Devil in the detail in the Govt gas price cap, page-18

The issue with the Govt policy is that it is not "short term" as said by @hippo25 . In the detail is that the Govt can set prices for gas for any new development that is the cost of production plus a rate of return that will be set by the Govt. This detail goes on forever. Here is the article from the AFR today

https://www.copyright link/companies/energy/near-nationalisation-shock-gas-market-changes-revealed-20221211-p5c5b6

The federal government will seek to take permanent controlof gas prices when it introduces radical new legislation to parliament onThursday, a move that industry leaders say would increase the risk of blackoutsby killing exploration and cutting supply.

The laws would give the government the power to decide the“reasonable price” of gas and go well beyond the emergency $12 a gigajoule price cap announced by Energy andClimate Change Minister Chris Bowen on Friday. Some analysts are warning the move could derail the $18.4 billion takeover bid for Origin Energy.

The policy, which has been broadly welcomed by strugglinggas buyers, effectively dismantles the gas market by seeking to heavilyregulate the prices of all sales on the east coast on an ongoing basis. Arushed consultation of just three days will be followed by an urgent recall ofparliament on Thursday to push through the legislation.

Analysts likened the bombshell proposal to a nearnationalisation of the east coast gas market, with Credit Suisse’s Saul Kavonicsaying it represented “a declaration of war on the gas industry” that wouldspark a major industry campaign against the Labor government on a par with themining tax advertising campaign a decade ago.

ExxonMobil, the world’s biggest privately owned oil andgas company which supplies about 20 per cent of the domestic east coast market,slammed the move as “reckless free market intervention” and said the “rushedand ill-considered” policy would inevitably risk gas shortages and blackouts.

“This reckless free market intervention by the governmentwill divert investment away from Australia to other nations that support fiscalstability and free markets,” the US giant said in a rare statement on publicpolicy. “The only thing this policy will achieve, if implemented, is lessAustralian gas production in 2023 and beyond.”

Woodside Energy, the US major’s partner in the GippslandBasin venture, labelled it “short-sighted”, saying it would destroy businessconfidence and scare away investment just when stable, long-term supplies ofgas are needed.

David Maxwell, CEO of east coast gas producer CooperEnergy, described the policy as “draconian”.

“In my 30-plus years in management roles in the gasindustry I have never seen such destructive legislation,” Mr Maxwell told TheAustralian Financial Review.

Samantha McCulloch, head of oil and gas industry lobbygroup APPEA, has requested an urgent meeting with Prime Minister AnthonyAlbanese, saying the intervention is far more extensive than the governmentmade known earlier on Friday. She said the extraordinary new powers to controlthe market would damage investment confidence across the whole Australianenergy sector.

“The powers provided through the Bill are extraordinary,providing for the government to control the entirety of the market andintervene in an essentially unlimited way,” Ms McCulloch said.

The heavy-handed proposal comes as gas-based manufacturers have been slammed by steep price increases.

‘Worst’ policy in 20 years

It would make gas produced and sold on the east coastmarket subject to a “reasonable price provision” that kicks in after the pricecap on uncontracted gas that will be in effect through 2023. Price caps willalso apply to thermal coal sold in the domestic market, at $125 a tonne.

The reasonable price provision means producers can onlycharge a price based on the assessed cost of production plus a reasonablemargin, largely overlooking the risked capital they have invested inexploration and development.

Mark Samter, energy analyst at independent firm MSTMarquee, said it was “the single worst piece of energy policy I have seenanywhere in the world in almost 20 years looking at global energy markets,despite staunch competition from many other dreadful policies around theworld”.

He said the proposal represented “gas market Armageddon”,and investment in the sector would be killed off. The proposal was “as bad apolicy as the United Australia Party’s plan to cap mortgages at 3 per cent for5 years,” he added.

While exploration costs would be taken into consideration,Mr Maxwell said that gave little comfort and said Cooper would not now investin exploration without specific government assurances on future regulatoryconditions.

