24
June 2022
PDF Version [275 KB]
Leah Ferris
Law and Bills Digest
The rising cost of gas in Australia has
led to reports that the recently elected Albanese Government may consider using
the so-called
‘gas trigger’ to stop the export of liquefied natural gas (LNG) and
increase gas supply to Australia’s domestic market.
This Quick Guide sets out the legislative framework which
governs the Australian Government’s ability to restrict gas exports, the
limitations of that framework for addressing rising gas prices, and the trade
law risks that may affect future reforms.
The Australian Domestic Gas
Security Mechanism
On 30 June 2017, the Turnbull Government made the Customs (Prohibited Exports) Amendment (Liquefied
Natural Gas) Regulations 2017 (the LNG Regulations), which amended the Customs (Prohibited
Exports) Regulations 1958 (the Export Regulations) to insert a new
Division 6 into Part 3 of the Export Regulations.
The purpose of these amendments was to establish a framework
for restrictions on the export of LNG to be imposed where the Minister
for Resources (Resources Minister) determines there is a reasonable
prospect of a supply shortage in the domestic market during the following
calendar year (a domestic
shortfall year).
This mechanism is known as the Australian
Domestic Gas Security Mechanism (ADGSM). The ADGSM was developed for the purpose of securing gas supply to
the east coast of Australia due to shortfalls forecast by the Australian Energy Market Operator (AEMO) and the Australian Competition and Consumer Commission (ACCC). The ADGSM was designed to be a ‘short-term and targeted’ measure that would cease on 1 January
2023.
The Explanatory Statement to the LNG Regulations outlines how the
ADGSM operates:
The ADGSM creates two decision points for the Resources
Minister: firstly, the power to determine when a year will be a domestic
shortfall year; and secondly, the power to grant permissions to LNG exporters
to export LNG in a domestic shortfall year. [Emphasis added]
The former Resources Minister published the Customs
(Prohibited Exports) (Operation of the Australian Domestic Gas Security Mechanism)
Guidelines 2020 (the Guidelines), which set out the ‘requirements,
indicative timing, processes, and considerations associated with the operation
of the ADGSM’. In making determinations, the Resources Minister also follows
the ‘Stepped
Process and Timeframes for the ADGSM’.
Determining when a shortfall year
has occurred
The Resources Minister can
only make a determination that a year will be a domestic shortfall year
when they have reasonable grounds to believe that there will not be a
sufficient supply of natural gas for Australian consumers during the year
unless LNG exports are controlled; and that LNG exports would contribute to
that lack of supply.
A determination must
be made on or before 1 November in the preceding year. Therefore, if the
Resources Minister intended to declare 2023 a domestic shortfall year, she
would need to make that determination on or before 1 November 2022. A
determination cannot be made retrospectively.
The Resources Minister must issue a prior notification of
her intention to determine whether the forthcoming calendar year will be a
domestic shortfall year, and she
is expected to write to and consult with:
-
relevant market bodies and agencies (for example AEMO and the
ACCC), requesting advice on the potential for a domestic gas shortfall, and
associated analysis
-
LNG projects, requesting information on gas production, planned
export volumes, etc. (LNG projects are invited to submit their views on the
market outlook)
-
other relevant Australian Government Ministers (including
the Prime Minister, Energy Minister, Industry Minister and Trade Minister)
-
any other stakeholders she considers appropriate.
Importantly, subsection 9(7) of the Guidelines requires the Resources
Minister to consider:
Estimates of the likelihood and extent of a potential
shortfall … developed using a reasonable price … which reflects that Australian
gas consumers (at a wholesale level) should, on average, pay no more for their
gas than the value of that same gas if sold for export. [Emphasis added]
The LNG
‘netback price’ as reported by the ACCC is used for this purpose.
As such, while a ‘reasonable price’ for domestic customers
is indirectly considered as part of shortfall year determination, it is only
for the purposes of estimating the probability that a shortfall year will
occur. Further, the price used for this purpose is linked to export market
prices. If export prices are high, and domestic prices are also high (but not
significantly higher, on average), then the domestic price is considered ‘reasonable’
in this context.
