Experts warn gas scheme ripe for manipulation

The federal government is trying to pass a package of laws that would require gas producers to keep up to 20 per cent for the domestic market.

Experts are warning that ambiguity and loopholes remain in policy that could undermine its ability to keep gas prices low.

Analysts and big energy users say the federal government has failed to close loopholes that could allow a major exporter to escape a domestic gas reservation scheme despite being blamed by many for increasing prices.

Under plans currently being debated in federal parliament, the Albanese government wants Australia's gas exporters to set aside the equivalent of up to 20 per cent of their production for the domestic market every year.

The proposal is designed to "modestly" oversupply the domestic east coast gas market, where prices have soared since 2016 when three big liquefied natural gas producers began exporting from Queensland.

Of the three, one in particular — the Gladstone LNG venture led by Adelaide-based company Santos — has been accused of driving up prices by buying huge amounts of gas from the domestic market to sell overseas.

Western Australia would be exempt from the scheme, although the Northern Territory might be affected.

Paul Farrow, the influential head of the Australian Workers Union, said the government had tried to fix shortcomings in its plans when it drew up the draft legislation now before parliament.

But he warned big loopholes remained and said they would allow Santos to potentially slip free of any obligations to supply extra gas to the local market.

"So we need to just make sure that it's tight enough where people can't exploit or ruin the integrity of the system."

Saul Kavonic, an analyst at MST Financial, there was broad consensus from producers, consumers, unions, and the public that keeping "more Australian gas for Australians" and ending a decade of policy interventions was a good idea.

"Unfortunately, there are growing concerns that the government may squander this unique opportunity," Mr Kavonic said.

"After over a year of work and consultations, the reservation policy is still littered with fundamental drafting errors, major loopholes and overly cumbersome design elements that inadvertently risk rendering the policy futile, or even counterproductive."

Kavonic said its effectiveness would depend almost entirely on the baselines against which gas projects would have their obligations assessed. But the process to determine these baselines would be opaque and susceptible to lobbying.

An ABC investigation revealed GLNG had sucked up and exported the equivalent of 20 per cent of eastern Australia's domestic gas demand over the past 10 years.

This was because the venture built an LNG plant with a capacity of 7.8 million tonnes a year despite not having nearly enough gas of its own to fill it.

By contrast, the other two LNG projects in Queensland — run by global super-major Shell and Australian company Origin along with US firm ConocoPhillips — had overwhelmingly been supplying the local market in net terms.

Mr Farrow said it appeared the legislation would allow an exporter like Santos to help meet its obligations through "paper" supplies, like acquiring local gas projects and claiming that production as their own.

As well, he said ministers would have virtually unlimited discretion to vary an exporter's obligations, with little or no recourse to contest or review a decision.

He said Santos had every incentive to lobby for a lower obligation because it still faced the same problem as always: it had too little of its own gas to feed its Gladstone export plant.

"They need to actually contribute to this from day one. So I don't want the loopholes there," Mr Farrow said.

"Others that have been contributing, I think the system will work for, but we can't have a system where those that have been part of the problem are not part of the solution."

Andrew Richards from the Energy Users Association, which represents major gas users such as manufacturers, applauded the intent of the proposed laws and said they got many things right.

Mr Richards said it was reasonable for gas exporters to argue — and the government to accept — there needed to be flexibility in how obligations were met.

He also agreed that any long-term contracts between exporters and overseas buyers were sacrosanct and should be exempt from the scheme.

But he argued the government needed to be careful it did not create "ambiguity" that could be exploited to undermine the intent of reservation.

"The government's walking a fine line here, trying to keep lots of people pleased," Mr Richards said.

"But it risks becoming lobbyists at 10 paces."

For Mr Richards, there was no doubt about the extent to which GLNG had pushed up domestic east coast gas prices since starting operations.

He said it was "telling" that gas prices in the eastern states plummeted this year after Santos stepped back from buying so much gas from the local market.

"The price went from $13 a gigajoule to about $8.50 almost overnight, which kind of tells you something about the impact they were having on the domestic price," he said.

Australian Energy Producers (AEP), the lobby which represents oil and gas companies, argued the policy went too far and would risk wrecking the viability of new gas projects.

In doing so, AEP chief executive Samantha McCulloch said the scheme would, perversely, lead to lower gas supplies and higher prices.

Ms McCulloch also told a Senate committee investigating the legislation that parts of the nill were unworkable, especially the requirement for exporters to sell rather than just "reasonably offer to sell" their share.

"Our central concern remains the must-sell requirement, which potentially forces producers to sell gas below cost or on non-commercial terms," Ms McCulloch said.

Mr Kavonic said the government had closed some loopholes in the legislation since earlier versions were released.

But he said the scheme as it was currently worded was still full of problems that would undermine its intent and could even make matters worse for local gas consumers.

He said there was a very real risk the proposed laws would provide incentives for gas exporters to acquire smaller domestic producers.

"A policy that is supposed to rein in the exporters will instead concentrate domestic market power in their hands," Mr Kavonic said.

"The policy as it is currently proposed is too susceptible to being compromised by aggressive lobbying and is inequitable in its treatment of gas producers."