Summary

What is gas?

Petroleum resources include oil, conventional gas and unconventional gas. Conventional gas and unconventional gas is the same product: natural gas, which primarily consists of methane. There are three types of unconventional gas: coal seam gas, shale gas and tight gas. Conventional and unconventional gas may be converted to Liquefied Natural Gas (LNG). LNG is natural gas that has been cooled to approximately -160^oC until it forms a liquid. This makes it easier and cheaper to transport long distances in LNG tankers to markets.

Gas resources are classified according to geological certainty and economic feasibility [see Appendix 1]. In order of declining economic feasibility, petroleum resources may be defined as Reserves, Contingent Resources or Prospective Resources. Reserves are further broken down into three categories in accordance with the level of certainty that the quantity actually recovered will equal or exceed the estimate: 1P (proved) reserves have a 90% certainty level, 2P (proved & probable) reserves have a 50% certainty level and 3P (proved, probable & possible) reserves have a 10% certainty level. [2.1]

Australia’s regional gas markets

There are three geographically and economically distinct gas markets in Australia: the western market (Western Australia); the northern market (Northern Territory); and the eastern market (ACT, NSW, Queensland, South Australia, Tasmania and Victoria). Physically, the eastern market is the largest and most mature, competitive and interconnected gas market in Australia. The western market is the largest market in terms of production, and the northern market is the smallest of the three. [2.2]

The gas supply chain

The gas supply chain is comprised of a number of distinct stages. The upstream sector generally encompasses exploration, development and production. Downstream sector activities include processing, distribution, storage, wholesaling and retailing. [2.3 & 2.4]

The upstream gas sector

Several key statistics on the upstream sector are as follows:

· in 2011-12, six major producers met 65% of domestic gas demand: Santos, BHP Billiton, ExxonMobil, Origin Energy, Woodside and Apache Energy;

· in 2012, the six companies with the largest shares of 2P gas reserves in Australia together held 61% of the total (85,120 petajoules or PJ): Chevron, Shell, ExxonMobil, BG, Inpex and Woodside;

· in 2012, the six companies with the largest shares in 2P gas reserves in the eastern market together held 66% of the total (48,858PJ): BG, Origin, ConocoPhillips, Santos, PetroChina and Shell; and

· in 2012, four companies held 99.4% of total 2P gas reserves in NSW (2,824PJ): Santos, AGL, Metgasco and EnergyAustralia. [2.4.3]

The downstream gas sector

Gas is transported to markets by pipeline or in LNG tankers. Australia’s gas pipelines are privately owned. In the eastern market, APA Group and Singapore Power International (through its subsidiary Jemena) are the principal owners in the transmission sector. Envestra and Singapore Power International (through its subsidiaries Jemena and SP AusNet) are the principal owners in gas distribution. [2.5.1]

The types of transportation contracts and services available in eastern market transmission pipelines depend upon the pipeline in question. In Victoria, gas shippers bid daily for transportation services through the Victorian Declared Wholesale Gas Market. In all other States, transport services are supplied by bilateral contracts between the pipeline owner and the gas shipper. [2.5.2]

Wholesale gas supply contracts are bilateral contracts between producers and large buyers (e.g. retailers, large industrial companies, mining companies, gas fired generators and LNG exporters) that set out the volume of gas to be supplied, the price to be paid and other terms and conditions. Historically, the wholesale supply of gas in Australia has been underpinned by long term contracts of ten or more years, enabling producers, pipeline owners and large end-users to underwrite significant capital investment. Currently, the predominant form of contracting in the eastern market is a mix of medium (1 to 3 years) and long-term contracts. [2.5.3]

Several facilitated markets allow for some wholesale gas trade, enabling participants to trade any gas supply imbalances that arise on a day-to-day basis because their actual demand differs from their contracted supply. The availability of gas market information has been boosted through the operation of the National Gas Bulletin Board and the Australian Energy Market Operator’s (AEMO) annual Gas Statement of Opportunities (GSOO). A new gas market brokerage hub, to be opened at Wallumbilla, Queensland in 2014, is expected to further enhance the transparency of gas trading. [2.5.4]

Gas retailers buy gas in wholesale markets and package it with network services for sale. NSW is the only State that regulates retail gas prices. In 2013, the Australian Energy Market Commission (AEMC) reviewed the NSW gas retail market and found that competition is delivering benefits to the majority of small gas consumers. Consequently, it recommended removal of gas price regulation. The NSW Government is preparing its response to the recommendation.

