Commonwealth enters new Heads of Agreement to safeguard Australia’s east coast domestic gas market

In July 2017, the Commonwealth Government implemented the Australian Domestic Gas Security Mechanism (ADGSM) to ensure that there is a sufficient supply of natural gas to meet Australia’s domestic demand. In short, the ADGSM allows the Minister to impose export controls on LNG projects where the Minister considers that such measure could increase gas supply to domestic consumers during periods of domestic gas shortfall.

On 1 August 2022, the Australian Competition & Consumer Commission (ACCC) released its Gas inquiry 2017-2025 Interim report (ACCC Report).[i] The ACCC Report forecast that the Australian east coast domestic gas market could be facing a shortage of 56 petajoules of gas in 2023.

In response to the ACCC Report, the Commonwealth Minister for Resources, the Honourable Madeleine King MP, indicated that the Commonwealth Government was considering taking the first steps to triggering the operation of the ADGSM in 2023.[ii] On 19 August 2022, and following that statement, the Commonwealth Government extended the operation of the ADGSM until 1 January 2030 (at the time the ADGSM was set to cease operation on 1 January 2023), which has had the effect of allowing the Minister for Resources to exercise her powers to impose export controls on LNG projects in 2023.

At that time of extension of the operation of the ADGSM, the Minister for Resources indicated that the Commonwealth Government was continuing to negotiate a new Heads of Agreement with the three Australian east coast LNG exporters, being the Queensland-based APLNG, GLNG and QCLNG projects (LNG Exporters), which was intended to safeguard Australia’s domestic gas supplies.[iii]

On 29 September 2022, the Commonwealth Government announced that it had signed the new Heads of Agreement with the LNG Exporters (HoA) and released that agreement.[iv] Sar Katdare, a partner in Johnson Winter & Slattery’s competition practice group, assisted APPEA and the three LNG exporters in drafting the HoA and negotiating with the Federal Government.

The HoA indicates that the LNG Exporters will offer an estimated additional 157 petajoules of gas to the Australian east coast domestic gas market in 2023 through a combination of supplying uncontracted gas and utilising existing and improved gas marketing methods.[v]

The execution of the HoA has resulted in the Commonwealth Government deciding to not trigger the operation of the ADGSM for 2023.

In this article, we set out an overview of the HoA, followed by an overview of the operation of the ADGSM for interested readers.

Overview of the Heads of Agreement

As mentioned, the HoA has been entered into by the Commonwealth Minister for Resources and the LNG Exporters to provide assurance to the Commonwealth Government that the forecast potential risk of a domestic gas market shortfall of 56 petajoules of gas in 2023 will be adequately mitigated.

Under the HoA, the LNG Exporters provide a number of commitments to the Commonwealth Government, which will remain in effect until 1 January 2026. Those commitments include the following:

• Uncontracted gas will be offered to the domestic market before it is offered to the international market. Uncontracted gas is gas which is not required to meet the LNG Exporters’ obligations under contracts or arrangements that were in force prior to 27 September 2022.
• Uncontracted gas will be offered to the Australian domestic gas market with reasonable notice, for reasonable supply periods and on competitive market terms. The offers of uncontracted gas made by the LNG Exporters will also comply with the  Voluntary Code of Conduct for the Negotiation of Gas Supply Agreements to the extent that the code is applicable.[vi] The LNG Exporters may, however, offer uncontracted gas on terms which do not comply with the preceding commitments due to extraordinary, unplanned circumstances (including as a result of a plant outage or similar operational circumstances). 
• Individual prices for gas and related services offered by the LNG Exporters to domestic gas customers will have regard to the cost of production and supply, factors that may be relevant to the customers’ individual circumstances (including the provisions of their gas supply agreement and any applicable transportation or retailer charges) and the prices the LNG Exporters could reasonably expect to receive for uncontracted gas in overseas markets. However, the LNG Exporters have agreed that domestic gas customers will not pay more for the LNG Exporters’ gas than the LNG Exporters’ international customers.
• The LNG Exporters will continue to engage with the Australian Energy Market Operator on the gas supply balance and provide information to aid in forecasting supply needs for gas powered generation. This will include supporting efforts to make gas available to meet peak demand periods in the National Electricity Market through the existing Gas Supply Guarantee.
• The LNG Exporters have agreed to publish a range of information on their respective websites every six months and to update that information quarterly if there are material changes. The information to be published by the LNG Exporters is intended to give domestic gas customers visibility on the uncontracted gas volumes that are available for supply and allow such customers to approach the LNG Exporters to purchase the available volumes. The information to be published by an LNG Exporter includes the quantity of gas the exporter intends to supply, the proposed duration of the supply, the proposed delivery point(s) for the supply, the price structure, the offer period and offer response period, and the point of contact to receive additional information about the offer.
• The LNG Exporters are required to provide a range of information to the ACCC upon request, such as information relating to a forthcoming calendar year (including forecasts of production and uncontracted gas volumes, contracted gas volumes (by basin and domestic or international customers) and forecasts of internal gas consumption needs) and additional information in relation to their compliance with the HoA.
• The LNG Exporters have agreed to report to, and meet with, the Commonwealth Minister for Resources on a quarterly basis (i.e. in March, June, September and December) to report on their actions to supply gas to the domestic market and their compliance with the HoA.