“It’s clear with this government that somebody’s word isnot enough,” he said.

‘One step short of nationalising’

Mr Kavonic said that Resources Minister Madeleine King,who has previously spoken against heavy intervention on gas prices, “appears tohave been largely ignored by Labor’s Cabinet” and seems to have neither thetrust of the industry nor influence within the corridors of power ingovernment.

“Labor’s lurch left on gas policy is governmentprice-fixing gas forever, effectively, one step short of nationalising the gassector,” he said, predicting looming energy shortages and job losses inmarginal seats.

Analysts named a long list of gas producers and investorsthat would be hit, including Gina Rinehart’s Senex Energy, which is controlledby Korean steel giant Posco, Beach Energy and Cooper.

Mr Samter estimated the hit to revenues at Origin atbetween $50 million and $60 million a year, based on the uncontracted volumesof gas that its Australia Pacific LNG venture has been selling into thedomestic market.

Origin CEO Frank Calabria voiced concern “thatinterventions like price caps will have the opposite impact to that intended”,discouraging investment in new gas resources and likely driving up prices overthe longer term.

For AGL, owned 11.3 per cent by tech billionaire MikeCannon-Brookes, the proposal comes on top of the exclusion of coal and gas from the “capacity mechanism” forthe National Electricity Market and spells “a pretty bleak environment”, given the expected drop in wholesale power prices and the limits on prices for gas, he said.

“I fear for poor old Mike Cannon-Brookes that his AGLstock 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 withoutelectricity,” Mr Samter said.

One senior gas industry executive in Queensland saidproducers would reassess their production plans and investments given theheightened risks, resulting in less gas coming to market.

He said there was now no signal or incentive for LNGimports as proposed by Andrew Forrest’s Squadron Energy in NSW, and severalventures in Victoria, which the Australian Energy Market Operator say will bevital within a few years to avoid shortages.

The executive described the policy as “essentially anevergreen cap on domestic prices at cost-plus via a code of conduct brought inby stealth with no recognition of the down-swings in the market”. They said theindustry is nervous that the near-term $12/GJ price caps will just roll forwardwell beyond 12 months.

Exxon said it had decided last week to halve its forwardplanning for investment in the Gippsland Basin JV to six months for the firsttime in 50 years, a move that had proved prudent.

Pull back on investment

The decision makes longer-term projects more difficult andheightens uncertainty over future production in the east coast’s biggestdomestic supply source.

“The main gas investors on the east coast will simply andquietly pull back on investment on the east coast and allocate capitalelsewhere,” Mr Kavonic said.

But Treasury, which released the consultation paper quietly on its website late Friday, 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 guideparticipants’ behaviour”.

The proposal includes compulsory mediation and arbitrationin disputes between producers and consumers, allows for supply to be forcedinto the market and penalty provisions that some in the industry are describingas “extraordinary”.

Consultation on a draft bill that allows for the pricecaps and market reforms closes on December 13, just three days after it wasreleased.

Consultation on the price cap specifically closes onDecember 15, while consultation on the rest of the proposed policy closes onFebruary 7.

Mr Samter said it was beyond him why any major player inthe east coast market would put fresh capital into gas supply, given the hugeuncertainty in the regulatory regime now.

“For all the headlines and quotes [on Friday] that this isa temporary measure, this embarrassing draft bill is then planning to implementa mandatory code of conduct where they have basically nationalised the gasmarket, but expect private entities to keep putting their capital into it,” MrSamter told clients.

He said the system would mean upstream gas was treatedlike infrastructure, limiting returns, despite the risks involved.

“I mean, seriously, have you ever heard anything moreridiculous in your life?”

He questioned how “anyone could form a strong view on howthis all plays out to say spend $15 billion on buying Origin”, casting doubt onthe takeover proposal for the major energy supplier from Brookfield and EIGGroup that is currently in the due diligence phase.

Brookfield declined to comment.