As of 30 June 2012, AGL held the largest share of the residential gas retail market in NSW, with 63% (696,616) of customers. EnergyAustralia and Origin Energy held the next largest shares with 22% and 8% respectively. AGL, EnergyAustralia and Origin Energy also hold the three largest shares of the non-residential gas retail market, with 71%, 13% and 9% respectively. [2.5.5]

Key gas statistics

Table 1 presents key 2011-12 gas statistics. 2012-13 data is only available for gas exploration and production. In Australia, exploration expenditure rose from $897.4 million in June 2012 to $1,137.3 million in June 2013. Over the same period, NSW exploration expenditure is projected to grow from $65 million to $112 million. Total Australian production rose from 2,256 PJ in 2011-12 to 3,023PJ in 2012-13. Eastern market production rose from 667PJ to 1,006PJ. [3.0]

Table 1: Key gas statistics (2011-12)

Indicator	NSW	Eastern market	Australia
Reserves
Gas reserves (2P) (PJ)	2,885	48,498	139,010
Gas reserves (total) (PJ)	95,003	422,478	912,166
Conventional gas reserves (2P) (PJ)	0	7,344	98,249
Coal seam gas reserves (2P) (PJ)	2,885	41,154	41,154
Shale and tight gas reserves (2P) (PJ)	0	0	0
Exploration
Exploration expenditure ($m)	$65m	$211m	$897m
Expenditure (5-yr av ann growth)	3.3%	6.3%	2.8%
Production
Production (PJ)	6	667	2,256
Production (5-yr av ann growth)	1.4%	7.8%	8.0%
Projected production (2034-35)	-	2,836	8,092
Projected av ann growth 2012-13 to 2034-35	-	4.8%	4.6%
Consumption
Consumption (PJ)	165	839	1,401
Consumption (5-yr av ann growth)	6.1%	2.5%	1.8%
Projected av ann growth 2012 to 2032	0.8%	1.1%	-
LNG exports
LNG exports (PJ)	-	-	1,090
LNG exports ($m)	-	-	$12,005m
Projected LNG exports (PJ) (2018+)	-	1,916	6,351
Prices
Wholesale price ($/GJ)	$2.46	-	-
LNG price ($/GJ)	-	-	$11.46
Retail price ($/GJ)	$24.80	-	-

As of December 2011, approximately 8,300PJ of 2P gas reserves in the eastern market were domestically contracted/earmarked. 40,298PJ (76.6%) of gas was contracted/earmarked for LNG export. Approximately 4,000PJ of gas was uncommitted, being available for either the domestic or export market. [3.1]

Table 2: Contract status of 2P gas reserves in the eastern market

Reserves	Total 2P	Domestic		LNG		Uncommitted
		Contracted	Earmarked	Contracted	Earmarked
Conventional	7,344	3,141	220	750	607	2,625
Coal seam gas	41,154	3,324	1,595	26,168	12,773	1,419
Total	48,497	6,465	1,815	26,918	13,380	4,043

As of 1 November 2013, there were 47 current petroleum titles in NSW. A further 19 petroleum title applications were with the Government awaiting assessment. AGL holds the largest number of petroleum titles, being in possession of five exploration licences and five production licences with one production licence application pending. Santos is the only other company in possession of a current production licence. Two production licences submitted by Metgasco and AGL are being assessed. [3.2.1]

Table 3: Petroleum titles in NSW (November 2013)

Petroleum title applications		Current titles
Title	No.	Title	No.
Petroleum Exploration Licence Application	10	Petroleum Assessment Lease	1
Petroleum Production Lease Application	2	Petroleum Exploration Licence	39
Petroleum Special Prospecting Authority	7	Petroleum Exploration Permit	1
		Petroleum Production Lease	6
Total	19	​	47

In 2012-13, regulated residential and business gas bills in NSW varied substantially by retailer (see Table 4). Between 2012-13 and 2013-14, IPART expects regulated gas bills to rise by 9.2% for all AGL customers and between 5.2-5.8% for the customers of all other retailers. According to IPART, network costs will account for 48% of the total increase, retail and wholesale costs 47% of the increase, and the carbon component the remaining 5%. [3.7]

