The global energy landscape has been dramatically reshaped by recent geopolitical events, particularly the escalating conflict in the Middle East. When Andrew Richards, head of the Energy Users Association of Australia (EUAA), returned to work after a brief break, he found a world where energy prices had been sent soaring by a furious military campaign against Iran, backed by the United States. This conflict has turned vital Gulf energy assets, from oil refineries to tankers, into potential targets for a regime fighting for its survival. The violence has even impacted Qatar’s massive Ras Laffan gas plant, a critical hub that accounts for a fifth of the world’s liquefied natural gas (LNG) supplies.
For Mr. Richards, representing Australia’s largest gas consumers, these developments are a significant cause for concern. He anticipated returning to a scenario where gas prices might have reached $20 per gigajoule, mirroring the sharp increases seen in Europe and Asia, the world’s primary LNG markets.
A Stark Contrast in Domestic Gas Prices
Remarkably, despite the global turmoil, Australia’s east coast spot gas prices have remained surprisingly subdued, staying below $10 per gigajoule. This stands in stark contrast to the 2022 energy crisis, triggered by Russia’s invasion of Ukraine, which sent gas prices to unprecedented highs. Mr. Richards points to a key difference that may explain this anomaly: the impending introduction of a domestic gas reservation scheme.
The Shadow of a Domestic Gas Reservation Scheme
“We are starting to get deeper into the process of negotiating the details of the domestic gas reservation scheme,” Mr. Richards explained. He suggests that gas producers might be exercising a degree of “strategic restraint” in anticipation of this new policy.
The federal government officially proposed the gas reservation scheme four months ago. The core of the proposal involves reserving between 15% and 25% of LNG exporters’ production for the domestic market, commencing in 2027. While existing “foundation” contracts with overseas buyers would be exempt, any new contracts would be subject to the scheme. Notably, Western Australia, which already has a similar policy in place, would be excluded.
Mr. Richards highlights that the mere prospect of this federal scheme has had a profound impact. As a veteran of the energy industry with a decade at the helm of the EUAA, he notes that gas exporters have rarely offered concessions to local users, even during past periods of international price spikes, and certainly not during the chaotic energy scramble of 2022. He recalls that domestic gas prices on the east coast during that period “rocketed to eye-watering highs, which pushed some customers to the wall,” alongside power prices.
Expert Opinions on Market Behaviour
Josh Runciman, lead analyst for Australian gas at the Institute for Energy Economics and Financial Analysis, concurs with Mr. Richards’ observations. He believes it’s highly probable that gas producers are currently “all on best behaviour.” However, Mr. Runciman cautions that the full repercussions of the Middle East conflict may not yet be evident in the longer-term contracting market, which is more significant due to the larger volumes of gas involved. He anticipates price rises in this segment, as they are indirectly linked to global LNG trade and the soaring oil price.
Potential for Windfall Taxes
Adding another layer to the evolving energy policy landscape is the government’s consideration of a windfall profits tax on gas exporters. Mr. Runciman views this as a strong indication that Canberra is determined to ensure a better deal for gas consumers and taxpayers.
Samantha McCulloch, representing gas exporters through the Australian Energy Producers lobby group, argues that a windfall profits tax is unnecessary. She warns that such a measure could push the effective tax rate for some producers to “around 80 to 90 per cent, destroying Australia’s ability to compete for global investment.” She points to the current modest domestic prices as evidence of the local market’s strength.
Shifting Supply and Demand Dynamics
While government interventions are a significant factor, the fundamental laws of supply and demand are also at play. The Australian Energy Market Operator (AEMO) recently released its latest outlook for the east coast gas market, presenting a more optimistic picture than in previous years. AEMO now forecasts adequate supplies until 2029, a notable improvement from earlier warnings of imminent peak-day shortfalls.
Several factors contribute to this improved outlook:
- Declining Demand: Households and businesses are reducing their gas consumption as they increasingly electrify their homes, vehicles, and buildings.
- Power Generation: Less gas will be required for power generation in the short term, thanks to the delayed closure of the Eraring coal-fired power station and the significant growth in battery storage capacity, which enhances the utilisation of surplus renewable energy.
- Infrastructure Expansion: The gas network is undergoing expansion, which will facilitate the movement of gas from production hubs in Queensland to consumption centres in southern states.
Doubts Over the Reservation Scheme’s Effectiveness
Despite these positive developments, some analysts question the necessity and potential effectiveness of the gas reservation scheme. A recent report by consultancy EnergyQuest suggests the scheme may be ineffective and could even backfire.
Rick Wilkinson, CEO of EnergyQuest, points out that the scheme is slated to begin in 2027, but a substantial portion of LNG exporters’ production is already committed under long-term foundation contracts that will not be affected. He estimates that the scheme will deliver little additional domestic supply until the mid-2030s. Furthermore, he argues that adding a reservation policy on top of existing disincentives, such as the government’s $12 per gigajoule market cap and a perceived lack of political support, could deter the development of new gas projects crucial for increasing local supply.
“The problem is there is not substantial surplus production by Queensland LNG producers above foundation LNG contracts,” Mr. Wilkinson stated. “The reservation will act as a disincentive to increase production, and the end result may be less gas produced.” He also highlights that the scheme is designed to ensure annual supply adequacy, but it does little to address the critical challenge of meeting peak demand, particularly during winter.
Users Push Back Against Criticisms
Andrew Richards, representing major gas users, is dismissive of these criticisms, having heard them before. He disputes the claim that the policy will have no impact for another decade, noting that while some foundation contracts extend to the mid-2030s, others are set to expire much sooner. “Foundation contracts start to roll off in 2030, which basically means if they want to start to negotiate new foundation contracts, they’re kind of starting those now,” he said. He interprets the government’s stance as a signal to producers to consider this new obligation when negotiating future export contracts.
Mr. Richards also refutes the notion that a reservation policy will derail gas project development. He cites Senex Energy, a joint venture involving Gina Rinehart and Korea’s POSCO, which secured rights to develop “domestic only” gas tenements in Queensland. Senex has built a successful business supplying the domestic market, with many EUAA members holding long-term contracts with the company. “There’s plenty of evidence there to say that it will work,” Mr. Richards concluded. “I think the people saying it won’t are the ones who’ve got, dare I say, vested interest in the game.”