As part of agreeing the HoA, each LNG Exporter also provided to the Commonwealth Government a plan in respect of its actions to mitigate a risk of domestic gas shortfall in 2023. Annex B of the HoA contains a summary of the aggregate effects of those plans. Among other things, that summary indicates that the LNG Exporters will provide flexibility to assist meeting peak demand periods, including by forfeiting gas contracted by domestic gas producers, offering sale and swaps packages and reallocating existing international supply for the domestic gas market.

The LNG Exporters will report to the Commonwealth Minister for Resources on their performance against their respective plans as part of the quarterly reporting to the Minister described above.     

Overview of the ADGSM

The ADGSM has been implemented through Division 6 of the Customs (Prohibited Exports) Regulations 1958 (Cth) (Division 6).

The Commonwealth Government has also published the Customs (Prohibited Exports) (Operation of the Australian Domestic Gas Security Mechanism) Guidelines 2020 (Cth) (Guidelines), which support Division 6 and assist LNG exporters and other stakeholders understand the operation of the division.

The key measures of Division 6 are:

• the export of LNG from Australia will be prohibited during a “domestic shortfall year” unless permission for that export has been obtained from the Minister administering the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (Minister);
• a “domestic shortfall year” will be a calendar year which the Minister has determined to be a domestic shortfall year. The Minister must make such a determination on or before 1 November prior to the relevant calendar year and, in order to make such a determination, the Minister must:
  • make a declaration that the Minister intends to determine a year as a domestic shortfall year;
  • have reasonable grounds to believe that: (i) there will be an insufficient supply of natural gas for the Australian domestic market (or part of it) during the relevant year unless exports of LNG are controlled; and (ii) exports of LNG would contribute to that lack of supply; and
  • have consulted with the Prime Minister and the Ministers administering the Australian Energy Market Act 2004 (Cth), Industry Research and Development Act 1986 (Cth) and Australian Trade and Investment Commission Act 1985 (Cth); and
• the Minister can revoke a determination of a domestic shortfall year at any time.

While Division 6 establishes the broad framework for the operation of the ADGSM, the Guidelines detail how the Minister will implement the ADGSM in practice and deal with:

• the timeframes for the Minister to declare that he or she intends to determine a year as a domestic shortfall year, which declaration must occur prior to 1 October of each year;
• the consultation between the Minister and relevant stakeholders (such as relevant market bodies and agencies, LNG projects, relevant Commonwealth Government Ministers and other stakeholders), including to identify whether industry can voluntarily make available volumes of gas to Australian consumers which would be sufficient to avoid the occurrence of a shortfall;
• assessment of whether the Australian domestic gas market is likely to be in shortfall. Some considerations that the Minister may take into account are:
  • whether LNG exports are drawing gas away from the Australian domestic gas market;
  • other external factors influencing the Australian domestic gas market (including natural disasters);
  • the ability for LNG exporters to redirect gas to the Australian domestic gas market;
  • any voluntary measures the LNG projects have proposed to avoid a shortfall; and
  • the past performance of all participants in the Australian domestic gas market, including any strategic behaviour or ‘gaming’ of the ADGSM;
• information gathering requirements in order to form a view on whether a year will be a domestic shortfall year including consultation with LNG projects and requests for the LNG projects to provide data regarding gas production, consumption, sales, purchases and reserves and other relevant information;
• determination of whether an LNG project is likely to be in net-deficit (the LNG project is drawing gas from the Australian domestic gas market) or a net-contributor (the LNG project is adding to the quantity of gas within the Australian domestic gas market); and
• allocation of the Australian domestic gas market shortfall volume across LNG projects in net-deficit.

The Guidelines set out the types of export permissions that may be granted under Division 6. Those permissions include an ‘Unlimited Volume’ permission, which allows an exporter to export an unlimited volume of LNG from a project over the domestic shortfall year, and an ‘Allowable Volume’ permission, which allows a maximum volume of LNG to be exported from a project over the domestic shortfall year. The person that owns the LNG at the point it is exported from Australia will need to hold the export permission granted under Division 6.

Importantly, the provisions of Division 6 apply Australia wide. As such, if the Minister determines a year to be a domestic shortfall year, then the export restrictions under Division 6 will apply Australia wide and not just to that part of the Australian domestic gas market that is identified as having a shortfall.

However, an LNG project which does not draw its feed gas for LNG from the Australian domestic gas market (that is the total gas used by the LNG project is less than the sum of its “Own gas” and “Third party export compatible gas” (as described in the Guidelines)) will be a net-contributor and may be eligible for an Unlimited Volume permission to export LNG if its project cannot deliver gas at a reasonable price to the part of the Australian domestic gas market experiencing the shortfall.

Similarly, the Minister may also grant an Unlimited Volume permission to one or more LNG exporters associated with an LNG project that is physically unconnected to the part of the Australian domestic gas market that is experiencing a shortfall (for example, where it is located in a separate gas market).

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).