Table 4: Indicative annual gas bills in NSW (nominal $, inc GST)

Residential customer			Business customer
Retailer	2012-13	Av ann growth 2009-10 to 2012-13	Retailer	2012-13	Av ann growth 2009-10 to 2012-13
AGL	$822	10.0%	AGL	$3,864	3.7%
ActewAGL	$1,217	2.2%	ActewAGL	$4,423	2.2%
Origin Energy (Wagga Wagga)	$965	1.7%	Origin Energy (Wagga Wagga)	$3,262	5.3%
Origin Energy (Albury/Murray Valley)	$886	6.0%	Origin Energy (Albury/Murray Valley)	$3,133	-3.3%

History of gas developments in Australia

Government involvement in the gas industry may take place for several reasons, including achieving energy security, encouraging and regulating development of Crown owned petroleum resources, and regulating gas transmission and distribution pipelines due to their natural monopoly characteristics. Two economic ideologies have influenced gas developments in Australia: economic nationalism and economic liberalism. Nationalism emphasises national industrial capacity and self-sufficiency while liberalism stresses the importance of free trade and market forces.

In broad terms, the economic nationalism that dominated government policies in the 1970s has given way in recent decades to an emphasis on economic liberalism. While the 2000s and early 2010s have seen further liberalisation of the gas industry, there has also been significant debate over the merits of a signature nationalistic gas policy option: domestic gas reservation. Domestic gas market reforms took place under a 2004 intergovernmental agreement – the Australian Energy Market Agreement – and included introduction of the National Gas Law and National Gas Rules, and several facilitated gas markets. In 2006, Western Australia adopted its WA Government Policy on Securing Domestic Gas Supplies. In 2009, Queensland adopted its Prospective Gas Production Land Reserve (PGPLR) policy.

Current COAG Standing Council on Energy and Resources gas reforms are focused on an increased role for markets, improved gas market information, effective regulation and improved pipeline capacity trading. The Australian Energy Market Commission is planning to create a strategic plan for gas market development. [4.1]

The upstream regulatory framework

Under Australian law, petroleum (including natural gas) and mineral resources are generally owned by the Crown. Onshore petroleum and mineral resources are owned and regulated by State and Territory Governments, while the majority of offshore resources are controlled by the Commonwealth, depending on the location of the resource with respect to the territorial sea baseline. Commonwealth resources are regulated under the Offshore Petroleum and Greenhouse Gas Storage Act 2006. NSW resources are regulated under the Petroleum (Offshore) Act 1982 and the Petroleum (Onshore) Act 1991. [4.2.1 & 5.1]

The downstream regulatory framework

The downstream sector is regulated under National, State and Territory legislation. The National Gas Law and National Gas Rules regulate some transmission pipelines and all distribution pipelines, the Gas Bulletin Board (GBB), the Victorian Domestic Wholesale Gas Market (DWGM) and the Short Term Trading Markets (STTM). The arrangements applying to retail markets in those jurisdictions that have implemented the National Energy Customer Framework, including NSW, are set out in the National Energy Retail Law and the National Energy Retail Rules.

A number of bodies hold key regulatory functions and responsibilities:

· the COAG Standing Council on Energy and Resources develops and administers the legislative framework and provides policy direction;

· the Australian Energy Market Commission is responsible for market development and rule-making;

· the National Competition Council advises on regulation of gas scheme pipelines;

· the Australian Energy Regulator is responsible for the economic regulation of pipelines, monitoring trading activity in the DWGM and STTMs, and monitoring compliance with the National Gas Rules;

· the Australian Energy Market Operator operates the DWGM, STTMs and Gas Bulletin Board, prepares the annual Gas Statement of Opportunities, and operates the gas retail markets in NSW, the ACT, Queensland, South Australia and Victoria;

· the Australian Competition Tribunal conducts merits based reviews of regulatory decisions and the Federal Court of Australia carries out judicial reviews; and

· the NSW Independent Pricing and Regulatory Tribunal (IPART) provides for regulated retail gas prices for residential and small business customers in accordance with the Gas Supply Act 1996 (NSW). [4.2.2]

Domestic gas reservation policies

At present, Western Australia and Queensland are the only States which implement any form of domestic gas reservation. The Commonwealth and the remaining States and Territories do not implement reservation policies for their respective offshore and onshore resources.

