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Acknowledgment of Country
I wish to acknowledge the Traditional Custodians of the land we are meeting on today, the Gadigal people of the Eora nation, who have never ceded this land.
I pay my respects to them and their cultures and to their Elders past, present and emerging. I acknowledge their continuing connection to the land, sea and community.
I would also like to acknowledge and welcome any Aboriginal and Torres Strait Islander people who are attending today’s event.
Introduction
Thank you for the invitation to again speak to you at your annual conference.
When I addressed you this time last year, the war in Ukraine was not yet a month old, and its duration, its challenges, and its implications for the world economy and global energy supply were only just beginning to emerge.
Since then, the world, including Australia, has become increasingly focused on the challenges of ensuring that the local demand for energy can be adequately met from available resources at reasonable prices that would prevail in a workably competitive market.
This has lead to a very public debate about aspects of gas markets in Australia and the balancing of the needs of exporters and their offshore clients with the needs of domestic users. A debate that, in my view, has shown the need for all concerned to work together to overcome the issues in the best interest of the nation and the economy.
For years, our role at the ACCC has been to monitor, report on and consider a range of issues including issues involving the pricing and availability of gas supply, and the volume of gas exported and the volume of gas available for local demand.
In my remarks to you today I will speak about our latest gas report, the 14th interim report in our series of such reports, published in January. Our next report unfortunately is not likely to be available until next month, so I am going to focus my remarks on our last report, and some of the developments since.
I will speak first about the supply outlook, both in the short and medium to long term before turning to the outlook for demand, and the recent policy developments.
Supply Outlook
Our last gas inquiry report, published in January 2023, found that the East coast gas market had sufficient supply if LNG producers were to contract an additional30 PJ of their uncontracted gas this year. However, if the Queensland LNG producers exported all of their uncontracted gas the domestic market would be 30PJ short.
We were pleased that this figure was an improvement in the outlook since our report of July last year, which had predicted a shortfall of 56 PJ if the LNG producers exported all their uncontracted gas. Yet at the time of our January report, the domestic market still required gas contracts for 2023 and beyond.
There was also great uncertainty about the level of demand and production, representing a key risk that there would not be adequate supply of gas in 2023.
The uncertainty around the level of demand in 2023 largely relates to the demand for gas-powered generation, which is critically dependent on the prevailing weather, and on the conditions in the electricity market, making it difficult to forecast.
If the gas demand in the electricity sector increases above average or expected levels, the risks of a domestic gas shortfall across the board obviously increases. The variability in gas required for electricity is likely to increase as it takes on a greater role in firming generation during the transition to renewable energy.
The variance and uncertainty of these predictions is evident when you look at AEMO’s predictions from July last year. It highlighted that higher than-average demand for gas-powered generation could result in a domestic gas shortfall as high as 109PJ in 2023. This gas would likely be required from LNG producers.
AEMO’s latest projections from March this year are slightly improved. They identified that there could be a supply shortfall of 33 PJ in 2023, if the upper bound of expected gas-powered generation is required. This will still need LNG producers to sell more domestic gas.
In times of tight global supply of gas, the security of supply has been impacted in a range of countries. Ahead of Europe’s last winter we saw calls for residents to reduce their electricity usage and discussions of the potential consequences of electricity outages due to a shortage of gas-powered generation. While Australia does not suffer the same harsh winters as much of Europe, this is clearly a situation we must aim to avoid.
As you are no doubt aware, the ACCC collects data under notice from industry on their forecast supply and export demand and combines this with the AEMO demand forecast. These numbers change as we get closer to the period in question and there is more certainty. When we release our next report in coming weeks we will include updated supply and demand data.
Over recent years, producers have committed additional gas to the domestic market over time to avoid the predicted shortfall. The options available to meet demand in the short term are otherwise limited. Australia relies on producers making the required gas available.
Since mid last year, LNG producers have told us they collectively expect to export 88 PJ of their 146 PJ of uncontracted gas. This leaves 58PJ of uncontracted gas without the expectation of export, which, if it is produced and brought to market, would leave sufficient gas to address the risk of a shortfall.
But it is not just for producers to prevent the shortfall. Governments also have a role in ensuring sufficient gas supply both immediately and over the longer term.
One tool the Australian Government has available to address the potential of a shortfall in the near term is the Australian Domestic Gas Security Mechanism. As you know, the Government has recently been consulting on changes to the ADGSM, providing the Minister for Resources greater flexibility in when and for how long to enact the mechanism.
