Gas giant warns Labor on risk of ‘Argentina-style’ industry collapse

One of Australia’s largest gas producers warns the Albanese government risks replicating failures that led to the decline of the industry in Argentina if it curbs gas exports too aggressively and kills off investment in future domestic sources of supply.

Unprecedented gas reservation rules in eastern Australia are due to kick in from July next year, which will compel exporters of liquefied natural gas (LNG) to hold back the equivalent of up to 20 per cent of what they send overseas each year and ensure they deliver it locally.

The move comes amid growing concerns that too much LNG is being shipped offshore from Queensland at the expense of local buyers, exacerbating a supply crunch and pushing up prices. Despite Australia’s position as one of the world’s biggest LNG exporters, officials warn that Victoria, New South Wales and South Australia face a domestic shortfall hitting before 2030, as the decades-old production fields of the Bass Strait continue to deplete rapidly; there are not enough new supplies to replace them.

Left unchecked, the shortfall could worsen cost-of-living stresses for consumers who still use gas for cooking and heating, add to the price of electricity, and threaten the viability of factories that use gas for heat or as a feedstock.

However, chief executives of major Australian gas exporters Santos, Shell and Woodside Energy on Tuesday sounded the alarm over unresolved aspects of how the government’s new reservation scheme would work. If it forced an excessive oversupply of local gas, they said, the policy would slash prices temporarily but undermine investment in new local drilling projects needed to keep supplies and prices stable into the future. It could also jeopardise crucial trade ties with Australia’s major LNG customers in Asia.

Kevin Gallagher, managing director of Adelaide-based Santos, said the scheme, if not designed carefully, would “kill investment in new supply”. “The minute that catches up, you will see shortages,” he said. “And you will see prices skyrocket.”

Gallagher said deterring investment in new local gas fields in south-eastern Australia would force Victoria and NSW to establish floating gas-import terminals to receive cargoes from other parts of the country or overseas at potentially higher prices. Gallagher underlined the risk of heavy-handed interventions by pointing to Argentina’s gas export tax and price controls in the early 2000s, which crippled its local export industry and turned the country from a net exporter to a net importer of gas.

“If you want to watch how to kill an industry, go and do a case study of Argentina – they killed a gas export industry by very similar types of intervention and policies,” Gallagher said.

Australia is the third-largest global supplier of LNG – gas that has been super-cooled down to a liquid so it can be shipped across the world. Western Australia has its own gas reservation policy, requiring the LNG industry to hold back 15 per cent of its reserves, but there were never such rules imposed on Queensland exporters when the state’s three LNG terminals – operated by Shell, Origin Energy and Santos – were launched a decade ago.

Shell Australia chair Cecile Wake said the government had an opportunity to create a “holistic and enduring policy” that would “restore certainty and unlock investment” in new supplies and infrastructure. However, a “poorly designed or poorly calibrated” scheme that forced an oversupply would worsen the threat of future supply shortfalls, she said.

“Our industry stands ready to work with the government and all stakeholders to ensure that, together, we achieve that outcome,” she said. “But it must begin with setting the conditions for growing supply, not redistributing an ever-diminishing pie.”

Energy Minister Chris Bowen said the gas reservation would help shield the local market from global shocks and create a “modest oversupply” that would put downward pressure on domestic energy prices.

Further details about the scheme’s design are expected to be revealed at meetings between industry and government leaders next week.

Despite facing pushback from the industry, Labor’s scheme has won the backing of major manufacturers, which need gas to fire their kilns and furnaces, and as a feedstock for making products like plastics, chemicals and fertiliser. Industry representatives said Labor’s reservation plan marked the most significant reform to the gas market in more than a generation, and would help keep factories viable.

The prospect of a domestic gas shortage underscores a deepening challenge for governments that are having to balance goals to combat climate change with the need to shore up polluting fossil fuels for those who still depend on them.

Households are increasingly switching from gas stoves and heaters to electric alternatives, aided by government incentives and policies banning gas hook-ups in new residences. However, that shift is not happening fast enough to avert the need to boost gas supplies, the energy market operator says.

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