In the Energy White Paper 2012, the Gillard Government affirmed its opposition to a domestic gas reservation policy, a standpoint confirmed by the current Industry Minister Ian Macfarlane in a speech to the Energy Users Association of Australia. The Abbott Government is in the early stages of drafting a national energy White Paper and an east coast gas supply strategy which will make clear its official position on this and other energy reform agendas. [5.0]

Western Australia domestic gas reservation policy

A domestic gas reservation policy has been in place in Western Australia, at least in principle, for some time. Prior to 2006, two State Agreements underpinned reservation policy in WA. The first State Agreement was applied to the North West Shelf (NWS) LNG project in 1979 and is legislated under the North West Gas Development (Woodside) Agreement Act 1979. The other State Agreement was applied by the State Government to the Gorgon LNG project and is legislated under the Barrow Island Act 2003. [6.1]

In 2006, a formal reservation policy, WA Government Policy on Securing Domestic Gas Supplies, was adopted by Premier Alan Carpenter, and later reaffirmed by the Barnett Government. Like previous reservation arrangements, this policy is enforced using individual State Agreements. The Pluto LNG project, which is located in the Carnarvon Basin north-west of Karratha, was approved for development in July 2007 conditional on it complying with the State’s reservation policy. The Natural Gas (Canning Basin Joint Venture) Agreement Act 2013, which applies to the gas development in the onshore Canning Basin, is also consistent with the State’s reservation policy. The Agreement provides that if commercially viable gas is discovered by mid-2016, the parties must submit a plan for construction of the domestic gas project, which will include a 600km pipeline south to Western Australia’s existing Pilbara gas network.

In the absence of a Commonwealth reservation policy, producers can conduct all processing offshore using FLNG plants to avoid becoming subject to the WA reservation policy and there is evidence to suggest that this is already occurring. [6.2]

Queensland domestic gas reservation policy

The uncertainty around gas supply and the risk of sharply rising prices saw the Queensland State Government introduce the Prospective Gas Production Land Reserve (PGPLR) policy. In May 2011, the Queensland Government passed the Gas Security Amendment Act 2011, which amended the Petroleum and Gas (Production and Safety) Act 2004 to enable implementation of the PGPLR policy. Under this policy, the State may, when granting a production license, require that any gas produced from an area be supplied domestically. To date, no gas field has been set aside for domestic gas only development. [7.0]

Stakeholder perspectives

Given the respective vested interests of stakeholders on either side of the policy spectrum, domestic gas reservation has divided opinion which is reflected in the contrasting policy perspectives to date. Manufacturing Australia, for example, argues that expected gas shortages and price expectations have impacted investment decisions and contributed to plant closures. They also argue that intervention by State and Federal governments is urgent and necessary and should be in the form of a reservation policy. The Australian Petroleum Production and Exploration Association, on the other hand, argues that domestic gas reservation is highly dangerous, short-sighted and self-interested; and that this policy would impair local gas supply and affordability, rather than improve it. [8.0]

Economic effects of domestic gas reservation

There are potential supply and price benefits for wholesale consumers from domestic gas reservation. In the short term, a fixed proportion reservation policy would guarantee a quantity of gas be supplied domestically, irrespective of domestic demand, which may place downward pressure on prices. The gains to wholesale gas consumers from lower gas prices, however, would be offset by the losses to producers who are obliged to sell a share of their production at a lower price. With diminished returns and weak investor sentiment, some analysts argue that a reservation policy may reduce prospective upstream investment and result in lower production and higher domestic prices in the long run. [9.0]

International gas market policies

International approaches can provide useful indictors for Australia, with different policies yielding contrasting price and supply outcomes. A review of selected jurisdictions suggests that wholesale government interventions have generally been unsustainable and have tended to reduce domestic gas prices in the short term, followed by perverse economic outcomes over the longer term, including: reduced foreign investment; stagnant or negative production growth; strained government budgets; and/or inefficient energy usage. Conversely, it is suggested that moderate government intervention, as evident in the United States and Canada, may be more economically viable in ensuring domestic gas supply. [12.0 & 13.0]

