In June 2023 the WA Economics and Industry Standing Committee commenced its parliamentary inquiry into WA’s Domestic Gas Policy. This week, the inquiry’s interim report was released.
In this article, we discuss this interim report and the potential impact of the findings on the future of WA’s Domestic Gas Policy.
Background
On 26 June 2023 the WA Parliament announced that the Economics and Industry Standing Committee (Committee) would commence a parliamentary inquiry (Inquiry) into WA’s Domestic Gas Policy (Policy). The Inquiry would be primarily responsible for hearing evidence about how well the Policy’s existing mechanisms ensure the timely delivery of gas into WA’s domestic market and the transparency of both supply and prices of gas. The Inquiry was also tasked with considering the state government’s role in ensuring that WA has adequate domestic gas supplies into the future, particularly over the short to medium term.
The Inquiry was prompted by WA’s evolving energy landscape, as Chair of the Committee, the Hon. Peter Tinley commented “[t]he [Policy] has been in use since 2007 and has generally served us well. In light of rapidly changing energy landscape, however, it is time to consider its role in meeting WA’s gas needs as we transition to clean energy”.
The Committee intended to release a report of its findings by 30 November 2023, however this timeline has been prolonged following an extended period of stakeholder consultation during which several key industry players, including Santos, Shell Australia, Exxon Mobil, Woodside Energy and Chevron Australia, provided submissions for the Committee’s consideration.
Interim Report
On 22 February 2024, the Committee tabled the report titled ‘Domestic Gas Security in a Changing World, Inquiry into the WA Domestic Gas Policy: Interim Report’ (Interim Report).
The Interim Report detailed that, in the Committee’s opinion, the Policy is no longer fit-for-purpose, commenting that the ‘[a]pplication of the Policy in its current form is unlikely to mitigate an imminent and potentially severe gas supply shortfall. The shortfall is likely to threaten thousands of WA jobs, jeopardise billions of dollars’ worth of activity and derail the State’s decarbonisation agenda’. The Committee also determined that the Policy is not robust enough to ensure that an adequate supply of gas will be delivered to WA’s domestic market.
The Interim Report set out 13 key findings which are briefly summarised below:
- Historically WA gas supplies have been secure, stable and affordable
Since the inception of the Policy, WA has enjoyed secure and relatively affordable supplies of gas, and it has been spared of the gas price and supply volatilities which have often plagued Australia’s east coast gas market. - Forecasted substantial shortfalls in supply
The Australian Energy Market Operator has forecasted that WA will experience a long-term shortfall (Forecasted Shortfall), and therefore there is a credible risk that the State will face a substantial gas supply shortfall in the near term and continuing for most of the next decade. - Adverse consequences
If the Forecasted Shortfall materialises, it will likely produce adverse consequences for the State, including higher electricity prices; loss of industry and jobs; and the presentation of a very real threat to WA’s decarbonisation agenda. - Lack of consistency, transparency and enforceability
While the contract-based approach of the Policy provides greater certainty to the parties, it does not allow flexibility over time to respond to the evolving market and the State’s interests when circumstances change. The present reliance on implementation of the Policy by contracts lacks consistency, transparency and enforceability. - No longer fit-for-purpose
The Policy, to date, has provided a framework that encourages market responses to gas surpluses or shortfalls, however given the Forecasted Shortfall (which is expected to be significant and prolonged), the Policy is no longer fit-for-purpose. - Producers not operating within the spirit of the Policy
Data collected as part of the Inquiry suggests that LNG producers were providing, on average, 8% of their gas reserves to the domestic market – about half of what they were required to under the Policy. The Committee determined that it appears some producers are not operating within the spirit of the Policy. - Domestic gas agreements inconsistent with Policy
Similarly, the Committee found that some gas producers have been strictly applying the terms of their domestic gas agreements seemingly without regard to either the spirit of the Policy or their social contract with the WA community. - LNG exports preferred
LNG exports are favoured by producers because, amongst other things, they provide exposure to larger international markets; deeper pools of international capital; and attract higher prices than deliveries of domestic gas. - Exports facilitating increase in gas volumes
There is competing evidence as to whether permitting onshore producers to export LNG would increase the volume of gas available to domestic consumers. That said, if greater pools of capital were available, this may facilitate the faster development of the resource and deliver greater volumes to the domestic market. - Government intervention
Given the Expected Shortfall and credible risk of imminent and material economic harm, there is a case for the State Government to intervene in the WA domestic gas market, which could include a legislative response. - Industry-led responses preferred
The Committee determined that industry-led responses to the Expected Shortfall are preferred (over State Government intervention) and should be encouraged. The Committee noted that it may be appropriate for government intervention to be deferred or suspended if a timely and effective industry-led response is addressing the problem. - Sovereign risk issue
Any government intervention needs to be conscious of the sovereign risk issue while also having regard to, amongst other things, the fact that industry in any jurisdiction faces the risk of regulatory change as circumstances and policies change over time. - Wide-spread intervention may not be necessary
The Committee concluded that government intervention measures do not have to apply across the board. If some gas producers are acting in accordance with the spirit of the Policy while others are not, it may be appropriate for a government intervention to target only the latter.
Where to from here?
As highlighted by findings 10-13 above, the Committee believes there is now a case for government intervention to prevent gas shortfalls in WA’s domestic gas market. Whilst the Interim Report did not include any formal recommendations to the State Government, it did provide that the final report will include such recommendations.
Policy updates across Australia (including the August 2023 updates to the Policy which prohibited LNG exports from the Perth Basin and the implementation of the Mandatory Gas Code of Conduct for the East Coast Gas Market) and reforms to the Australian Domestic Gas Security Mechanism (ADGSM) (applicable to east coast LNG exporters) have demonstrated the continued willingness for state and federal governments to intervene in Australia’s domestic gas market in a bid to secure adequate and fairly priced gas supply for domestic industry and consumers.
In light of the Committee’s findings and WA’s commitment to transition to a clean energy future in which gas will play a significant role, it is unlikely that this intervention will decrease in the foreseeable future (despite the Committee emphasising that an industry-led approach is preferred).
We will provide a further update following the release of the Committee’s final report. In the meantime, for more information about the Interim Report and how this may affect your company’s operations, please contact HopgoodGanim’s Resources and Energy team.