21 October, 2015
Update on the ACCC's East Coast Gas Inquiry and potential implications for both the East Coast and Western Australia
The ACCC's East Coast Gas Inquiry is now in full swing, with 40 public submissions published on the inquiry website, robust public hearings in Melbourne and Sydney, and extensive ongoing private inquiries by the ACCC (which, as it promised, has proactively used its information gathering powers to obtain confidential information under compulsion).
The broad theme that has emerged from the inquiry to date is, on the one hand, gas buyers and users believe that both gas, and gas transport, is difficult to secure and increasingly expensive, as producers prioritise LNG export, while gas producers and pipeline owners by and large have suggested that gas markets are working, but undergoing change, and the key impediment to increasing gas supply is to remove regulatory obstacles to developing new fields and sources of supply (such as coal seam gas). This article discusses the key themes of the inquiry, and considers the implications the inquiry may have for not only the East Coast wholesale gas market, but also Western Australia.
About the inquiry
The inquiry was started by the Minister for Small Business on 8 April 2015, who gave the ACCC 12 months to complete it and provide its report. The ACCC is tasked with inquiring "into the competitiveness of wholesale gas prices and the structure of the upstream, processing, transportation, storage and marketing segments of the gas industry".
In its Issues Paper (issued on 4 June), the ACCC indicated that its focus will be on identifying features of the gas industry, and any specific behaviour, which might limit competition (whether or not that behaviour discloses breaches of the competition law). The inquiry will not consider the international competitiveness of the industry, and so will not explore issues such as environmental regulation, workforce productivity or industrial relations unless it contributes to its competition assessment; although those topics have featured in submissions by industry participants.
The inquiry is the latest in a long line of inquiries about wholesale gas markets, including most recently the 2014 Eastern Australian Domestic Gas Study (which pointed to a review into competition in the gas market as an option for Government, which the Harper Review subsequently expressly supported).i While the inquiry is focused squarely on competition issues, its findings will contribute to a broader domestic gas policy debate, in which Government and industry are grappling with issues such as a domestic gas reservation policy, the "globalisation" of the gas industry, and the impact of LNG markets on domestic gas.
As it is a formal inquiry under section 95H of the Competition and Consumer Act 2010 (Cth), the ACCC has the power to compulsorily acquire documents and information, and interview participants. The ACCC's issues paper identified the prospect of being able to issue notices to overcome confidentiality restrictions as a key tool, and it has not been afraid to use its powers to obtain the information it wants; in particular, on gas supply agreements and contractual negotiations for domestic gas supply.
Key themes and our observations
There have been a wide range of public submissions (and many more private submissions) from industry participants. At a very broad (and simplified) level, the submissions may be divided into two divergent themes:
- domestic gas is not available, and more expensive, because gas producers have an incentive to prioritise LNG exports over domestic supply, in circumstances where a small number of producers dominate supply from jointly marketed projects; and
- gas markets are undergoing change due to globalisation and increasing LNG prices, but are fundamentally "working".
In addition to those broad arguments, submissions on the following related "themes" have also emerged:
- transparency of gas market information;
- access to gas transport services; and
- whether ending joint marketing will increase competition.
For convenience, this article refers to "gas producers", "pipeline owners" and "gas buyers" (to cover retailers and end users), but it is important to appreciate that a range of market participants, as well as other interested groups, have participated in the inquiry to date, and the interests of individual participants in those groups do not always align.
The availability and pricing of gas, and the impact of LNG exports
As expected, a number of gas buyers expressed concern about not only rising gas prices, but the availability of gas at all. A number of gas buyers have submitted that gas producers are prioritising LNG exports over domestic gas, and the current position is that it is difficult to secure domestic gas at any price. In this context, gas buyers have argued these issues are exacerbated by the fact that a small group of producers control a very high proportion of gas reserves, and make only a small fraction of those reserves available for domestic supply, under long term bilateral contracts (rather than through spot markets; although gas trading hubs are emerging).
On the other hand, gas producers have submitted that the market is working, but going through a period of change, and that Australia is now very much part of a global gas market.
