Against the backdrop of the deepening gas supply crisis on the east coast of Australia, in its 13th Gas Inquiry Interim Report of July 2022 (July 2022 Report), the ACCC has issued a stern warning to gas producers and LNG exporters that some of their current practices may breach Australia’s competition laws.
The July 2022 Report’s key findings in relation to “behavioural factors” that may adversely affect competition in the upstream gas market include:
The ACCC is concerned that the above practices are at risk of breaching competition law given the high levels of market concentration, and it has put gas producers and LNG exporters on notice that it will continue to review those practices and consider commencing enforcement action where appropriate.
The following practices are likely to be most at risk of being investigated and becoming the subject of ACCC enforcement action.
In its July 2022 Report, the ACCC “strongly encourages” JV producers:
There can be little doubt that the ACCC will conduct spot checks amongst JV producers in the coming months to ensure that they have put in place appropriate ring-fencing protocols and that their staff adheres to those protocols.
Historically, joint marketing arrangements were relatively common in the industry and the prevailing view was that protection from the application of the cartel conduct prohibition for such arrangements was generally available under the so-called JV defence provided that the joint marketing activities were reasonably necessary for the undertaking of the JV.
In its July 2022 Report, the ACCC points out that the recent trend towards separate marketing suggests that producers have overcome the hurdles associated with separate marketing and that, therefore, joint marketing may no longer be necessary for JVs to undertake the activities required to meet the purposes of the JV, namely the exploration, production and supply of gas.
This is a clear warning to those JVs which are still engaging in joint marketing activities (without being authorised by the ACCC to do so) to re-visit their joint marketing arrangements and to discontinue the practice if there is any risk of non-compliance with the applicable competition laws.
More specifically, the ACCC states that it is difficult to see why joint marketing of gas to the domestic market by participants in the LNG JVs would be necessary in order to produce and export LNG. The ACCC therefore encourages the LNG exporters to reconsider their marketing arrangements for the domestic market.
JV partners can seek an authorisation from the ACCC to jointly market JV gas if the likely public benefits from engaging in joint marketing activities outweighs the likely public detriment of doing so (including, in particular, the likely harm to competition). In the last five years, the ACCC has granted authorisation to engage in joint marketing for two JVs which involved new entrants and only relatively small volumes of gas. In its July 2022 Report, the ACCC makes it clear that these authorisation decisions were based on those two factors which may not be applicable in other instances of joint marketing.
The ACCC announced its intention to undertake a closer review of the remaining instances of joint marketing that are currently occurring without authorisation and to consider enforcement action where appropriate.
In addition to the key concerns about exclusive supply arrangements in GSAs set out above, the ACCC has identified a number of other competition concerns, including:
The ACCC questions whether it is necessary to restrict a selling producer’s ability to supply the domestic market in order to achieve the benefits of exclusivity arrangements claimed by market participants (such as de-risking projects for selling producers and allowing more capital to be committed to the development of upstream resources).
The ACCC again stated its intention to undertake a closer review of GSAs containing exclusivity provisions in order to determine whether they could have the likely effect of substantially lessening competition and to consider enforcement action where appropriate.
It would be prudent for any gas producers or LNG exporters to conduct a comprehensive competition law audit of their existing arrangements to ensure that they are competition law compliant and, to the extent necessary, to alter those arrangements to remove, or at least minimise, any competition law and ACCC enforcement risks. Preferably, the competition law audit ought to be undertaken by an ‘independent’ firm, i.e. a firm which was not involved in the drafting of the arrangements themselves or has previously advised on the conduct. In particular:
 In its July 2022 Report, the ACCC identifies the following large JVs which are in effect engaging in joint marketing and which together account for 83% of the 2P gas reserves on the east coast:
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