the time of its development in 2017, and during the 2019-20 review, APPEA argued against the need for the ADGSM because fundamentally, Government intervention in the market, whether real or perceived, can undermine confidence, create risk for investors and discourage new entrants into the market.

While sensible reforms can improve the efficiency of the gas market and its operation, and the industry has played a constructive role in recent policy and regulatory reform processes, market interventions can affect confidence in the oil and gas industry and discourage new market entrants and supply diversity.

APPEA recognises the challenges faced by Australian manufacturers and residents because of energy price rises in eastern Australia. Action by the industry, including through the HoA, together with significant investment in new supply by the industry, has ensured that a supply of gas is available to domestic customers for any purposes required, at competitive prices (particularly for longer-term new gas supply agreements).

The ADGSM has already been in operation for over five years. There have been no shortfalls in the east coast gas market during the period the ADGSM has been in operation.

There has never been an actual shortfall in supply and the industry will work with all stakeholders, including gas customers, to ensure there will not be one next year.

2. PUT DOWNWARD PRESSURE ON DOMESTIC GAS PRICES

In all sectors of the economy — not just oil and gas — maintaining access to open and competitive markets is in Australia’s best interest.

Around 90 per cent of gas traded on the east coast gas market is traded through longer-term bilateral gas supply agreements (GSAs) which, as the ACCC has consistently noted through its Gas
Inquiry Interim Reports, are priced significantly lower than prices observed in the thinly traded and illiquid short-term trading markets that have been the focus of recent attention. Both markets trade at lower levels than the ACCC’s LNG netback price series.

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As noted above, Australia’s gas industry is delivering substantial, economywide benefits in terms of investment, jobs, and regional development.

While the call for interventions (such as a “strengthened ADGSM”) from businesses under pressure is understandable, such interventions risk discouraging new market entrants and supply diversity.
Discouraging investment would reduce supply competition and could ultimately lead to higher prices.

Rather than generating more gas or driving down prices, interventions may impede the very investment needed to bring on new, or cheaper, supplies.

Our best policy response to concerns about prices or supply availability lies in bringing more gas to market.

Put simply, the best way to create downward pressure on gas prices is more gas, not more regulation. Governments can help ease price and supply pressures by encouraging exploration, releasing more acreage for gas exploration and development, removing regulatory and planning barriers to the safe and responsible development of resources for domestic and export use.

Meeting future gas demand will require ongoing industry investment in commercialising existing reserves and resources and finding new sources of supply. This means it is as vital as ever that all governments support developing new gas supplies as quickly and as cheaply as possible.

The challenge the industry, and Australia more broadly, now faces is how to restore confidence, encourage investment and return to growth.

Changes to the ADGSM that undermine investor confidence will discourage the exploration and development needed to deliver new gas supplies and competitive prices. Ongoing interventions are more likely to add to the challenges, rather than grasping the opportunities.

3. MAINTAIN AUSTRALIA’S POSITION AS A LEADING CONTRIBUTOR TO GL OBAL
ENERGY SECURITY

The Australian oil and gas industry has made a significant contribution to energy security, particularly in the Asia-Pacific region, in recent months as global energy market disruptions have resulted from the Russian invasion of the Ukraine.

Significant caution needs to be exercised when considering changes to the ADGSM that risk
Australia’s ongoing contribution to regional and global energy security, the attractiveness of
Australia as an investment destination for upstream oil and gas industry investment, and that send worrying signals to both domestic and international investors and major trading partners.

These include investors and trading partners with whom the Australian industry has spent a generation building relationships as a secure trading partner and a secure and credible investment destination and have looked to Australia as part of their energy security responses in recent months.

Any form of price-based intervention will be difficult to reconcile with this principle given the impact investor confidence and Australia’s reputation as a reliable and stable energy exporter.

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4. RESPECT THE TRUST TRADING PARTNERS AND INTERNATIONAL INVESTORS HAVE
SHOWN IN AUSTRALIA’S RESOURCES AND ENERGY SECTORS

As with principle 3, significant caution needs to be exercised when considering changes to the
ADGSM that risk the attractiveness of Australia as an investment destination.

