ACCC: Current practices of gas producers and LNG exporters may breach competition law

Articles Written by Sar Katdare (Partner), Michele Laidlaw (Partner), Peter Rose (Partner), Wolfgang Hellmann (Special Counsel)
Gas burner on a plain black background

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.

Key Competition Concerns

The July 2022 Report’s key findings in relation to “behavioural factors” that may adversely affect competition in the upstream gas market include:

  • The upstream gas market is highly concentrated and dominated by the three LNG exporters. In 2021, LNG exporters and their associates had influence over almost 90% of the 2P gas reserves on the east coast through a combination of direct interests in tenements, joint venture (JV) arrangements and exclusivity provisions in Gas Supply Agreements (GSAs).
  • JVs between gas producers may harm competition in a variety of ways, and this is of particular concern to the ACCC as over 95% of the east coast’s 2P gas reserves are held through JVs:
    • JVs may facilitate coordinated conduct across competing projects unless effective ring-fencing arrangements are put in place that prevent the sharing of commercially sensitive information with other projects in which the JV partners have an interest.  
    • JV participants may have an incentive to prioritise the development of their own projects and/or to delay the development of gas by the JV if they consider that this might improve the competitive position of their other projects.
    • Joint marketing between JV participants reduces the number of producers competing to supply gas into the domestic market.
  • Exclusivity provisions in GSAs between domestic producers (as sellers) and LNG exporters (as buyers) may also have various anti-competitive effects, including by:
    • restricting the ability of producers to sell gas into the domestic market for long periods of time; and
    • reducing the incentive of producers to bring gas to market as development decisions will be based on the requirements of LNG exporters rather than the supply and demand situation in the domestic market.
  • Acquisitions of producers, tenements or JV interests by larger producers may result in a reduction in producers competing to supply gas into the market and slow the progress of gas developments.

ACCC Enforcement Action

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.

JV ring-fencing protocols

In its July 2022 Report, the ACCC “strongly encourages” JV producers:

  • who have no formalised, or only weak, ring-fencing protocols in place, to implement more robust ring-fencing protocols to prevent the disclosure of competitively sensitive information between rival gas projects; and
  • to have an independent auditor regularly review compliance with the ring-fencing protocols as the effectiveness of such protocols is critically dependent on staff’s adherence to them.

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.

Joint marketing arrangements

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[1].

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.

Exclusive GSAs

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:

  • exclusivity arrangements provide for a significant degree of cooperation between (potential) competitors;
  • the long term nature of exclusive supply obligations which range from 18 to 31 years; and
  • the additional visibility of the operations of (potential) competitors provided by annual reserves and resources estimates and other technical information.

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.

What you should do if you are a gas producer or LNG exporter

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:

  • JV participants need to ensure that their JV has robust ring-fencing protocols in place and that the protocols are adhered to by JV staff.
  • JV participants engaging in joint marketing activities need to ensure that those activities are protected by the JV defence or otherwise consider seeking an authorisation from the ACCC (if there are genuine public benefits from engaging in joint marketing).
  • Producers which have entered into GSAs with exclusivity provisions need to ensure that the exclusivity obligations do not have the likely effect of substantially lessening competition in the upstream gas market.

[1] 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:

  • APLNG, an incorporated JV between ConocoPhillips (47.5%), Origin Energy (27.5%) and Sinopec (25%);
  • QCLNG, an unincorporated JV between Shell (73.75%), CNOOC (25%) and Tokyo Gas (1.25%);
  • GLNG, an unincorporated JV between Santos (30%), Petronas (27.5%), Total (27.5%) and KOGAS (15%); and
  • Arrow, an incorporated JV between Shell (50%) and PetroChina (50%).
Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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