Hastily assembled legal teams. Accusations of Soviet-era policy. Counter jabs about “Putin profits.” Warnings of a threat to future investment.
Welcome to Australia, where a major row has erupted between political leaders and the resources industry over sweeping new government powers to set natural gas market prices.
On Thursday, the country’s Labor government passed legislation capping uncontracted gas sold in the domestic market at A$12 a gigajoule ($8.5 a million British thermal units) for 12 months. That’s well above historic local rates and the cost to produce gas, but just a fifth of current overseas spot prices in Asia.
The move is designed to protect consumers from soaring global prices as the world looks for alternatives to Russian imports. Despite being the second-largest exporter of LNG, Australian retail gas prices were expected to rise 40% by June 2024.
Australia only sells about 20% of its gas locally, so the immediate financial hit to the industry is relatively limited. What really worries energy companies though is the possibility of a permanent price cap and the potential for the government to force them to divert supply, earmarked for profitable export, to the domestic market.
The government hasn’t announced plans to cap prices beyond 12 months, but the bill includes provision for a mechanism backed by substantial civil penalties to set domestic rates to reflect the costs of production and a “reasonable” return on capital.
“Marxist power grab,” is how Saul Kavonic, a Sydney-based energy analyst with Credit Suisse, characterised the regulations. “Labor is seeking to be able to take any business’s gas away and sell it to wherever, whoever, and at whatever price the government decides on the day, with no recourse.”
Similarly strident are industry voices claiming the changes will jeopardise future investment in Australia.
“The unprecedented market intervention announced risks driving investment out of the system,” Woodside Energy Group Ltd. Chief Executive Officer Meg O’Neill said. “This is going to have a chilling effect on future investment in supply,” said Samantha McCulloch, CEO of the Australian Petroleum Production & Exploration Association — a lobby group whose members include Chevron Corp., Shell Plc and BP Plc.
The “Soviet-style” policy could make companies demand fiscal stability agreements for new projects, like in Venezuela or Nigeria, Santos Ltd. CEO Kevin Gallagher told the Australian Financial Review newspaper.
That’s a sensitive area for the government as the LNG sector is of growing importance to the Australian economy. Exports of the fuel more than doubled to A$70.5 billion ($47 billion) in 2021-22, equivalent to 3.1% of gross domestic product, and are seen rising to A$90 billion in 2022-2023.
Yet Australia is far from alone in seeking to protect domestic consumers. The UK, for example, is implementing a windfall tax on “excess profits” from some power generators with Germany and Italy also among those levying energy companies.
Labor has been reluctant to follow suit with a special tax, in part because of a bruising history of conflict with the powerful energy industry.
In 2010, then Prime Minister Kevin Rudd proposed a tax on “super profits” of resources companies, which triggered a furious media campaign against his government from mining magnates. Eventually the bill was significantly watered down after Rudd lost his job in a leadership contest.
A similar dispute with energy groups over an emissions trading system helped bring down the government of Julia Gillard, Rudd’s successor, in 2013. Labor spent the next nine years in opposition, only returning to government in May this year.
However, Canberra believes this is a battle Prime Minister Anthony Albanese can win. Polling by Resolve published in the Nine newspapers on Dec. 5 found almost 80% of Australians backed a price cap on gas and coal.
And the explosive rhetoric isn’t one way. On Friday, Industry Minister Ed Husic said it is taking action in the national interest, contrasting that to “lippy” executives wanting to “hold on to every single dollar of their Putin profits.”
Labor argues the A$12 a gigajoule cap is above what the sector routinely accepted without complaint before Russia’s invasion of Ukraine caused international prices to spike.
They have backing from some sector experts. Industry warnings are “hyperbole in the extreme,” said Bruce Robertson, a gas analyst at the pro-renewables Institute for Energy Economics and Financial Analysis, noting similar arguments were used in 2006 when Western Australia enacted laws forcing gas producers there to reserve a portion of gas for the domestic market. “Since 2006 there has been more investment in Western Australia rather than less.”
After an initial tumble in Australian gas company shares, market reaction has been muted with no major movement in the big producers.
One of the biggest issues for the gas industry has been the speed at which the legislation was introduced and approved. The text of the bill legislating short-term caps was issued on just Dec. 9. Shell and Woodside had to urgently assemble their legal teams late last week to comb through the legislation, according to people with knowledge of the matter.
Australian LNG traders have been calling major customers in countries including Japan and South Korea to assure them that they will do everything in their power to make sure the new regulations won’t affect contractual commitments, the people added.
The center-left Labor government dismisses suggestions it has been hasty, arguing the energy industry had been widely canvassed for months ahead of the policy announcement, and has repeatedly said the long-term contracts under which most gas is sold will be unaffected. It’s also tried to ease concerns, saying it will consult until February before deciding on longer-term measures.
Albanese met with gas industry leaders on Wednesday, where he agreed that any new rules would have provisions that protect delivery of LNG supplies to customers abroad, according to people with knowledge of the discussions. Albanese’s office didn’t immediately respond to a request for comment.
Such meetings are just the start of an ongoing negotiation — with both sides holding strong cards.
“The gas industry is very powerful. They may not win in the court of public opinion, but they don’t have to invest if they don’t want to,” said David Leitch, energy analyst at ITK Services. Still, Australia’s vast reserves give the government a major bargaining chip. “There are only so many places with gas.”