Together, the investment by Australia’s international investment and trading partners has seen more than $70 billion flow into the Australian economy, and the Queensland regional economy, to underpin the development of a global export industry and significant domestic gas supply. For that significant and ongoing investment and economic development to be met with increasing regulatory intervention would send a worrying signal to those global investors and trading partners, many of whom are the very investors and trading partners Australia is now looking towards to help underpin the development of new industries, such as hydrogen, where the Australian upstream oil and gas industry is poised to make a significant contribution.

It also sends a worrying signal about the stability and attractiveness of Australia as an investment destination. This is an issue that should be of concern not just to the Australian oil and gas industry, but to industry more generally.

Even more so than principle 3, it is extremely challenging to see how changes to the ADGSM, particularly any form of price-based intervention, can be reconciled with this principle.

5. SUPPORT ENERGY TRANSITION IN LINE WITH CLIMATE ACTION GOALS

Australia’s oil and gas industry supports a national climate change policy that delivers greenhouse gas emissions reductions at the lowest cost to the economy. The policy approach should achieve emissions reductions consistent with net zero emissions across the Australian economy by 2050 as part of a contribution to a goal of global net zero emissions by 2050.

Greater use of Australian natural gas – in the domestic market, and LNG exported globally – can significantly reduce greenhouse gas emissions both here and abroad. Natural gas is a lower emitting and cleaner burning fuel than traditional energy sources, such as coal, complements renewable-based power generation and is a key pathway to large scale hydrogen development.
This industry is investing to reduce its own greenhouse gas emissions and is rapidly advancing low emissions technologies such as carbon capture and storage and hydrogen.

Australia’s goal should be an approach to climate policy that is national, consistent with the objectives of the Paris Agreement and which supports the environmental objectives and industries that provide jobs and economic growth.

APPEA’s Australia’s Cleaner Energy Future13, which incorporates the industry’s Climate Change
Policy Principles, highlights the sector’s commitment to meeting emissions reduction targets while maintaining affordable, secure energy supplies to consumers and industries that provide jobs and economic growth.

13 See 2021-APPEA-Climate-Change-Policy-Principles.pdf for a copy of the Principles.

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The four principles underpinning the oil and gas sector’s climate change policy are designed to assist policymakers in developing efficient and effective responses to climate change. They are:

1. Net zero emissions by 2050 should be the goal of national and international policy.
2. Climate policies should be efficient, enduring and integrated with economic, social, technology
and energy policies.
3. Australia’s international competitiveness should be enhanced. Government should pursue
climate policies that maximise growth in jobs and investment and maintain the competitiveness
of Australian trade-exposed industries, such as LNG.
4. Universal access to affordable, reliable, sustainable and modern energy must be achieved
consistent with the UN’s Sustainable Development Goal 7.

These principles lay the foundation to achieve emission reductions consistent with net zero emissions across the Australian economy by 2050. Australia’s policy response should set clear, long-term targets for emissions reduction consistent with this aim while also providing predictability to industry to support future planning, investment and employment growth.

The Australian oil and gas industry continues to monitor, report, and reduce its own emissions profile and participates in a range of global initiatives to reduce emissions, including the Oil and Gas
Climate Initiative, the World Bank Zero Routine Flaring initiative, the Climate & Clean Air Coalition
Oil & Gas Methane Partnership and Methane Guiding Principles.

APPEA’s Climate Change Policy Principles serve as a companion to the Industry Action on Emissions
Reduction14 report, which provides an overview of activities and initiatives undertaken by the oil and gas industry to reduce greenhouse gas emissions.

The future growth of the Australian gas industry, including in investment to bring on future gas supply, is aligned with the industry’s commitment to net zero by 2050 (or earlier for some APPEA members) and consistent with the Australian Government’s approach to reducing emissions.

This includes the target to reduce emissions across the Australian economy by 43 per cent on 2005 levels by 2030 and to net zero emissions by 2050, as envisaged in the Climate Change Bill 2022 and the Australian Government’s announced climate change policy approach.

6. ENHANCE TRANSPARENCY AND PROCESSES THAT SUPPORT COMPETITIVE
PRICING OUTCOMES FOR GAS CONSUMERS

This important principle is being met through a significant new package of gas market transparency measures15 that were first agreed in March 2020 have now passed through the SA Parliament, in the form of Natural Gas (South Australia) (Market Transparency) Amendment Act 2022, National
Gas (South Australia) (Market Transparency) Amendment Regulations 2022 and the National Gas
Amendment (Market Transparency) Rule 2022.

