Australia Mandates LNG Exporters Reserve 20% of Gas for Domestic Market
Australia will require east coast LNG exporters to reserve 20% of gas for the domestic market under a major policy shift aimed at easing supply shortages and lowering energy prices.
(Reuters) — The Australian government said on May 7 energy exporters must reserve 20% of their natural gas for the domestic market on the country's east coast to avert supply shortfalls and help lower energy bills.
The scheme will apply from July next year and not affect existing contracts, the government said.
Three liquefied natural gas export projects on the east coast operated by Origin Energy, Shell and Santos, respectively, will be affected by the reservation scheme.
In December, the government proposed a plan to reserve between 15% to 25% of gas.
"This is a carefully calibrated model which ensures that Australia's national best interests are put first," Energy Minister Chris Bowen told reporters.
"This is a policy which will obviously not please everyone - often good policy doesn't - but it's good policy."
Bowen said the policy would only apply to prospective contracts and the spot market. It is intended to create a "modest oversupply" of gas in the domestic market to force down energy prices, he said.
"It's going to put downward pressure on prices. And what it will also do is to a certain degree, disconnect Australian gas from spikes in international prices," Bowen said.
Australia is one of the world's largest LNG exporters and ships more gas overseas than it consumes domestically.
But most of the country's large gas reserves are located in the northwest, far from the more populous southeast where demand is concentrated.
The state of Western Australia already has its own reservation scheme that requires offshore export projects to divert 15% of their gas to its local market.
'Historic Shift' in Gas Policy
Resources Minister Madeleine King added the policy was part of broader gas market reforms that involve scrapping the Australian Domestic Gas Security Mechanism, a policy that allows the government to restrict exports from the three east coast LNG plants.
The government will also remove an agreement under which the three exporters committed to offer any uncontracted gas volumes to the domestic market on internationally competitive terms.
"Today is a very important and historic structural shift in Australia's domestic gas market policy settings," King said.
Shares in Santos, which operates the Gladstone LNG project in Queensland, fell 3% in afternoon trading. Origin Energy, which leads rival export consortium Australia Pacific LNG, was down 1.2%. The declines came as energy stocks weakened broadly due to lower oil prices.
Analysts said the impact of the policy was hard to determine, other than as legacy contracts expire, more volumes will be exposed to the scheme. "A meaningful volume" of Australian LNG contracts are due to expire between 2027 and 2029, said Kpler analyst Go Katayama.
The plan had only been expected later this year following discussions with the industry.
"This is a surprise political announcement to distract from the parliamentary gas tax debate and little more," said MST Marquee analyst Saul Kavonic.
The government recently ruled out plans for a gas export tax in next week’s federal budget over fears it could jeopardize relationships with Asian trading partners that send fuels such as gasoline and diesel to Australia.
The policy could also increase perceptions of regulatory risk for investors and make future LNG projects less attractive, analysts said.
"This could reduce incremental Australian LNG supply growth at a time when the market is already facing uncertainty surrounding Middle Eastern LNG supply," said Rystad Energy analyst Masanori Odaka.
Manufacturing Australia CEO Ben Eade backed the policy, saying it will "help underpin manufacturing investment, energy transition and energy security for future generations."