Gas giants agree to rein in exports as supply crunch looms

Large gas exporters face unprecedented requirements to keep greater supplies of the fossil fuel in Australia as more industry executives indicate they are willing to work with the Albanese government to finally establish domestic reservation rules.

In a major reversal of oil and gas giants’ long-running opposition to calls for an east coast gas reserve, global energy company Shell has become the second liquefied natural gas exporter to say it would support new domestic supply commitments, including rules compelling it to set aside a specified amount of gas production that cannot be sold overseas and must be delivered locally.

The move comes amid intensifying concerns from Australian governments, regulators and gas users that too much LNG is being shipped offshore from Queensland, exacerbating a supply crunch and driving up prices in Victoria, NSW and South Australia as the decades-old gas fields in Bass Strait rapidly deplete.

Australia is one of the biggest global suppliers of LNG, a commodity that rakes in tens of billions of dollars of revenue a year. Western Australia has its own gas reservation policy, requiring the LNG industry to hold back 15 per cent of their reserves but there were never such rules imposed on Queensland exporters when their terminals were launched a decade ago.

Shell, which produces super-chilled LNG at its QCLNG joint venture near Gladstone, has told the federal government it would now back new commitments or reservation rules, as long as they applied equitably across the industry and were accompanied by a set of regulatory changes to remove barriers to drilling and developing new sources of gas supply.

“Reservation can only be part of a broader framework,” Shell Australia chair Cecile Wake said. “Without active measures to increase the supply of gas, solely focusing on carving up an ever-diminishing supply will only curb investment and exacerbate the very problem it is trying to resolve.”

Last week, another Queensland exporter, Australia Pacific LNG, also said it believed an export licensing and permitting regime that guaranteed supply for the domestic market was the best way to tackle concerns around supply shortfalls and rising prices. APLNG, whose backers include Origin Energy, US giant ConocoPhillips and China’s Sinopec, said domestic contributions must be spread equitably among exporters.

”An export licensing and permitting regime … could address projected gas supply shortfalls in coming years while providing the investment certainty for the east coast LNG producers and all market participants to develop new supply,” APLNG said.

Most of Queensland’s gas is locked into long-term export deals and sold as LNG to buyers in Asia. APLNG and QCLNG are also key suppliers of east coast domestic gas, together accounting for about 40 per cent of the market. The state’s third LNG exporter, the Santos-backed GLNG business, however, is a net withdrawer of domestic gas to meet its export commitments.

“Requiring all east coast LNG producers to contribute to the domestic market would materially ease short-term pressures and help maintain reasonable pricing until new sources of Australian gas come online,” APLNG said.

The threat of local gas shortfalls emerging in south-eastern Australia from 2028 marks a deepening challenge for governments, which are having to balance goals to tackle climate change with the need to shore up supplies of polluting fossil fuels for those who still depend on them.

Households are increasingly switching from gas stoves and heaters to electric alternatives, aided by government incentives and policies banning gas hook-ups in new residences. However, that shift is not happening fast enough to avert the need to boost gas supplies, the Australian Energy Market Operator says.

Major gas users, including factories that need the fuel to make products such as steel, cement, bricks and fertiliser, have been pleading for the government to clamp down on the LNG sector with export restrictions.

“After being convinced by LNG developers that exports would not adversely impact on domestic users, the last 10 years has seen a progression of government policies playing catch-up as they try to address these adverse impacts,” said the Energy Users Association of Australia, whose members include manufacturing giants such as Brickworks, BlueScope Steel and Incitec Pivot. “None has had an enduring positive impact.”

The Albanese government is reviewing laws and regulations governing the LNG sector to “make sure they are delivering as intended”, and it has urged the industry to co-operate and participate in the process constructively.

The Energy Users Association submission says LNG producers’ existing sales contracts should not be interfered with, but domestic commitments should be attached to new export licences once those agreements come up for renewal from 2030.

Former opposition leader Peter Dutton took a promise to the May federal election to slug LNG exporters with a charge on uncontracted gas supplies that were shipped overseas instead of sold locally. The plan, which would have applied only to APLNG and QCLNG, was staunchly opposed by the industry amid warnings it would stunt investment. Labor dismissed it as a “thought bubble”.

Holding back more export gas for local buyers could boost domestic supply, analysts said, but it would not solve the problem of shortfalls in Victoria and NSW on cold winter days when gas demand for heating was particularly high. The north-south gas pipeline is often running at capacity during winter, and there is insufficient storage capacity in the south to store off-peak gas.

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