03 Feb 2023
Transcript: APPEA CEO Samantha McCulloch’s opening statement to the Select Committee on Cost of Living
I would like to begin by acknowledging the traditional owners of the land on which we meet today and pay respect to Elders past, present and emerging.
The Australian Petroleum Production & Exploration Association (APPEA) is the peak national body representing upstream oil and gas explorers and producers active in Australia.
The industry is working tirelessly to provide Australian households and businesses with a secure, stable and affordable supply of natural gas against a background of significant global headwinds and domestic market upheaval.
Like everyone, the industry recognises the cost of living pressures facing Australians and we welcome efforts to provide effective relief to households and manufacturers.
We know that energy, and natural gas prices are an important element of today’s cost of living pressures.
The Russian invasion of Ukraine has compounded the underlying trend of price increases in the energy market. Energy and gas prices were increasing even before the invasion of Ukraine, both at home and abroad, due to underinvestment in new gas supply, combined with increasing demand volatility.
With the transition away from coal-fired power generation, and growing shares of renewables, the reliance on natural gas for secure and dispatchable power in Australia is increasing.
This was evident during the 2022 winter, where a combination of coal outages, limited renewable capacity and cold weather, saw demand for natural gas increase by 55% relative to the same time in 2021.
It is the ability of the industry to ramp up supply to meet this demand that is key to keeping the lights on in the east coast of Australia.
This increasing volatility of Australia’s demand profile, alongside barriers to investment in new supply, are major contributors to higher domestic prices.
New gas supply is the key to putting sustained downward pressure on prices.
This was confirmed last week by the ACCC in their most recent Gas Inquiry Interim Report, which highlights that “avoiding long-term supply shortfalls will require development of new supply” in particular in the southern states.
The recent Government interventions in the market are exacerbating, not easing, this situation.
The 12-month price cap and ongoing price regulation proposed as part of the mandatory Code of Conduct, have brought enormous uncertainty to the market. These measures will result in less investment in supply, ultimately increasing gas prices – which is the opposite of what the ACCC says is needed.
We have already seen investment in new supply being halted due to these interventions.
Analysis by ACIL Allen suggests that the investment uncertainty associated with these measures could actually increase gas prices in the long-term by as much as 40%, over and above where they would’ve been without government intervention.
The price cap order is now in place and industry is doing what it can to work within the interim guidelines provided. However, continued uncertainty around compliance is hampering efforts to execute gas supply agreements this year, given that any inadvertent breaches could attract a potential $50 million penalty.
We have seen how disruptive this intervention has been, while delivering limited, if any, actual cost of living relief to consumers.
We hope that the lessons learned from this experience will be applied to the mandatory Code of Conduct consultation process which is still ongoing.
In particular, the proposal in the mandatory Code that prices will be set at the discretion of the regulator and be subject to change at any time, rather than being determined by the market, has a particularly chilling effect on investment.
The impact of intervention in the gas market isn’t limited only to the gas market.
Investors across the economy – including overseas investors who have contributed so much to the resilience of the Australian economy over the last two decades – are watching what is happening with great concern.
Capital is mobile and if Australia loses its reputation as a safe, dependable investment destination, it will have significant repercussions across the economy and on the cost of living for all Australians.
This is especially the case given the investment we need to grow the economy and maintain secure affordable energy supply, while we transition to net zero.
APPEA welcomes the opportunity to present to the Committee today and I look forward to taking your questions.