EUAA submission on the Eastern Australian Domestic Gas Market Study

Transcription

1 7 February 2014 The General Manager Onshore Gas Energy Division Department of Industry GPO Box 1564 Canberra ACT 2601 By Dear Sir / Madam EUAA submission on the Eastern Australian Domestic Gas Market Study Thank you for the opportunity to make a submission on the Eastern Australian Domestic Gas Market Study. The EUAA represents many of the large energy users in Australia in the commercial, industrial and resources sector. Our members account for a significant proportion of the gas consumed in the Eastern Australian Gas Market. We welcome the opportunity to respond to the challenges presented in the Study and acknowledge the need for short, medium and long term directives and sustainable policy settings. Many EUAA members are experiencing immediate stresses due to the issues raised in the Study, and the failure of policy to address the short and medium term needs of industry. As an association we congratulate to the Federal government for embarking on this process. We highly commend and support the efforts of the Federal government and through SCER to get State government s commitment to gas supply solutions for Australia s domestic needs. Attached herein is the EUAA response and we welcome further dialogue on any of these matters. Yours faithfully Phil Barresi CHIEF EXECUTIVE OFFICER Energy Users Association of Australia ABN Suite 1, Level 2, Prospect Street, Box Hill, Victoria, 3128 Phone: (03) Fax: (03) euaa@euaa.com.au

2 Executive Summary The Energy Users Association of Australia (EUAA) actively pursues the interests of its members solely focussed on energy issues impacting their business. Gas, gas cost and gas availability are critical to the sustainable operation of a large percentage of the EUAA member base. This submission is in response to the release of the Eastern Australian Domestic Gas Market Study on 3 January 2014 by the Bureau of Resources and Energy Economics (BREE) and makes reference to feedback of EUAA members and results of studies commissioned by EUAA. Input from EUAA members indicates a strong bias toward the inability to contract competitive terms for gas purchases to maintain the long term sustainable operation of their businesses in Australia. The source of this inability appears to be the manoeuvring by major gas producers to hoard gas and escalate margins using their market power and disproportionate influence. The net result is a confluence of (i) uncertainty of future costs to operations of energy consumers escalating to high risk decisions on future operations in Australia and (ii) the prospect of significant job losses in industry. The key observations and recommendations made in this submission are summarised below: 1. EUAA recently completed a survey of its members representing 20% (or 60PJ/a) of the industrial sector gas use on the east coast where it is shown there is a scenario of up to 3,300 jobs lost in the industrial sector by 2020 and foregone capital expenditure of over $1.9 billion. 2. The key objective of the reform agenda should be to enable competitive and efficient trade of (and access to) gas for industry. 3. At least two of the three LNG proponents developing plants in Gladstone publicly advertise their expected ability to shape higher margins by taking advantage of their market power and position where it relates to the domestic gas market. 4. The review of gas market competition must address the potential for predatory pricing, joint marketing limiting competitive markets, joint marketing by producer JV s limiting competition and anti-competitive terms (for example, take or pay provisions and ability to on-sell unused gas). EUAA recommends referring the matter of joint marketing to the ACCC. 5. Where there are obvious gas reserves in relative proximity to domestic markets, government action must address the ability for producers to access the gas in a cost-effective manner by reducing red and green tape. EUAA submission on the Eastern Australian Gas Market Study Page 1

3 6. State and Territory governments must honour their commitment to the Australian Energy Market Agreement and certify their gas pipeline access regimes with a consultation process. 7. The government must apply greater scrutiny to applications for exemption to gas pipeline coverage which have the implication of completely limiting the long term options for efficient access to transport gas to market and competitive pipeline access for gas purchasers. 8. The government should limit the allowable term for gas pipeline no-coverage applications. 9. The gas pipeline market carriage model appears to be working successfully in Victoria. An assessment of its applicability to the east coast market should be performed. 10. The government must undertake to improve gas market price transparency and develop forward markets. 11. For incremental expansions of existing gas export facilities and new gas export facilities, the government should apply a National Economic Benefits Test in the approval process with due consideration for all options. 12. EUAA supports SCER as the appropriate vehicle to drive the change for a revised governance framework and we encourage regular engagement. 13. If there are overlapping instances where state and federal consultations can be aligned, or interdepartmental consultations have similar purpose, it would be far more efficient from EUAA s perspective to vertically align consultation process where applicable. EUAA submission on the Eastern Australian Gas Market Study Page 2