14 See Industry-Action-on-Emissions-Reduction-1.pdf (appea.com.au) for more information.
15 Further information is available at Regulatory amendments to increase transparency in the gas market | energy.gov.au.

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The requirements under the new regulatory package are wide-ranging. The transparency reform measures will increase transparency in the eastern and northern Australian gas markets, providing a range of new information on:

• Gas and infrastructure prices.
• Supply and availability of gas.
• Gas demand.
• Infrastructure used to supply gas to end-markets.

The extensive new transparency arrangements contained in this legislative and regulatory package come into effect between June 2022 and April 2023 and fundamentally increase the range of information available to gas market participants and a broad range of stakeholders.

These developments follow fifteen years of ongoing and often underappreciated policy, legislative and regulatory developments to improve the transparency of the Australian east coast gas market.
Amongst other things, this includes the development of the various short-term trading markets and gas supply hubs, the Gas Bulletin Board, the Gas Statement of Opportunities, the mandatory reporting of petroleum data for the Australian Petroleum Statistics, the Australian Bureau of
Statistics Producer Price Indexes, Australia publication and mandatory information gathering powers used by the ACCC for their Gas Inquiry Interim Reports. None of the information provided through these various processes was readily available in 2010, a little over a decade ago.

These developments are also complemented by the development of a Gas Code of Conduct (the
Code). The Code was finalised on 1 December 2021 and reflects extensive collaboration between gas users and gas suppliers, led by APPEA commencing in late 2020 16.

The purpose of the Code (as agreed between suppliers and users) is consistent with the government’s objectives to provide greater supply certainty to the market and improve transparency. It does this by:

• Providing minimum standards of business conduct for gas suppliers in their interactions with
gas customers and to build and sustain trust and cooperation between gas suppliers and gas
customers.
• Increasing transparency and certainty for gas customers in the negotiation of GSAs with gas
suppliers and to minimise disputes arising from a lack of certainty in respect of the terms being
negotiated between gas suppliers and gas customers.
• Providing an effective, fair and equitable dispute resolution process for gas customers to raise
complaints about the compliance of gas suppliers with the Code and have those complaints
investigated and resolved (but excluding disputes between gas customers and gas suppliers not
related to the Code that arise under an executed GSAs which will be governed by the provisions
the GSA).
• Promoting and supporting good faith in commercial dealings between gas suppliers and gas
customers in the negotiation of GSAs.

16The finalisation of the Code of Conduct for the negotiation and development of Gas Supply Agreements as agreed between Gas
Suppliers and Gas Customers on the East Coast of Australia was publicly announced on 1 December 2021. See Media release: Code of
Conduct finalised | APPEA for further information.

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The Code will apply to all signatories, including LNG exporters.

7. MINIMISE IMPLEMENTATION COST AND COMPLEXITY FOR GOVERNMENT AND
INDUSTRY

Any regulatory intervention comes with significant costs, including compliance and administration costs. This has been the case for the existing ADGSM and for the range of regulatory and other arrangements outlined earlier in this submission, with the ongoing information requests from the
ACCC a key part of the administration and compliance costs facing the industry.

APPEA agrees that minimising implementation, administrative and compliance costs should be a key principle underpinning the design of any ADGSM. Minimising changes from the existing ADGSM arrangements would be one way to keep these costs similar to those facing the industry now.
Significant change to ADGSM arrangements are likely to increase costs for all parties.

COMMENTS ON THE OPTIONS AND AD GSM REVIEW QUESTIONS

1. STRENGTHEN THE ADGSM

Activation at short notice

1. Would a short term activation power effectively address sudden shocks or shortfall risks?
2. What timeframes and limitations should apply to shorter-term activation powers?
3. How would short-term activation interact with other energy security measures, like the Gas
Supply Guarantee?
4. What should be the threshold for a short-term activation mechanism?

As was considered earlier, the ADGSM does not operate in isolation, but alongside a range of other policy, legislative and regulatory arrangements, which together act to provide for market operation, market transparency and energy security arrangements for the broader energy market, including the east coast domestic gas market.

This means the ADGSM is not the appropriate mechanism for short-term and infrequent energy market disruptions. The significant and wide-ranging adverse consequences that would flow from any activation of the ADGSM mean it should only ever be considered as a ‘last resort’ measure and should not be used to manage short-term or sudden market disruptions.

