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1 May 2024
Insight
On 22 February 2024, the Economic and Industry Standing Committee of the Legislative Assembly of the Western Australian Parliament (the Committee) tabled in State parliament an Interim Report on its inquiry into the WA Domestic Gas Policy (the Policy).1
First introduced in 2006, the Policy was designed to secure enough gas to provide for the State’s energy needs and economic development into the future by governing the approval process of liquefied natural gas (LNG) projects within Western Australia. The Policy presently requires LNG producers to take measures to ensure adequate supply of gas for local use, including by reserving 15% of LNG production from each WA export project for domestic gas consumption.
The inquiry has been driven by recent forecasts issued by the Australian Energy Market Operator (AEMO), who presented the Committee with evidence that WA is likely to experience a shortfall of gas in the short and medium term.2 Given the expected shortfalls, the inquiry investigated the operation of the Policy, and found that it is no longer remained fit-for-purpose.
The Interim Report sets out the Committee’s preliminary findings on the efficacy of the Policy, to engage with gas market participants and the wider WA community on potential solutions to the expected gas shortfall. The full report, including the Committee’s recommendations, is expected to be finalised and tabled on 30 May 2024.
Key Takeaways
- AEMO expects the WA gas market to experience a shortfall from as early as 2024, which will continue for most of the next decade. However, in light of recent reports of a similar decline in local gas demand, it remains to be seen whether AEMO’s forecasted shortfall will be as severe as anticipated.3
- With the WA gas market facing extended periods of significant shortfall in the gas market, the Policy is no longer fit-for-purpose. Many stakeholders have concerns that the Policy is unable to respond to the evolving market, specifically, stakeholders believe the Policy lacks consistency and clarity, transparency on compliance, and provides inadequate compliance and enforcement mechanisms.
- Given the risk of a shortfall is credible, the Committee believes there is a strong case for the WA Government to intervene, which could include a legislative response.
The Forecast Shortfall
Over the next decade, the demand for gas, both domestically and international, is expected to grow. AEMO projects that the WA domestic gas market will be in deficit between 2024 and 2029, with committed and expected projects up to 11% below forecast demand.4 From 2030 onwards, further gas supplies are forecast to be required to meet increasing demand to prevent WA from facing an increasing deficit. By 2033, gas supply shortages peak at a deficit of 355 terajoules per day (or 27% of WA’s domestic gas demand at the time).5
Findings in the Interim Report
The Policy is not set out in legislation but is instead given effect through contractual agreements between LNG project developers and the State (such as state agreements, domestic gas producer agreements and domestic gas commitment agreements).
Although each agreement is different, the Policy requires LNG export project developers to commit to making gas available in the WA domestic market by:
- reserving 15% of LNG production from each export project for domestic gas consumption;
- developing and obtaining access to the necessary infrastructure to meet domestic gas commitments; and
- showing diligence and good faith in marketing and making gas available to existing and prospective domestic consumers.
The Policy is currently providing a degree of certainty about how LNG producers should supply gas to the domestic market, and at what levels. However, concerns have been raised about the Policy’s ability to respond to the evolving market and the State’s interest when circumstances change.
