In July 2017, the Commonwealth Government implemented the Australian Domestic Gas Security Mechanism (ADGSM) to ensure that 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.
On 1 August 2022, the Australian Competition & Consumer Commission (ACCC) released its Gas inquiry 2017-2025 Interim report (ACCC Report).[i] The ACCC Report forecast that the Australian east coast domestic gas market could be facing a shortage of 56 petajoules of gas in 2023.
In response to the ACCC Report, the Commonwealth Minister for Resources, the Honourable Madeleine King MP, indicated that the Commonwealth Government was considering taking the first steps to triggering the operation of the ADGSM in 2023.[ii] On 19 August 2022, and following that statement, the Commonwealth Government extended the operation of the ADGSM until 1 January 2030 (at the time the ADGSM was set to cease operation on 1 January 2023), which has had the effect of allowing the Minister for Resources to exercise her powers to impose export controls on LNG projects in 2023.
At that time of extension of the operation of the ADGSM, the Minister for Resources indicated that the Commonwealth Government was continuing to negotiate a new Heads of Agreement with the three Australian east coast LNG exporters, being the Queensland-based APLNG, GLNG and QCLNG projects (LNG Exporters), which was intended to safeguard Australia’s domestic gas supplies.[iii]
On 29 September 2022, the Commonwealth Government announced that it had signed the new Heads of Agreement with the LNG Exporters (HoA) and released that agreement.[iv] Sar Katdare, a partner in Johnson Winter & Slattery’s competition practice group, assisted APPEA and the three LNG exporters in drafting the HoA and negotiating with the Federal Government.
The HoA indicates that the LNG Exporters will offer an estimated additional 157 petajoules of gas to the Australian east coast domestic gas market in 2023 through a combination of supplying uncontracted gas and utilising existing and improved gas marketing methods.[v]
The execution of the HoA has resulted in the Commonwealth Government deciding to not trigger the operation of the ADGSM for 2023.
In this article, we set out an overview of the HoA, followed by an overview of the operation of the ADGSM for interested readers.
As mentioned, the HoA has been entered into by the Commonwealth Minister for Resources and the LNG Exporters to provide assurance to the Commonwealth Government that the forecast potential risk of a domestic gas market shortfall of 56 petajoules of gas in 2023 will be adequately mitigated.
Under the HoA, the LNG Exporters provide a number of commitments to the Commonwealth Government, which will remain in effect until 1 January 2026. Those commitments include the following:
As part of agreeing the HoA, each LNG Exporter also provided to the Commonwealth Government a plan in respect of its actions to mitigate a risk of domestic gas shortfall in 2023. Annex B of the HoA contains a summary of the aggregate effects of those plans. Among other things, that summary indicates that the LNG Exporters will provide flexibility to assist meeting peak demand periods, including by forfeiting gas contracted by domestic gas producers, offering sale and swaps packages and reallocating existing international supply for the domestic gas market.
The LNG Exporters will report to the Commonwealth Minister for Resources on their performance against their respective plans as part of the quarterly reporting to the Minister described above.
The ADGSM has been implemented through Division 6 of the Customs (Prohibited Exports) Regulations 1958 (Cth) (Division 6).
The Commonwealth Government has also published the Customs (Prohibited Exports) (Operation of the Australian Domestic Gas Security Mechanism) Guidelines 2020 (Cth) (Guidelines), which support Division 6 and assist LNG exporters and other stakeholders understand the operation of the division.
The key measures of Division 6 are:
While Division 6 establishes the broad framework for the operation of the ADGSM, the Guidelines detail how the Minister will implement the ADGSM in practice and deal with:
The Guidelines set out the types of export permissions that may be granted under Division 6. Those permissions 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 export permission granted under Division 6.
Importantly, the provisions of Division 6 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 Australian domestic gas market (that is 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 Guidelines)) 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 the part of the Australian domestic gas market experiencing the shortfall.
Similarly, the Minister may also grant an Unlimited Volume permission to one or more LNG exporters associated with an LNG project that is physically unconnected to the part of the Australian domestic gas market that is experiencing a shortfall (for example, where it is located in a separate gas market).
[i] Australian Competition & Consumer Commission, Gas inquiry 2017-2025 Interim report (July 2022) < https://www.accc.gov.au/system/files/ACCC%20Gas%20Inquiry%20-%20July%202022%20interim%20report%20-%20FINAL.pdf >.
[ii] The Honourable Madeleine King MP (Minister for Resources, Commonwealth), ‘Government responds to ACCC gas shortage report’ (Media Release, 1 August 2022) < https://www.minister.industry.gov.au/ministers/king/media-releases/government-responds-accc-gas-shortage-report >.
[iii] The Honourable Madeleine King MP (Minister for Resources, Commonwealth), ‘ADGSM extended to 2030 to safeguard domestic energy supply’ (Media Release, 19 August 2022) < https://www.minister.industry.gov.au/ministers/king/media-releases/adgsm-extended-2030-safeguard-domestic-energy-supply >.
[iv] The HoA is accessible at: < https://www.industry.gov.au/sites/default/files/2022-09/heads_of_agreement_the_australian_east_coast_domestic_gas_supply_commitment.pdf >.
[v] See Annex B of the HoA.
[vi] This code was developed by the Australian Petroleum Production & Exploration Association and is set out in Annex C of the HoA.
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