Hopes rise for energy price reforms as gas giants and government talk

Australian energy giant Woodside says it is increasingly optimistic that the gas industry and the federal government can reach an agreement on the final design of controversial new domestic price controls to ensure ongoing investment in fuel supplies and ease the threat of future shortfalls.

In a bid to tame soaring electricity and gas bills, the government introduced emergency laws in December that capped the domestic gas price for 12 months, and it is finalising a mandatory code of conduct designed to shore up local gas supply and limit prices beyond the end of this year.

The Bass Strait gas field has traditionally supplied up to half the demand on the east coast, but its reserves are rapidly shrinking.Credit:

The most controversial element of the proposal is a requirement that gas contracts are struck at prices that reflect production costs plus a margin allowing for a “reasonable” rate of return – a change that gas producers have criticised as a major intervention that ignores exploration and development risks and other significant expenses, and will imperil the availability and affordability of gas for Australian consumers.

However, in a speech to be delivered on Tuesday, Mark Abbotsford, the vice-president of marketing at Australian oil and gas producer Woodside, will say ongoing discussions with the government have been constructive, and the company was increasingly confident they will “land on a suite of measures” that would not have a negative effect on driving investment in critical new supplies.

“We absolutely understand the delicate balance before government of ensuring the interests of Australian households and businesses are supported, without impacting a vital export industry that delivers benefits to Australia and supports key strategic partners in our region,” Abbotsford will tell the Australian Domestic Gas Outlook conference in Sydney.

“I do think we can land on a suite of measures that ensure a functioning market and a positive investment climate to deliver the energy Australians need.”

Despite the formal consultation period over the code finishing in February, the Australian Competition and Consumer Commission (ACCC) on Monday confirmed talks with the gas industry, the federal Energy Department and Treasury were continuing.

“Government is moving forward to develop the code and our understanding is that it intends to release a code for consultation and finalisation in the first half of the year,” an ACCC spokesperson said.

Woodside is also in talks with Resources Minister Madeleine King over proposed changes to the Australian Domestic Gas Security Mechanism, a policy that enables the government to redirect gas exports to the local market to head off shortfalls. “We are also engaging constructively with Minister King and her department, and we believe the majority of proposed changes to the mechanism will make it a more effective tool of last resort,” Abbotsford will say.

East-coast gas users, such as manufacturers that use gas for energy or as a raw material in their factories’ processes, have strongly supported the government’s efforts to bring down what they say are “unreasonably and unsustainably” high prices that have risen disproportionately to exploration and production expenses.

Before the government decided to intervene in the market, east-coast gas bills had been forecast to surge by more than 40 per cent by 2024, largely due to the fallout from the war in Ukraine worsening a global energy crunch and boosting prices.

However, gas producers responded angrily to the government’s proposal to set “reasonable” pricing controls, which would reflect cost of production plus an appropriate return on capital. The industry has argued that the draft proposal ignores the significant and unique risks involved in oil and gas projects, such as unsuccessful exploration activity, development costs, power costs and extensive decommissioning requirements.

Woodside, which supplies about 20 per cent of east-coast gas demand through its stake in the 50-year-old Bass Strait oil and gas fields, earlier this year said the proposed price controls may force it to reassess its long-term investment plans in the venture that it jointly owns with US energy giant ExxonMobil.

The offshore gas fields have traditionally been Australia’s biggest source of domestic gas but are rapidly declining, prompting the AEMO to issue warnings that Victoria could face gas shortfalls this winter if a burst of cold weather drives up heating usage at the same time as a slump in output from wind farms or breakdowns at coal-fired power plants.

By 2027, states including Victoria, NSW and South Australia would face yearly gas supply deficits unless new gas supplies were made available, AEMO said.

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