A more appropriate mechanism to address short-term and infrequent disruptions would be the Gas
Supply Guarantee (GSG)17 that was designed by industry in early 2017 to complement the ADGSM.
It provides processes to identify, assess and confirm a potential gas supply shortfall as well as processes to communicate with industry and to call for a response to a shortfall. It was designed to deal with short-term developments in particular in the electricity market and has been called on in
2022.

17 See AEMO | Gas Supply Guarantee for more information.

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While the GSG itself would require some modification to take on this slightly different role and it would be important to ensure it does not become a ‘catch-all’ for any disruptions that may occur in the energy market18, the GSG provides a basis for responding to short-term developments in a far less interventionist and disruptive way that would result from the activation of the GSG.

As noted above, the industry developed the GSG in 2017 and has worked constructively with the
Australian Energy Market Operator (AEMO) during the GSG’s activation19 in June and July 2022.

In addition, Energy Ministers announced20 at their meeting on 12 August 2022 proposals to:

Make sure market bodies have the information they need, by designing and consulting on a
package of reforms to provide the Australian Energy Market Operator and gas market
participants with improved visibility of short, medium and long term supply, demand and
system adequacy, allow the Operator to signal emerging issues to the market, and provide
the Operator with a set of system management mechanisms to respond effectively if a
market response to address a gap in system adequacy is not forthcoming

Further amendments to the ADGSM to allow for short-term activation are not considered necessary given the arrangements that are already in place.

Price based activation

5. What factors should a reference price take into account? How should each factor be measured
or monitored?
6. Which entity is best placed to determine the price, and what should that process include?
7. What implications or unintended consequences could price-base activation have, including on
new supply and the competitive functioning of the market?

APPEA would caution in the strongest possible terms against the introduction of any form of price control through the ADGSM. Not only would this send a very poor signal to the industry and its investors, including some of Australia’s key investment and trading partners, risking the very future investment required to bring more gas to the domestic market, it would fundamentally disrupt and distort the operation of the entire east coast domestic gas market.

Determining the appropriate reference price for any price controls would be problematic. For example, and as noted above, in any given period around 90 per cent of gas traded on the east coast gas market is traded through longer-term bilateral GSAs which, as the ACCC has consistently noted through its Gas Inquiry Interim Reports, are priced significantly lower than prices observed in the thinly traded and illiquid short-term trading markets that have been the focus of recent attention. Both markets trade at lower levels than the ACCC’s LNG netback price series. It is not at

18 It can be argued that this is what occurred during May-July 2022, when the GSG was activated as an unprecedented amount of gas was called into the NEM. This was the result of the significant level and planned and unplanned outages of coal-fired power generation, challenges in parts of the coal supply chain, and a lack of response from a range of renewable power generation. This means what occurred was an electricity crisis rather than a gas crisis. This resulted in the use of the GSG twice, with no similar mechanism applied to other parts of the energy market.
19 See APPEA statement on regulator using Gas Supply Guarantee Mechanism | APPEA and APPEA Media Statement on regulator using

Gas Supply Guarantee | APPEA for more information.
20 See Meetings and communiques | energy.gov.au for more information.

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all clear how these factors would be – or could be – appropriately considered in any move to introduce a price-based activation of the ADGSM.

The distortions to the domestic gas market, future competition supply and the investment environment for future gas investment that would follow any intervention would be adverse and profound. In addition, the application of price controls to one part of the market – the LNG exporters to which the ADGSM applies – but not to other parts of the gas market (or the broader energy market) fundamentally breach the market-based and competitively neutral approach that has underpinned the development of the energy market since the mid-1990s.

APPEA recommends that no form of price activation be introduced into the ADGSM.

A far better way forward is to work with APPEA and the industry on the range of other regulatory reform process already underway, including the development of the Wallumbilla Gas Supply Hub21, the Gas Code of Conduct, the package of measures APPEA provided to the Government on
10 August 2022 and the significant new range of measures announced at the 12 August 2022
Energy Ministers Meeting22.

Incentivise domestic supply

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

Providing an attractive investment environment to encourage more investment in exploration and development to bring more natural gas and more natural gas suppliers into the east coast is the best and most enduring way to ensure energy security and competitive price outcomes. By far the best way to ensure this includes the removal of unnecessary and unscientific regulatory restrictions on that exploration and development.