They argue that gas buyers can, and do, "switch" to alternative energy options, and so gas producers face competition from alternative sources of energy, and gas buyers do not exclusively rely on domestic gas for their operations. Gas producers have argued that the real limit on expanding domestic gas is not the rise of LNG exports, but the fact there are regulatory policies that restrict exploration and resource development. In particular, gas producers have argued that environmental regulation (such as the Victorian and New South Wales' governments' moratoriums on onshore drilling) is limiting or slowing the development of future sources of gas, and this is harming competition and reducing future liquidity.
Some gas buyers have submitted that, even if those new reserves were developed, the ACCC should not assume that the new reserves will be available for domestic gas pricing, given that greater returns can be made by selling gas as LNG exports to international markets. Similarly, some submissions have raised issues about the "hoarding" of exploration tenements, and the effectiveness (or otherwise) of "use it or lose it" rules.
While the ACCC has indicated it that it does not intend to comment on broader policy (such as environmental regulation), given the arguments that it directly affects competition in domestic wholesale gas markets, it seems that it will be difficult for the ACCC to entirely avoid expressing a view.
Gas buyers have also raised concerns about access to processing facilities, which they submit are held by gas producers with little commercial incentive to allow third party access. By contrast, the operators of processing facilities argued that they would welcome "bona fide" third party access to processing facilities.
The impact of the LNG exports on domestic gas is an area that the ACCC has shown considerable interest in during the inquiry. In particular, the ACCC is likely to be interested in considering (among other things) how the cost in developing LNG processing facilities, compared to the relatively less expensive process of processing gas for domestic sale, is likely to affect gas prices in the future, and the scope for LNG projects to supply domestic gas.
Access to gas market information
A number of gas buyers have strongly advocated for greater transparency and access to information, particularly about gas pricing and terms, the availability of gas, and gas transport services, as a means to increasing competition in gas markets. They have argued that more information will assist gas buyers in negotiations with gas producers and pipeline owners, and assist in making longer term decisions.
We expect that the ACCC will agree, in-principle, that greater transparency of information is likely to promote competition. However, it would be a significant step for the commercial terms of bilateral gas supply and gas transport agreements to be made publically available (in contrast with pricing and other market data that is published as part of the short term trading markets, Wallumbilla gas trading hub, and the Victorian Wholesale Gas Market; and spare capacity and reference prices and terms published under the National Gas Law).
Liquidity of transport services
A number of gas buyers have also emphasised the need to enhance liquidity in the market for gas transport services. Gas transport, like gas supply, is typically contracted under long term bilateral agreements between pipeline owners and users. Some submissions raised concerns that users can contract large tranches of pipeline capacity, with little or no incentive to release it when not in use.
However, the Australian Pipelines and Gas Association has strongly argued that the market is operating efficiently, and in line with a competitive market, and that pipeline users often have transport agreements with multiple pipelines, which promotes competition.
It will be interesting to see what the ACCC makes of the competing submissions, particularly given the movement away from gas pipelines being covered by third party access regulation under the National Gas Law, and therefore lower direct regulatory oversight of how capacity is used and contracted (and which provides for greater disclosure of information about capacity, pricing and other access terms).
Some gas buyers have specifically criticised this trend, and the "15-year no coverage" process under the National Gas Law (where a greenfields pipeline can apply for exemption to the National Gas Law for 15 years). Relevantly, the ACCC issues paper notes the growth of "new" pipeline services, such as as-available / interruptible haulage services, and park and loan facilities, and asks whether these services are effective substitutes for traditional "firm" haulage services. Those questions have not been squarely addressed in the public submissions.
Joint marketing – is the end near?
Finally, a number of submissions have called for the end of joint marketing by gas producing joint ventures, on the basis that, while they did create efficiencies in the past, they are now no longer necessary and are an impediment to upstream competition. In the past, the ACCC has found that the efficiencies from joint marketing outweigh any anti-competitive harm (and, further, that joint marketing may not always be possible). However, the ACCC has always warned that, as domestic gas markets mature and increase in size, there is likely to be a point where that is no longer true. It will be interesting to see whether the ACCC believes that the point has been reached, or is likely to be reached in the near future. This is an issue that both ACCC Commissioner Jill Walker, and ACCC Chairman Rod Sims, appeared to be particularly interested during the public hearings.