4 Introduction The Energy Users Association of Australia (EUAA) actively pursues and represents the interests of its members to all levels of government and industry. A very strong focus has been on gas issues impacting members operations and the material impact on members corporate strategy and bottom line. For example, in the last twelve months, EUAA s activities include: Report on Upstream Gas Policies for Australia Nov 13 1 Scoping Study on the Economic Impact of High Gas Prices Feb 14 (released soon) Attendance at the inaugural SCER energy forum Calling for a stakeholder forum to address NSW gas issues, resulting in our attendance at NSW Gas Summit Submission to the AEMC on the Gas Market Scoping Study, June 13 Key ministerial addresses at EUAA s Annual Conference in Brisbane Submission to AER s Draft Shared Assets Guideline Sept 13 Submission to NSW Government Parliamentary Inquiry in Downstream Gas Supply, June 13 Submission to Productivity Commission inquiry into National Access Regime AEMO presentations to members on the Wallumbilla Gas Hub This response to the Eastern Australian Domestic Gas Market Study dovetails with EUAA s response to the Energy White Paper Issues Paper. EUAA acknowledges the many facets that need to be addressed and, as reflected in EUAA s report on Upstream Gas Policies for Australia 2, policy responses should be consistent with the following principles to ensure a well-functioning gas market: Transparency adequate timing and locational signals for investment in production, transmission and storage, and for new and current consumers to understand the future demand, supply and economic conditions. Simplicity prima facie, markets should be left to operate with the minimum of government intervention. Where government action is required it should be consistent with the other guiding policy principles. Liquidity short and long term gas prices should be visible and tradable, supported by a competitive secondary financial market and storage facilities. These arrangements would facilitate price discovery and provide greater access to gas at competitive prices. Efficiency policies need to encourage allocative efficiency of scarce resources to maximise total economic welfare. 1 EUAA (October 2013) Upstream Gas Policies for Australia 2 EUAA (October 2013) Upstream Gas Policies for Australia, p17 EUAA submission on the Eastern Australian Gas Market Study Page 3

5 Approach to this submission In this submission, EUAA has followed the key headings format provided in the Submission Guide provided and seeks to focus on providing evidence of the potential impacts of the options under consideration and provide details about the advantages and disadvantages, costs and benefits and risks associated 3 where member issues and feedback relate to the six policy option themes presented (listed below). 1. Gas market reform 2. Supply competition 3. Data and transparency 4. Infrastructure 5. Non-market interventions and 6. Governance EUAA responses Gas market reform The current experience of many EUAA members is the inability to obtain a response from gas suppliers to expressions of interest for gas supply to their facilities. Whilst there are material impacts to the respective sectors/s of the economy from high gas prices, it is not only the medium to long term impact of expected high gas prices, it is also the short term inability to engage in negotiations to contract gas supply. This is the case for member s facilities across the entire east coast market. 1. EUAA recently completed a survey of its members representing 20% (or 60PJ/a) of the industrial sector gas use on the east coast where it is shown there is a scenario of up to 3,300 jobs lost in the industrial sector by 2020 and foregone capital expenditure of over $1.9 billion. There are several reports suggesting similar experience across industry including Energy Quest 4 suggesting for the timeframe it is likely to be a difficult time to secure long-term third-party gas supply contracts and in a sellers market terms on any contracts are likely to reflect seller preferences. 2. The key objective of the reform agenda should be to enable competitive and efficient trade of (and access to) gas for industry. 3 Department of Industry (2013) 4 Energy Quest (2011) esaa Domestic Gas Study Stage 3, p30 EUAA submission on the Eastern Australian Gas Market Study Page 4