However, it is unclear that the proposals outlined on page 7 of the Issues Paper will achieve this outcome. Firstly, the legal basis for the Minister to compel sales into the domestic market is unclear, nor would such an approach be sustainable. A better way forward would be for the
Minister to work cooperatively with producers to consider what measures may be appropriate to bring more gas into the domestic market, should additional volumes of gas be required.

Improve administration of export permits

9. How could the TMSO be improved?
10. What features would effective LNG export permits have?
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?

21 APPEA notes proposals to move forward on some of the short-term aspects of GSH development were announced on 12 August 2022
(namely, developing and submitting rule changes on anonymised trading and harmonised prudential arrangements (see Meetings and communiques | energy.gov.au for more information). Some of the more fundamental reform options considered through the GSH development process in 2021 should now the subject of future development in consultation with the industry.
22 See Meetings and communiques | energy.gov.au for more information.

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These questions are best answered by the LNG projects themselves and APPEA would refer you to their submissions.

2. STATE AND TERRITORY MEASURES TO INCREASE SUPPLY

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?

As noted above, providing an attractive investment environment to encourage more investment in exploration and development to bring more natural gas and more natural gas suppliers into the east coast is the best and most enduring way to ensure energy security and competitive price outcomes.

For over a decade, it has not been a lack of natural gas but onerous regulatory restrictions in some jurisdictions (notably New South Wales and Victoria) that have impeded gas development and supply and continue to adversely affect both upstream competition and timeliness of supply.

Removing these unnecessary constraints would be the single most important step governments can take to stimulate supply, put downward pressure on prices and enhance competition.

Any outcomes from this review must support and reinforce the removal of regulatory restrictions impeding the efficient functioning of the east coast gas market.

In the case of Victoria, moratoriums on exploration and hydraulic fracturing that commenced in
2012 and that in some cases will remain in place, mean that no exploration and no production for gas has occurred in onshore Victoria for at least a decade23. A moratorium on the use of hydraulic fracturing has been place in Tasmania since 2014 24.

In New South Wales, the New South Wales Gas Plan25 places regulatory limits on potential production areas and the NSW Government has ‘bought back’ licences to remove areas (comprising more than 75 per cent of the State) as potential sources of future production.

23 See Restart of onshore conventional gas - Earth Resources for more information. In 2012, an administrative moratorium was placed on all onshore gas exploration and development in Victoria. In 2017, the Victorian Government passed the Resources Legislation
Amendment (Fracking Ban) Act 2017. Under this legislation, hydraulic fracture stimulation and coal seam gas extraction were permanently banned, and the existing administrative moratorium on onshore conventional gas was replaced with a legislative moratorium that halted all exploration and development activities in Victoria until 30 June 2020. In June 2020, the Petroleum Legislation
Amendment Act 2020 was passed by the Victorian Parliament, which allowed for the restart of onshore conventional gas exploration and production from 1 July 2021.
24 See Government Policy on Hydraulic Fracturing (Fracking) in Tasmania | Department of Primary Industries, Parks, Water and

Environment, Tasmania (dpipwe.tas.gov.au) for further information. The Tasmanian Government has put in place a moratorium on the use of hydraulic fracturing for the purposes of hydrocarbon resource extraction in 2014 and has recently extended the moratorium until
2025.
25 See Future of Gas Statement | NSW Government for more information. The Statement notes “… the government has significantly reduced the land available for gas exploration. The NSW Government will only renew a limited number of Petroleum Exploration Licences in the Narrabri region …”. The Future of Gas in NSW Report notes this will result in a 77 per cent reduction in the total area currently covered by Petroleum Exploration Licences. See Future of Gas in NSW Report for more information.

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These regulatory barriers both directly, through their application, and indirectly, through the signal they send to potential investors, place clear restrictions on the ability and incentive for gas producers to explore for, or develop, new gas reserves and resources.

Both New South Wales and Victoria have conducted extensive review processes that have each found the development of onshore gas resources, underpinned by an appropriate legislative and regulatory regime, can proceed with no greater risk than that applying to any industrial developments. The ongoing regulatory restrictions in each jurisdiction have directly impeded the development of onshore natural gas resources and have directly added to the challenges facing the east coast energy market. In addition, both jurisdictions have significant onshore gas resources.

