Draft regulations and guideline for the Australian Domestic Gas Security Mechanism

On 27 April 2017, the Commonwealth Government announced that it would implement the Australian Domestic Gas Security Mechanism (ADGSM) to ensure 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.

The ADGSM will be implemented through amendments to the Customs (Prohibited Exports) Regulations 1958 (Cth).

On 5 June 2017, the Commonwealth Government released:

• an exposure draft Customs (Prohibited Exports) Amendment (Liquefied Natural Gas) Regulations 2017 (Cth) (Amendment Regulations) which will insert a new Division 6 into the Customs (Prohibited Exports) Regulations 1958 (Cth) (Division 6) to give effect to the ADGSM; and
• a draft guideline (Guideline) which will support Division 6 and assist LNG exporters and other stakeholders understand the operation of the division.

The key measures proposed under the Amendment Regulations 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 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
  • 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).
• The Minister can revoke a determination of a domestic shortfall year at any time.
• Division 6 will only apply until 1 January 2023.

Division 6 establishes the broad framework for the operation of the ADGSM, while the Guideline sets out the detail of how the Minister will implement the ADGSM in practice and deals with:

• the time frames for the Minister to declare that he or she intends to determine a year as a domestic shortfall year, which must occur prior to 1 October of each year;
• 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 domestic market;
  • other external factors influencing the gas market (including natural disasters);
  • the ability for LNG exporters to redirect gas to the domestic market; and
  • any voluntary measures the LNG projects have proposed to avoid a shortfall;
• 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 domestic market) or a net-contributor (the LNG project is adding to the quantity of gas within the domestic market); and
• allocation of the Australian domestic gas market shortfall volume across LNG projects in net-deficit.

The Guideline also sets out the types of export permissions that may be granted under Division 6. These 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 permission granted under Division 6.

Importantly, the provisions of Division 6 will 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 domestic gas market (that is (i) 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 Guideline) and (ii) the LNG project’s gas purchases from the domestic market are less than its gas sales to the domestic market) 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 a market experiencing the shortfall.

Submissions on the proposed Amendment Regulations and Guideline are due by 12 June 2017.

It is expected that Division 6 will commence on 1 July 2017.