Effective regulatory tools, such as the ADGSM, as well as the Heads of Agreement and industry code of conduct, are needed to improve the way the market works and avoid a domestic shortfall. This is partly due to the commercial incentives at play; while LNG producers have capacity to supply more gas domestically, they also have the ability to divert that gas into the export markets as additional or spot sales. This has seen high prices in recent years that, at times, have substantially exceeded the cost of production.
Medium and long term supply outlook
I have focused so far on the short-term outlook, but the supply outlook over the medium and long term is just as important. As many of you know, the ACCC also publishes a longer term outlook, which looks at supply over the coming 10 years, and is based on production forecasts provided by gas producers and demand forecasts published by AEMO.
Over the medium term, we currently expect that from 2024 to 2026, ‘2P’ production will be sufficient to cover domestic gas demand and meet expected LNG export demand based on increased forecast production and forecast demand across the East coast.
This is an improvement from the medium-term outlook set out in our report from July last year. This improvement is due to increased forecast production in the Otway, Surat and Bowen basins, decreased forecast domestic demand and lower forecast additional or spot LNG exports.
But there are still significant risks for the medium-term outlook, including the risk that while supply might be made available, demand may not reduce as much as expected.
On the production side, there are risks stemming from the reliance on undeveloped 2P reserves, and uncertainty around production due to the changing regulatory and policy environment.
Based on the current forecasts, and without more gas being developed and brought to market, shortfalls across the East coast gas market are likely from 2027, based on the levels of expected domestic and export demand. These are not just our predictions, in fact AEMO has expressed similar concerns.
It is also important to look at the situation in a more granular way, as there are significant differences between the northern and southern states of the gas market on Australia’s East coast.
Declining production in the south means that the southern states are likely to face ongoing shortfalls in supply without additional gas from Queensland, where resources are increasingly concentrated.
Because much of the East Coast demand comes from the southern states, this means that gas will increasingly have to be transported south to meet that demand.
Unless new sources of gas are developed in the southern states additional investment is required either in additional pipeline infrastructure or an LNG import terminal to facilitate gas coming in from overseas to meet domestic demand. Investment in new sources of supply, pipeline infrastructure or an LNG import terminal is clearly needed to accommodate the geographic mismatch.
To help the East coast avoid a gas shortfall, there are steps that could reduce regulatory barriers to the development of new supply. Since our first inquiry report in 2016 we have recommended that governments remove moratoria and take a case-by-case approach to approving new gas developments. This is particularly important in the south given the risks of shortfalls.
But as the competition regulator we are also interested in the way the market operates. In our view measures to improve competition are as critically important to preventing the shortfall as efforts to address supply.
Our 2021-22 review of upstream competition in the East coast gas market found that the upstream market was highly concentrated and that competition between gas producers was not effective. It also found that a range of structural factors may be affecting competition and the timeliness of supply.
There are a few things governments could do to improve competition. Governments can help encourage greater diversity and more timely supply by changing processes for releasing gas acreage, as well as monitoring, and enforcing compliance with work programs.
There are also measures that could reduce infrastructure, regulatory and capital barriers faced by producers. One way to do that would be by introducing a third party access regime for upstream infrastructure, and facilitating a more coordinated approach to the development of new transport pipelines.
These measures would likely increase competition by making it easier for new entrants to enter the market, develop new gas fields and compete effectively.
We also found in our review that joint ventures, joint marketing and exclusivity arrangements may be contributing to the lack of effective upstream competition in the East coast.
Further, there is a risk that producers entering into these types of arrangements without ACCC authorisation risk breaking the restrictive trade practices provisions in Part IV of the Competition and Consumer Act. Such ACCC authorisation provides statutory protection from court action for conduct that might otherwise raise concerns under the competition provisions of the CCA.
We are reviewing some of these arrangements to identify any concerns they might raise under the Act and I reiterate our advice that producers should closely consider the legality of any current or prospective cooperative arrangements with potential competitors.
So, to recap, while supply forecasts vary over time, there is a lot that can be done to be ready and act early to prevent a shortfall. It is crucial that governments and industry work together to ensure sufficient gas supply. And it is critical that industry continues to develop and bring new gas to market.
Demand Outlook
The equation about forecasting potential gas shortfalls of course does not rely on available supply alone.