6 EUAA s report on Upstream Gas Policies for Australia 5, refers to the Australian Industry Group s research 6 businesses are finding it extremely difficult to secure gas contracts. Of those businesses currently looking for gas contracts, nearly 10 percent could not get an offer at all and 26 percent could get an offer from only one supplier. 3. At least two of the three LNG proponents developing plants in Gladstone publicly advertise their expected ability to shape higher margins by taking advantage of their market power and position where it relates to the domestic gas market. Santos notes in its 2013 Investor Seminar 7 Growing margins from higher revenues and eastern Australia gas prices greater than $8/GJ for new contracts. See Exhibit 1 below. Exhibit 1: Santos Summary of Eastern Australia Gas Market8 Santos well placed to benefit Origin Energy notes Expanding gas margins and Energy Markets margin uplift in its presentation dated March In Origin s presentation dated November 2013, it is headlined Scale and diversity of Origin s low historical priced gas position enables Origin to benefit from rising gas prices 10 These two examples indicate gas suppliers intend to use their market position in a tightening market to increase margins on domestic gas sales. The potential for predatory pricing and anti-competitive behaviour based on out-dated contract terms is a real risk faced by large energy users. For example, take or pay provisions were traditionally settled to de-risk development of new gas fields but these contract provisions are irrelevant now the fields owned by gas supply majors are largely developed. (Exhibit 2) With regard to joint marketing and its restriction to competition, we make reference to the 2007 report to COAG by the Energy Reform Implementation Group (ERIG) in which it 5 EUAA (October 2013) Upstream Gas Policies for Australia, p11 6 AiG (2013) Energy shock the gas crunch is here, p6 7 Santos (4 December 2013) Investor Seminar 2013, p22 8 Santos (4 December 2013) Investor Seminar 2013, p67 9 Origin Energy (March 2013) United States Roadshow, p6 10 Origin Energy (November 2013) Asia Roadshow, p14 EUAA submission on the Eastern Australian Gas Market Study Page 5

7 states one of the impediments to a competitive gas market is joint marketing by producers and it clearly articulates a longer-term policy objective is to promote separate marketing where feasible. As KPMG note there is merit in reviewing the current prevalence of joint marketing arrangements which may restrict competition The review of gas market competition must address the potential for predatory pricing, joint marketing limiting competitive markets, joint marketing by producer JV s limiting competition and anti-competitive terms (for example, take or pay provisions and ability to on-sell unused gas). EUAA recommends referring the matter of joint marketing to the ACCC. Exhibit 2: Excerpt from Origin's Asia Roadshow 12 indicating gas is available; this has not translated to competitive offers to energy users Exhibit 3: Origin expecting "Expanding gas margins" and Energy Markets uplift in FY ERIG (January 2007) Energy Reform, the way forward for Australia, p Origin Energy (November 2013) Asia Roadshow, p13 13 Origin Energy (March 2013) United States Roadshow, p6 EUAA submission on the Eastern Australian Gas Market Study Page 6

