PERTH (miningweekly.com) – Australian gas producers have warned that the federal government’s cap on gas prices would undermine the incentive to explore and development gas opportunities in the country, echoing concerns raised by the Australian Petroleum Production and Exploration Association (Appea).

Oil and gas major Woodside on Tuesday said that while it fully supported government policies aimed at bringing down the cost of living pressures in Australia, the broader plan to intervene in the Australian gas market would not meet this objective, and could in fact, make matters worse.

The company said in a statement that a policy of such significance, proposed without any meaningful consultation with industry, created an environment of uncertainty that would result in investment activity dropping across energy markets, making solving the underlying structural problems in the energy market harder, not easier.

Woodside has called on the federal government to reconsider this unprecedented intervention and bring energy companies, retailers, manufacturers and infrastructure owners together to properly engage on a solution.

“The Prime Minister last Friday correctly acknowledged that Australia has not invested enough in its own energy security. And yet the unprecedented market intervention announced risks driving investment out of the system,” said CEO Meg O’Neill.

“That investment, including in natural gas, is crucial to support renewable energy sources as we strive to decarbonise without the lights going out. The policy will not address falling domestic gas supply and the increasingly critical role of gas in providing dispatchable power.

“These are the primary factors that are driving higher energy prices in the east coast gas market, rather than solely the impact of the tragic war in Ukraine. We need to unlock gas supply now. For example, Woodside has been looking at options to increase supply, including through new liquefied natural gas (LNG) import terminals, exploration spending and further development on the east coast. Unfortunately, the proposed market intervention will make it very difficult for industry to economically invest to increase supply.

“No one wants to see energy shortages and gas rationing. We must develop a comprehensive, longer-term solution that addresses gas supply and reliability, the overall energy mix and infrastructure, without undermining the market-based economy,” she said.

Takeover target Beach Energy CEO Morné Engelbrecht said that the "so-called reasonable price provision" touted by the Commonwealth government would cause irreparable damage to the investment environment desperately needed for gas exploration and development, and in turn energy security and future prices in Australia.

“This unprecedented move goes well beyond the temporary price-cap, which itself will damage the investment environment in Australia, leading to more gas shortages and higher power prices in the long term.

“How can the government expect to impose a regulated price on gas exploration and development where significant upfront capital investment, exploration success risk and the multi-decade nature of projects are par for the course?

“If the energy market is subjected to permanent pricing intervention, the government must be upfront about whether other industries will have their 'reasonable price' determined by the government as well,” Engelbrecht said.

“Should the government set a reasonable price for large household expense items such as groceries and motor vehicles? The answer to this question is of course ‘no’, and the same must be said for temporary or permanent meddling in the energy market, which is under threat of being completely dismantled.

“Instead, the answer to this crisis is right under everyone’s noses; work with us to increase gas supply which will bring downward pressure to energy prices.”

ASX-listed Cooper Energy told shareholders that the proposed gas price cap was not expected to apply to the company’s 2023 sales, given that 85% of the company’s gas sales for the year were under medium- and long-term gas sales agreements, with the remainder sold at spot volumes.

However, MD David Maxwell said that the government’s proposed intervention would create significant additional uncertainty and constraints on the gas exploration and production industry.

He said that this intervention was a significant disincentive for companies to explore and pursue new supply, and as such, it was imperative that the price cap be restricted to 2023 only and that the mandatory Code of Conduct be very explicit in its support for market pricing not only to remove any uncertainty but, actively encourage gas exploration and development.

“To maintain reliable supply and mitigate against gas and electricity supply interruptions and/or much higher prices because of a dependence on imported LNG, the government must focus on supporting domestic gas suppliers, such as Cooper Energy, to develop new competitively priced gas supply. This is the logical path to reducing the supply deficit and managing gas prices,” Maxwell said.

The federal government on Friday last week announced a temporary cap on both gas and coal prices as part of its Energy Price Relief Plan.

To tackle the high gas prices, the Commonwealth is introducing a 12-month emergency gas price cap, to be set at A$12 per gigajoule on new wholesale gas sales by east coast producers subject to consultation.

The cap will apply to new wholesale contracts with east coast gas producers for 12 months from December 2022, with a review by mid-2023. Gas from undeveloped fields and gas sold through the short term trading markets and the Victorian declared wholesale gas market will be exempted from the cap, minimising the impact on supply incentives and short term price signals in these important balancing markets. 

A mandatory code of conduct will also be introduced for the wholesale gas market that includes a reasonable pricing provision, accelerating the introduction of the Australian Domestic Gas Security Mechanism, and boosting resources for the Australian Competition and Consumer Commission (ACCC) for implementation, monitoring and enforcement.

The code will apply to contracts between gas producers and their customers in the east coast market, and the government will undertake consultation on the scope of the code and whether it should be expanded to wholesale contracts sold by other market participants. The ACCC will continue to closely monitor and report on the behaviour of all market participants, including energy retailers, and take enforcement action where required to ensure competition across the market.

The code will include a provision for reasonable pricing. This will provide a basis for producers and buyers to negotiate domestic wholesale gas contracts based on guidance on reasonable pricing from the ACCC, which will reflect the long-run costs of domestic production and an appropriate return on capital. If producers and buyers are unable to agree, they may seek a binding arbitration determination.

Stakeholders have until December 15 to give feedback on the price cap before it is written into law, and until February 7 to comment on the mandatory code of conduct.