Effect of export controls
If export
controls are invoked, the export of LNG requires permission in writing from the Resources Minister. The Minister
can impose ‘whatever conditions he or she deems necessary and appropriate’ (subsection 11(15) of
the Guidelines), noting that such conditions must still comply with the relevant
provisions in the Export Regulations.
While the
Minister can include conditions relating to the export of gas, there is no
ability for the Minister to require the exporter to decrease the price for the
domestic market.
Once permission has been granted, the Resources Minister
cannot vary the permission unless the exporter agrees. If the exporter does not comply with one of the conditions of
the permission, then the Resources Minister may vary the conditions or revoke
the permission.
‘Heads of’ Agreement with east coast
LNG exporters
In 2017, East Coast LNG exporters established an ‘industry-led,
voluntary and non-binding agreement’ with the Australian Government
committing them to first offer uncontracted gas to the domestic market in the
event of a shortfall (p. 21).
On 21 January 2021, the
Morrison Government announced it had signed a
new Heads of Agreement with major east coast LNG exporters (Australia
Pacific LNG, Queensland Curtis LNG and Gladstone LNG). The Agreement
commits these exporters to:
-
offer uncontracted gas to the domestic market before exporting it
overseas and
-
regard the ACCC’s
LNG netback price when offering gas domestically.
This reflects the design intent of the ADGSM to ensure that
domestic gas prices will be no more than the export value of the gas. However,
nothing in the Head of Agreement would enable the Australian Government to
prevent gas from being exported overseas.
The current agreement operates until 1 January 2023.
Extension of the ADGSM
With the ADGSM set to expire on 1 January 2023, the new
Albanese Government has announced it will seek to renew it ‘as soon as
possible’. This will require amendments to the Export Regulations. The
Resources Minister, Madeleine King, has
also announced that the Government will conduct a review of the ADGSM.
In 2020, a
review conducted by the then Department of Industry, Innovation and Science
recommended that the ADGSM continue operating until 1 January 2023, noting that
‘while there have been clear improvements in the eastern gas market, the market
remains uncertain and persisting pressures still need to be addressed’ (p. 5).
The Review
noted that while the ADGSM can restrict exports:
- ‘Prices would still be determined by market forces in the event
the ADGSM is triggered, and its activation may not deliver a targeted price
level’
- ‘[the ADGSM] does not require LNG exporters to increase sales to
the domestic market, nor at a specified price’ and
-
that ‘it is possible that only a small proportion of any
ADGSM-triggered exports would flow to the domestic market as high-cost
production may be cancelled or delayed’ (p. 34).
In 2018, as part of its National
Platform, the Australian Labor Party (ALP) stated that the ADGSM ‘is a weak
and insufficient policy response that would not provide effective price relief
for households and manufacturers’ (p. 248). They proposed to introduce ‘a new
permanent gas export control trigger, which will be activated if the domestic
gas price rises above a benchmark price, to be set, monitored and policed by
the ACCC’ (p. 248). The ALP’s
2021 National Platform also referred to support for a ‘a price related
export control trigger’ (p. 41).
Trade law risks to reforming the
ADGSM
Any extension of the ADGSM will need to be considered in the
context of Australia’s commitments as a member of the World Trade Organization
(WTO). WTO
rules generally prohibit WTO members from introducing or maintaining any
form of export prohibition or restriction other than duties, taxes or other
charges, except where they have been ‘temporarily applied to prevent or relieve
critical shortages of foodstuffs or other products essential to the exporting
contracting party’.
When introducing the ADGSM, the then Resources Minister,
Matt Canavan, stated that ‘the ADGSM
is a mechanism of last resort to be applied in accordance with our
international trade obligations and will only be used if there will not be a
sufficient supply of gas for Australian consumers’.
Any gas export control trigger that was specifically based
on pricing would need to be carefully
constructed in accordance with WTO rules. Were the Australian Government to
impose export restrictions on gas under the current scheme, it would
likely be required to notify the WTO, including any justification for the
restrictions. This would also provide other trading partners with the
opportunity to raise questions about the operation of the ADGSM through formal
WTO processes, including challenging the mechanism if they viewed it as an
unjustified restriction on trade.
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