New modelling confirms critical flaws in gas reservation scheme

The Federal Government's proposed gas reservation scheme could displace up to 39 petajoules a year of gas from domestic-focused producers, undermine investment in new supply, reduce competition and ultimately put upward pressure on energy prices, according to new independent analysis.

The Wood Mackenzie modelling reinforces Australian gas producers' concerns with the scheme's proposed 'must-sell' and '10 per cent oversupply' requirements. These provisions could force exporters to sell gas into an already well-supplied market at below cost or on non-commercial terms and crowd out smaller domestic-focused producers that currently supply the majority of gas delivered to the east coast market.

The analysis finds that the proposed scheme does not meet its own objectives, Instead, it will undermine energy security, exacerbate the risk of shortfalls, and ultimately put upward pressure on gas prices for Australian households and businesses.

Australian Energy Producers Chief Executive Samantha McCulloch said the findings confirmed the need for key changes to the legislation to address serious flaws in the current design.

"Artificially suppressing prices might deliver a short-term sugar hit, but it comes at the expense of the investment needed to keep gas flowing and prices affordable over the medium and long term," Ms McCulloch said.

"Australia needs reliable gas supply, not another market intervention that makes it harder to invest."

Wood Mackenzie found the scheme could have significant and lasting impacts on the east coast gas market, including:

• Less domestic production: The must-sell obligation could displace up to 39 PJ of supply from smaller, domestic-focused producers in a single year, because "compelled LNG exporters must sell gas at any price, whether commercial or not".
• Less investment: Artificially suppressed prices could delay or prevent new gas projects. “Prices driven below those costs [of production] would halt exploration and appraisal, render pre-FID projects uninvestable, reduce sustaining capital, and ultimately force exit.”
• Less competition: The scheme could increase LNG exporters' share of domestic gas supply from around 22 per cent in 2028 to approximately 60 per cent by 2045, while encouraging acquisitions of existing gas production over investment in new supply.
• Higher long-term supply risks: Reduced investment could leave the east coast structurally undersupplied from the early 2040s, increasing the risk of reliance on imported LNG and exposure to international prices.
• Reduced exports: Even assuming existing LNG contracts are protected, Queensland LNG exports could fall by approximately one to two million tonnes annually – equivalent to up to 17 per cent of forecast exports by 2043 – through the 2030s and early 2040s as investment declines.

The analysis also shows why the government's proposed 10 per cent oversupply buffer won't work. Wood Mackenzie found: "The 10% of supply that cannot find a domestic gas buyer cannot be cleared, and as there is no physical means of converting or continuously storing that gas, it will remain unproduced."

The analysis aligns with the Government’s own Impact Assessment, which found the scheme may reduce domestic gas production, investment and LNG exports. The Government has so far refused to release the modelling behind these findings.

Ms McCulloch urged the government to work with the Coalition on practical amendments to address the legislation's serious flaws.

"A gas reservation scheme should deliver reliable and affordable gas for households and businesses while encouraging the competition and investment needed to bring new supply into the market.

"The current reservation design fails this test and falls short of the legislation’s own objectives.

"We welcome the Coalition’s recognition that the bill should not be passed without addressing industry concerns and encourage both parties to work constructively to deliver a scheme that strengthens energy security and delivers lasting benefits for Australian households and businesses."

Read the report: Woodmac Energy.