8 Promote gas supply competition Bringing on gas reserves sounds simple but good gas reserves don t magically appear. By and large, the good tenements are taken. While there are reserves in the ground, the risk of exploration and cost of development increase as prospective tenements go deeper, further from markets and into more difficult geological formations. Credit Suisse notes in its Equity Research 14, Shale from the Cooper Basin is expected to have fewer difficulties with landowners but is unlikely to be a large new cheap source of cheap gas. Commercial viability remains uncertain and costs are estimated to be in the $6-9/GJ range. While CSG is both plentiful and cheap, the best acreages have likely been picked by current LNG producers. And CSG, if approved, may become increasingly expensive as new environmental restrictions or landowner compensation leads to higher capex and operating costs. Federal Minister for Industry Hon Ian Macfarlane, in his address to the EUAA Annual Conference on 17 October made particular reference to Slow approval processes and excessive green tape regarding our east coast gas supply are compromising the energy security of the region and beyond. 5. Where there are obvious gas reserves in relative proximity to domestic markets, government action must address the ability for producers to access the gas in a cost-effective manner by reducing red and green tape. Improve commercial and regulatory environment for infrastructure EUAA recognises each state has a level of regulatory access arrangements for infrastructure, however it is disappointing to see that despite the Productivity Commission stating All state and territory governments have agreed to have their access regimes certified through the Australian Energy Market Agreement (for electricity and gas regimes) 16, no state or territory has certified their gas infrastructure access regimes. See Exhibit 4. The lack of clear or uniform infrastructure access regulations at a national level limits the ability of parties to access gas infrastructure on a recognised basis. 14 Credit Suisse (4 June 2013) Eastern Australia Gas Prices 15 Hon Ian Macfarlane (17 October 2013) Address to the EUAA Annual Conference 16 Productivity Commission (May 2013) National Access Regime Draft Report, p66 EUAA submission on the Eastern Australian Gas Market Study Page 7

9 6. State and Territory governments must honour their commitment to the Australian Energy Market Agreement and certify their gas pipeline access regimes with a consultation process. Exhibit 4: Excerpt from National Access Regime showing no certification of gas access regimes in any state In addition to the lack of uniformity, we note in the National Access Regime Draft Report 17, Under the gas regime, anyone can apply to the NCC to recommend to the relevant Minister that a pipeline be covered under the regime. The NCC determines the form of regulation to apply to covered pipelines. Vice versa, pipeline developers can apply to the NCC for exemptions to coverage for which the NCC will make a recommendation to the minister for approval. All three LNG proponents building pipelines to Gladstone have been granted a 15 year exemption from coverage 18 indicating there will be no opportunity for smaller producers or new entrants to access existing infrastructure in an efficient manner for that period of time. 7. The government must apply greater scrutiny to applications for exemption to gas pipeline coverage, which have the implication of completely limiting the long-term options for efficient access to transport gas to market and competitive access for gas purchasers. 17 Productivity Commission (May 2013) National Access Regime Draft Report, p69 18 Hon Gary Gray (20 June 2013) Minister s Determination (GLNG); Hon Martin Ferguson (28 August 2012) Minister s Determination (APLNG); Hon Martin Ferguson (15 June 2010) Minister s Determination (QCLNG) EUAA submission on the Eastern Australian Gas Market Study Page 8

10 8. The government should limit the allowable term for gas pipeline no-coverage applications. Market data and transparency Mandatory reporting Mandatory reporting adds another layer of regulatory burden which could be argued will increase the cost of gas production. This is counterproductive. The inability of the CSG producers to create certainty on current CSG productive gas reserves and deliverability is limiting domestic gas availability due to gas being held in ground to cover delivery risk. Operational initiatives We note in the Study 19, the Victorian market carriage model allows a greater number of buyers and sellers to transact, which increases the depth and liquidity of the wholesale market. In particular, open access to transport infrastructure and a fully integrated gas supply chain strengthens competition, and makes individual buyer and seller behaviour less important. 9. The gas pipeline market carriage model appears to be working successfully in Victoria. An assessment of its applicability to the east coast market should be performed. Transparency There is a limited degree of price transparency in gas markets for the Short-term Trading Market (STTM) and the Declared Wholesale Gas Market (DWGM) in Victoria where prices can be viewed on the AEMO website. The STTM market sees very little trade and operates for the trading of imbalances and prices not particularly informative. Recommendations from the AEMC's Gas Market Scoping Study 20 include creating a single end of day gas price for the STTM to settle market schedule variations and pooling prudential requirements across the Victorian gas market and the STTM. 10. The government must undertake to improve gas market price transparency and develop forward markets. 19 BREE (3 January 2014) Eastern Australia Domestic Gas Market Study, p56 20 AEMC/K Lowe (July 2013) Gas Market Scoping Study EUAA submission on the Eastern Australian Gas Market Study Page 9