As the ACCC has noted on several occasions during their Gas Inquiry Interim Reports, what would most relieve east coast price pressures is developing new low-cost supply in the southern states.
For example, in its Gas Market Inquiry Interim Report January 202026, the ACCC noted

We also continue to encourage state and territory governments to adopt policies that
consider and manage the risks of individual gas development projects, rather than
implementing blanket moratoria and regulatory restrictions.

While the ACCC’s findings have informed a range of other actions, including this review, there has been no movement on this consistent ACCC recommendation.

The Australian Government could support actions by States and Territories working directly with jurisdictions through the Energy Ministers Meeting to put in place specific steps and timeframes that each jurisdiction would follow to allow for the exploration for and development of onshore gas resources. In the case of the Northern Territory, the Australian Government should work cooperatively with the Northern Territory Government to implement the remaining recommendations arising from the Independent Scientific Inquiry into Hydraulic Fracturing of
Onshore Unconventional Reservoirs in the Northern Territory.

An early way forward would be for the New South Wales Government to work expeditiously to ensure that the Narrabri Gas Project is able to move forward to Final Investment Decision (FID) and if FID is reached, to ensure it moves expeditiously to development, while following all appropriate regulatory and approval processes.

Recommending the removal of regulatory barriers to exploration and development would be the clearest and most positive recommendation the ADGSM review could make to increase the competitiveness of Australia’s domestic gas market.

CONCLUSIONS/NEXT STEPS

To conclude, APPEA recommends the Australian Government exercise significant caution when considering additional regulatory interventions that risk the attractiveness of Australia as an investment destination for upstream oil and gas industry investment and which send worrying signals to both domestic and international investors and major trading partners.

26 See January 2020 interim report | ACCC, page 43 for further information.

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These include investors and trading partners with whom the Australian industry has spent a generation building relationships. These trading partners are also, in many cases, significant investors in Australian LNG projects.

Adverse changes to the ADGSM risk making new investments even more challenging and creating the very problem the ADGSM purports to address.

APPEA remains committed to working with the Australian Government. We continue to encourage the industry and all governments to work constructively and collaboratively to ensure more natural gas development takes place on the east coast, particularly in the southern states.

APPEA will continue to participate in the review of the ADGSM and looks forward to ongoing consultation with the Government and with the Department.

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ATTACHMENT 1: RECENT ENERGY MARKET DEVELOPMENTS AND THE ROLE OF
NATURAL GAS

To provide a fact base to inform decision-making, an independent assessment, prepared by
EnergyQuest, was commissioned to examine the factors leading to those energy market, particularly electricity market, disruptions experienced in May and June 2022.

That examination found:

• During the period January 2020 to May 2022 there were major international disruptions to the
energy market with shortages in Asia and the outbreak of the Ukraine-Russia conflict causing
high global demand for LNG.
• In first quarter of 2022, coal-fired power generation (CPG) reached record lows due to high
levels of planned and unplanned outages, coal prices more than four times the prices of a year
ago and increasing competition from renewables.
• This caused very large increases in non-coal fuel power generation to offset the lower CPG.
Gas-fired power generation (GPG) increased 54 per cent in May 2022 compared to May 2021.
• Yet despite the important role of GPG in meeting electricity demand, the fuel which sets the
power price most is coal, followed by renewables, and then gas.
• Since January 2020, domestic gas prices at Wallumbilla gas supply hub (WGSH) have averaged a
20 per cent discount to international Brent oil-indexed LNG net back prices, and 44 per cent
discount to LNG spot (JKM) indexed netback prices.
• Priority in maintaining gas supply for electricity generation is considered to be a major
contributor to the gas price increases in April and May 2022, even with declining LNG feedstock
demand for those months.
• In May 2022, domestic demand drove domestic prices higher than the Brent indexed netback,
but not the LNG spot (JKM) index, with the WGSH price at a discount of 23 per cent to the LNG
spot (JKM) index netback for that month.
• Gas price spikes for March, April and May 2022 are related more to the recent increase in GPG
rather than anything to do with LNG exports.
• The domestic demand increases in winter are offset by lower LNG feedstock demand which
usually corresponds to programmed maintenance of the LNG plants.
• Over the three months from March to May 2022, the LNG feedstock volumes have declined
from the mid-April peak in favour of the domestic market which as expected, has climbed
approaching the winter season.

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