When we develop our gas market outlook, one of the inputs is future demand estimates published by AEMO.
Like with supply there is significant uncertainty about future demand for gas in the East Coast gas market.
The predictions for the long-term outlook are shaped by a variety of factors including the context of broader energy market policy, including government commitments to net-zero emissions targets and the transition from traditional energy to renewable energy.
As Australia shifts towards net-zero emissions targets, it is likely that gas will increasingly support the transition between coal power generation and renewable energy sources. This means that gas remains critical.
However, at the same time, consumers will likely substitute gas for other types of energy, especially in the transition to more renewable energy .
The outlook for the market, and expectations of when and how much new gas will need to be developed, will depend on assumptions made about the demand for gas in the economy and the transition to renewable energy.
Reflecting this difficulty and uncertainty, AEMO publishes several demand scenarios in their gas statement of opportunities, each of which can have significant differences in forecast future demand.
Recent reports by AEMO and the AER have identified several factors contributing to this uncertainty.
The first set of uncertainties revolves around policies to tackle climate change. State governments have implemented various energy policies to reduce carbon emissions, which will have strong influence on future gas demand. One such example is the Victorian government’s Gas Substitution Roadmap which seeks to build that state’s way towards ‘net zero emissions’.
The extent to which states roll out renewable generation will also reduce the level of gas required for electricity generation.
Secondly, in addition to climate change considerations, increasing concern over unpredictable and higher gas prices may prompt consumers to switch to other forms of energy. But it is likely that gas will remain an important fuel source in coming years.
Thirdly, at a consumer level, gas is an important source of space heating for households, especially in Victoria. Moves to replace gas with electric sources of heating will take time, but are expected to eventually reduce the demand for domestic gas.
Further, gas is a crucial input to industry, both as an important source of high heat and as a chemical feed stock in industry, and currently no large-scale, commercially viable alternatives have been identified. This demand by commercial and industrial users is likely to continue for a significant amount of time.
And finally, gas plays a vital role in firming in the electricity network and underpinning the uptake of greater renewable generation.
Predicting demand is extremely difficult. But at the moment, demand forecasts show we will need more gas to be developed.
Policy
In the past the ACCC’s role has been to monitor and report on pricing and availability of gas, as well as making recommendations to Government.
Late last year, the Australian Government asked for our advice to help it address the impact on the domestic gas market of significant volatility and substantial price rises the market was facing.
We made several recommendations to the Australian Government.
Firstly, to address the very high-priced offers observed in late 2022, we recommended that the Government enact a targeted and temporary emergency price cap of $12/GJ for 2023. The Government has described this clearly as an emergency measure.
In our view, this gas price cap has been, and remains, an appropriate response to ameliorate the impact on the East Coast gas market of the disruption that the war in Ukraine has had on global energy markets.
In mid-January 2023 we published guidelines to provide clarity and certainty to the market on how we would enforce the price cap. We have since engaged closely with the industry to identify any remaining areas of uncertainty, noting that the issue of ‘Take or Pay' was a particular concern to industry. In early March, we published updated guidelines, reflecting the key issue raised in our consultation with industry.
Under the emergency gas price order, regulated gas producers and affiliates of regulated gas producers can apply for a price cap exemption and the ACCC has been delegated by the minister to make and publish decisions on those exemption applications.
We have sought to act quickly to provide industry the certainty it needs to continue transacting and investing by publishing the interim guidelines and in dealing with the exemptions application.
Second, we also recommended the Government should implement a mandatory Gas Industry Code of conduct to address pricing and conduct issues in the market.
We are currently working with Treasury and DCCEEW to implement a targeted policy that delivers on the Government’s objective – a regulatory system that provides sufficient domestic gas supply at a reasonable price and on reasonable terms.
Extensive consultation has taken place with industry, led by DCCEWW and Treasury, and I have also met with several of you individually.
We have heard from you about the importance of certainty in enabling much needed investment. And that this certainty is particularly important in relation to requirements for reasonable prices or arbitration.
Government is moving forward to develop the code and our understanding is that it intends to release a code for consultation and finalisation in the first half of the year.
Conclusion
We remain committed to ensuring that the domestic market faces adequate supply at reasonable prices and will continue to engage with stakeholders and Government to develop targeted measures while international prices remain at levels elevated from underlying costs. I appreciate the spirit of engagement from the industry and hope to continue our productive discussions.
Thank you for your time.