11 The Gas Market Bulletin Board has limited transparency on gas pipeline capacity and capacity trading. Members are concerned that a more transparent information board would facilitate increased capacity trading. Role for non-market interventions The Study acknowledges the difficulty that gas energy users are experiencing in the short to medium term by calling for a policy response 21. It states, In a period of transition, there is a risk price may overshoot export parity until there is sufficient gas supply or information available to the market to overcome any transient market power and readjust risk expectations. EUAA members experiences mirror this concern it is not the expectation of long term stabilisation of gas supply and prices but rather what happens today as the market tightens? Furthermore in the same Study on page 18, governments could consider pursuing a number of measures to further improve supply, market signals, and support efficient market operations.. 22 is a statement that we wholeheartedly support. We offer one such policy response in the EUAA s report on Upstream Gas Policies for Australia 23. If the Australian government was to contemplate intervening in the eastern Australia gas markets to a greater extent than mandatory provisions, it might consider the following market-based economic approach as a viable option that avoids picking winners or overriding commercial decisions of investors, but ensures finite resources may be allocated on some economic rationale and thus balancing the needs of domestic gas users with LNG export markets. National Economic Benefits Test To ensure finite gas resources are developed in accordance with the policy principles proposed, especially allocative efficiency, a National Economic Benefits Test (NEBT) may apply for new proposed gas export capacity (onshore and offshore) and any capacity expansions of existing facilities. Such an approach would need to consider the direct economic value of a given quantity of natural gas from LNG exports versus the economic value of the same quantity of gas produced from domestic use. Use it or lose it International jurisdictions are pursuing policies that maximise production of depleting resources through use it or lose it provisions in development licenses. Such provisions are worthy of further consideration for Australia BREE (3 January 2014) Eastern Australia Domestic Gas Market Study, p3 22 BREE (3 January 2014) Eastern Australia Domestic Gas Market Study, p18 23 EUAA (October 2013) Upstream Gas Policies for Australia, p35 EUAA submission on the Eastern Australian Gas Market Study Page 10

12 11. For incremental expansions of existing gas export facilities and new gas export facilities, the government should apply a National Economic Benefits Test in the approval process with due consideration for all options. Governance and Implementation Issues EUAA attended the most recent SCER meeting with a briefing by the Federal Minister for Industry and round table discussions with energy stakeholders. 12. EUAA supports SCER as the appropriate vehicle to drive the change for a revised governance framework and we encourage regular engagement. Regulatory supply chain burden The NSW Parliamentary Library Briefing Paper on Gas 25 outlines the functions and responsibilities of the regulatory supply chain for gas. This is summarised in the table below. Table 1: Summary of regulatory 'supply chain' for gas Function Policy direction Market development and rule making Pipeline coverage and form of regulation Economic regulation and enforcement Market operator Appeals bodies Responsible Body SCER AEMC NCC AER AEMO Australian Competition Tribunal Whilst we accept the need for different responsible bodies to administer the regulations and we appreciate (in fact we demand) the opportunity to respond to regulatory issues, the physical and financial burden of responding to consultative processes is becoming more challenging to sustain. 24 EUAA (October 2013) Upstream Gas Policies for Australia 25 NSW Parliament (December 2013) Gas: resources, industry structure and domestic reservation policies. Briefing Paper No 12/2013, p50 EUAA submission on the Eastern Australian Gas Market Study Page 11

13 13. If there are overlapping instances where state and federal consultations can be aligned, or interdepartmental consultations have similar purpose, it would be far more efficient from EUAA s perspective to vertically align consultation process where applicable. EUAA submission on the Eastern Australian Gas Market Study Page 12