Outlook for domestic prices: factors and forecasts

Once east coast LNG exports commence, Australia will become a significant net exporter of gas. Prospective domestic prices in both the eastern and western markets will then be linked with the netback price (i.e. the LNG sale price, less the costs incurred in producing and transporting the LNG to the point of sale) and largely influenced by highly variable international supply and demand factors. If a national reservation policy is implemented, and depending on the extent of this policy, the domestic market would be disconnected from the international market. In this case, domestic supply and demand variables will have a greater influence in determining domestic prices, which at least in the short run, are likely to be lower than the netback. With or without a reservation policy, the price outlook is highly uncertain because of exposure to domestic and international supply and demand variables. [10.0]

Estimates of the costs and benefits of a reservation policy

Two studies have estimated the net economic effects of introducing a domestic gas reservation policy. The first, commissioned by the Australian Industry Group (AIG) and the Plastics and Chemicals Industries Association (PCIA), examined the net effects specific to the east coast market. The second, commissioned by the Australian Petroleum Production and Exploration Association (APPEA), examined the net effects to the national economy of a reservation policy.

As these Associations are gas consumer and producer groups respectively, they represent different sides of the policy debate, each with vested interests in whether a reservation policy is implemented. Unsurprisingly, the two studies used different methodologies and produced contrasting sets of estimates of the costs and benefits of reservation. The National Institute of Economic and Industry Research (commissioned by AIG and PCIA) estimated the net annual GDP cost of unrestricted east coast LNG exports to the Australian economy to be $22 billion (2009 dollars) in 2040; while Deloitte Access Economics (commissioned by APPEA) estimated the net annual GDP cost of a national reservation policy to be $6 billion (2011-12 dollars) in 2025.

Aside from these estimates, the economic costs and benefits of domestic gas reservation have been largely discussed at a theoretical and conceptual level to date, with arguments presented from both sides of the policy debate. The costs and benefits of reservation would ultimately have to be quantified independently to fully appreciate the net effect of such a policy on the Australian economy. [9.5]

International implications of a reservation policy

The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement regulating international trade which is still in effect under the World Trade Organisation (WTO) framework. As a member of the WTO, Australia has legal obligations under this agreement which, among other things, includes rules regarding export restrictions. This may be of relevance if a national domestic gas reservation was implemented.

Article XI of the GATT prohibits export restrictions “other than duties, taxes or other charges” but allows exceptions to alleviate critical shortages of essential items or when the restrictions are necessary to enforce classification standards. It is highly unlikely that either of these exceptions could be reasonably invoked by Australia with respect to domestic gas reservation. Article XX allows a country to ignore Article XI and impose export restrictions if they meet very specific requirements. Export restrictions may be imposed if they are “necessary to protect human, animal or plant life or health”; or if they relate “to the conservation of exhaustible natural resources”. However, as an additional requirement, in order to qualify for either exception, Australia would have to impose restrictions on domestic production and consumption of natural gas as restrictions cannot be limited to LNG exports.

It is unclear as to whether or not the WA and Queensland domestic gas reservation policies would be in breach of GATT Article XI. Other countries with a gas reservation policy, such as Egypt, have not been subject to a WTO dispute case. [11.1]

Australia is also a signatory to a number of free trade agreements (FTAs) which contain provisions that are consistent with Article XI of the GATT and prohibit quantitative restrictions on imports and exports. It is difficult to ascertain what obligations individual States have under these FTAs and what would specifically constitute a breach of these quantitative restrictions.

With regards to the investment interests of foreign corporations, it appears that implementation of a domestic gas reservation policy may be in breach of FTA provisions if the policy infringes upon existing gas rights. Based on analysis by Martignoni and Nygh (2010), were the Western Australia or Queensland policies to be implemented in a manner that infringed on existing gas rights, it appears that they may breach one or more FTA provisions. For example, the Western Australia policy could breach Chapter 11, Art 9 of the ASEAN FTA, which prohibits indirect expropriation. The Western Australia policy could also breach the Fair and Equitable Treatment Standard of a relevant FTA, by failing to honour an investor’s reasonable and legitimate expectations. Further, both policies could breach Chapter 8, Art 19 of the ASEAN FTA which, following GATT Article XX, relates to the conservation of exhaustible natural resources. [11.2]