ACCC views to date
On 16 September 2015, Mr Sims shared his "early insights" from the inquiry in a speech to the Eastern Australia's Energy Markets Outlook conference in Sydney. Significantly, it appears the inquiry is satisfied that many of the issues raised by gas buyers are being borne out.
In particular, he observed that "the arrival of major LNG projects has upended the East Coast gas market, likely permanently". As a result, LNG demand was now equal to total domestic demand on the East Coast, and would need to triple in order to meet demand for both LNG exports and domestic demand by the time QCLNG, GLNG and APLNG reach production. This has led to a situation where the East Coast market was "now living under the shadow of supply uncertainty".
Significantly, he said that gas buyers' complaints about being unable to access gas, particularly between 2012-2014, are "largely true", and that the gas supply offers that are being made are "largely on take-it-or-leave-it, inflexible terms"; although he acknowledged that there were signs that during 2014 and 2015, more gas supply was becoming available (but on short term contracts with higher prices), which he suggested could be attributed to "slippage in LNG project timeframes" and coal seam gas becoming available. He observed that the lack of available gas has led to gas buyers changing their behaviour, including by taking on exploration risk, increasing participation in short term trading markets, and directly trading gas supply with other users.
Consequently, it appears the ACCC will proceed on the assumption there has been a permanent change in the East Coast gas market, and will be focused on developing recommendations to improve market efficiency in that new environment.
Implications for Western Australia?
While the East Coast Gas Inquiry covers each State and Territory other than Western Australia and the Northern Territory, the ACCC's work is likely to factor into its thinking the domestic gas market in Western Australia. Given this, it may be prudent for Western Australian gas market participants to remain interested in the inquiry, and consider making public submissions should the opportunity arise in the future.
There has been activity in the Western Australian domestic gas sector in the past year. In March 2015 the ACCC cleared Woodside's $US2.8 billion acquisition of Apache's domestic gas interests in Western Australia, being the Wheatstone LNG project, on the basis that it would not change the structure of the market in a material way, given the transfer of market share to Woodside was less than 5%, and that both Apache, and other suppliers, would continue to constrain Woodside. Apache subsequently sold its remaining domestic gas interests to Macquarie Capital and Brookfield Asset Management, resulting in the creation of Quadrant Energy, a new player in domestic gas production in Western Australia (effectively replacing Apache).
Looking forward, the next key development will be the review of the joint marketing authorisations for the North West Shelf Project and Gorgon Project. These authorisations will expire on 31 December 2015, but, at this stage, the ACCC has not published any information indicating whether it has received an application for those authorisations to be renewed.
When the ACCC last authorised those arrangements, it flagged that developments such as Reindeer and Macedon, the Gas Bulletin Board (which shows transport and production capacity), and increasing storage capacity, might mean the Western Australia market would "mature" to a point where joint marketing was no longer necessary, or efficient. Consequently, the ACCC's assessment of the viability of joint marketing on the East Coast may influence its thinking in relation to these authorisations. While the ACCC previously distinguished the Western Australia market from the East Coast on the basis of a strong LNG export market, high cost of new fields, and rapid increase in demand for energy from the resources sector, those differences may be getting smaller.
Looking ahead
The ACCC has six months to finalise the inquiry, and report to the Minister. While the initial round of public consultation has concluded, the ACCC is consulting directly with market participants, and has foreshadowed the possibility of further public hearings (including in Brisbane). The ACCC may also issue a draft report for comment before concluding its inquiry, and issuing its final report with recommendations for Government. Ashurst will continue to maintain a watching brief on the inquiry, and will publish updates as material developments occur.
For further information, please contact:
Justin Jones, Ashurst
justin.jones @ashurst.com
