The changes will increase the risk of blackouts by killing exploration and cutting supply, and could derail the $18.4 billion takeover bid for Origin Energy, industry sources and analysts say.
One step short of nationalisation
The proposed policy, which comes as
gas-based manufacturers have been slammed by steep price increases, would make gas produced and sold on the east coast market subject to a “reasonable price provision” that kicks in after the price cap on uncontracted gas that will be in effect through 2023. Price caps will also apply to thermal coal sold in the domestic market, at $125 a tonne.
The reasonable price provision means producers can only charge a price based on the assessed cost of production plus a reasonable margin, ignoring the millions of dollars -- or as much as $1.5 billion in the case of Santos’ Narrabri project -- that they have spent on exploration and production.
Mr Kavonic said the policy is “retrospective, anti-market, and directly hurts investors in east coast gas -- both locals such as Hancock Prospecting, Beach Energy and Cooper Energy, and foreign investors such as Korean steel giant Posco, which controls Senex Energy.
Woodside Energy, owner of half the Gippsland Basin joint venture, has already warned that the price cap proposal has destroyed the confidence that both buyers and sellers need to complete gas sales deals that would keep the economy moving”.
“The biggest victims by the end of the decade will be Queensland taxpayers again, and jobs along the gas value chain,” Mr Kavonic said. “The main gas investors on the east coast will simply and quietly pull back on investment on the east coast and allocate capital elsewhere.”
One senior gas industry executive in Queensland said producers would reassess their production plans and investments given the risk in the outlook, with the result that less gas would come to market. He said there was now no signal or incentive for LNG imports as proposed by Andrew Forrest’s Squadron Energy in NSW, and several ventures in Victoria, which the Australian Energy Market Operator say will be vital within a few years to avoid shortages.
The executive described the policy as “essentially an evergreen cap on domestic prices at cost-plus via a code of conduct brought in by stealth with no recognition of the down-swings in the market”. They said the industry is nervous that the near-term $12/GJ price caps will just roll forward well beyond 12 months given broad industry expectations that the energy crunch will get worse for a prolonged period.
“In the meantime, demand will rise, exploration will stall – expect the announcements to start on Monday – coal closures coming in Q2 next year and huge delays in new capacity.”
Introducing the proposed policy,
released on its website late on Friday, Treasury said the plan would “ensure that our wholesale gas markets deliver adequate supply at reasonable prices and on reasonable terms to domestic users”.
It said the proposed mandatory code of conduct would “address systemic issues within the wholesale gas market and guide participants’ behaviour”.
“As part of the code, a reasonable pricing framework will provide a basis for producers and buyers to negotiate domestic wholesale gas contracts at ‘reasonable prices’, which should reflect the cost of domestic gas production including a reasonable return.”
Consultation on a draft bill that allows for the price caps and market reforms closes on December 13, just three days after it was released. Consultation on the price cap specifically closes on December 15, while consultation on the rest of the proposed policy closes on February 7.
Mr Samter said the proposal represented “gas market Armageddon”, and investment in the sector would be killed off. He said the proposal was “as bad a policy as the United Australia Party’s plan to cap mortgages at 3 per cent for 5 years”.
“For all the headlines and quotes [on Friday] that this is a temporary measure, this embarrassing draft bill is then planning to implement a mandatory code of conduct where they have basically nationalised the gas market, but expect private entities to keep putting their capital into it,” he said in a note to clients.
He said the system would mean upstream gas was treated like infrastructure, limiting returns, despite the risks involved.
“I mean, seriously, have you ever heard anything more ridiculous in your life?”
“It is beyond me why any major player in the east coast market would put fresh capital into the ground, given the huge uncertainty on the regulatory regime and what the government might, in any given year, determine is a reasonable price (and doubtless particularly as you get closer to an election that reasonable price might drop).”
He questioned how “anyone could form a strong view on how this all plays out to say spend $15 billion on buying Origin”, casting doubt on the takeover proposal for the major energy supplier from Brookfield and EIG Group that is currently in the due diligence phase.
Origin could take a hit to revenues of between $50 million and $60 million a year, based on the uncontracted volumes of gas that its Australia Pacific LNG venture has been selling into the domestic market, Mr Samter estimated.
“I fear for poor old Mike Cannon-Brookes that his AGL stock might start to mirror somewhat the last 12 months of his Atlassian stock – thank goodness all his houses are off-grid, so at least he won’t be without electricity.”
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