The final report intends to provide recommendations on how the Policy can be improved, but the key findings on the Policy so far, include:
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Key Issue |
Description |
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Lack of consistency and clarity |
Concerns have been raised about the Policy’s lack of clearly stated objectives and enforcement mechanisms. Given the various agreements with LNG exporters contain obligations which have been negotiated by the State at a particular point in time, this has led to differences in the nature and obligations in each agreement (including in reporting requirements). |
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Lack of transparency on Policy compliance |
Some stakeholders have noted concerns that some gas producers are subject to clear obligations that are publicly accessible, whilst other arrangements have not been publicly disclosed and it is unclear the extent of their obligations are concrete and legally enforceable. Although each joint venture participant in an LNG export project is individually responsible for its obligations and must individually report to the the Department for Jobs, Tourism, Science and Innovation (JTSI)– public reporting by JTSI on compliance only occurs at the project level. This has been highlighted by a number of stakeholders, as a way in which obligation holders are not kept accountable in the public eye. |
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Inadequate compliance and enforcement mechanisms |
The Policy assumes that gas producers will act in ‘good faith’ and adhere to spirit of the Policy. Many stakeholders have concerns that the reliance on gas producers to act in good faith, without any enforcement mechanisms, exposes the domestic gas market to the risk that gas will not be delivered in a timely manner. As part of the annual compliance process under the Policy, JTSI collects data from the domestic gas commitment holders. Since their commitments started, the information collected from the JTSI suggests that LNG produces have delivered an average around 8% of domestic gas relative to LNG exports (just over half on what is required to be reserved under the Policy). There is a considerable variation between producers, and the JTSI has observed that some are not operating within the spirit of the policy. Projects which were not complying with the Policy were not named in the interim report, but could be identified once the final report is published. |
Possible Market Intervention
As a result of AEMO’s forecasted shortfall in domestic gas figures, the Committee believes that there is a case for government intervention to ensure an adequate amount of domestic gas is supplied to the WA market, and that this could include a legislative response (whilst recognising this response should be sensitive to sovereign risk issues). Nevertheless, the Committee believes industry-led responses to the forecast domestic gas shortfall are preferred and to be encouraged, which could ultimately lead to government intervention becoming obsolete. This means that further expectations on, and commitments from, the local LNG industry on measures to address the potential shortfall may be imminent.
Some of the possible market interventions identified to alleviate the shortfall (which the Committee acknowledged range from modest to severe) include:
- Improve the approvals process: The consensus amongst gas users and producers is that the existing approvals process for proposed gas projects contains various inefficiencies. Stakeholders reported that those wanting to begin gas exploration activities or bring new developments online must generally obtain permits from multiple State and/or Commonwealth Government agencies which results in unnecessary duplication and regulatory conflict.
- Changes to the pipeline specification: Submissions from Strike Energy and Santos noted that broadening the pipeline specifications for gas sold in WA would increase gas availability given the current WA specifications are harder and more costly to meet than their east coast counterparts.6
- Permit onshore producers to export LNG: If permitted to export to higher priced LNG market, LNG producers would be encouraged to invest more in exploration, development and production (in addition to receiving access to deeper pools of international capital).
The Committee considered various measures such as improving the Western Australia Gas Statement of Opportunities, expanding the Western Australia Gas Bulletin and creating a trading market or hub.
The Committee considered whether the gap between domestic gas prices and LNG netback could be addressed by allowing the domestic gas price to float but emphasised that eastern states experience has demonstrated the range of serious consequences for the WA economy and citizens, including expensive electricity, risk of loss of industry and increased cost of living for households. Alternatively, thought was also given into taking an east coast approach and regulating the wholesale market by implementing something similar to the Mandatory Gas Code of Conduct.
Some solutions to securing more volumes included capturing and clarifying the Policy in legislative form, updating the Policy (including increasing the 15% reservation) for future LNG export projects, requiring prodcuers to offer spare gas to the domestic market before exporting, a reserve capacity mechanism for gas (along the lines of the Reserve Capacity Mechanism in the SWIS electricity market), activating the Australian Domestic Gas Security Mechanism (or creating a specific mechanism for Western Australia), emergency interventions, or implementing a formalised “use it or lose it” policy that will see production licences lost if economically viable gas is not extracted and sold from a permit area within a specified period.
Although not discussed in great detail, the Committee noted measures to reduce gas demand may be considered further in its final report. Such demand side measures may include green hydrogen development in the Pilbara, encouraging and facilitating major gas users to switch to non-fossil gas alternatives, and opportunities to convert the South West Interconnected System to renewable energy backed by battery and other storage.
- Economics and Industry Standing Committee, Inquiry into the WA Domestic Gas Policy: Interim Report, February 2024.
- Notably, since AEMO’s forecasts, local demand for gas has also been reported to have fallen: see for example Woodside’s comments in the Australian Financial Review on 13 March 2024.
- ‘Nickel miners’ pain is gas market’s gain, says Woodside’, AFR.
- Australian Energy Market Operator, 2023 Western Australia Gas Statement of Opportunities, December 2023, p. 3.
- Ibid.
- Inquiry into WA Domestic Gas Policy, Submission 34, Strike Energy, p.10.
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© Herbert Smith Freehills 2024