The PC studied the issue and agreed with the Australian Petroleum Production and Exploration Association that by reducing the return on new gas discoveries there would be less investment in exploration, and that would be bad for Australia.
Western Australia's DomGas Alliance, the union movement and the Australian Industry Group have called on the Commonwealth to enact some sort of national gas reservation, similar to that used successfully in the United States, to help keep gas prices low and support the manufacturing industry, but the PC warns that will not be sensible.
"The gap created between domestic prices in the eastern market and export prices likely under such a policy would especially weaken incentives to invest in projects that would produce solely for the eastern market, given that all of a domestic project's production would be sold at prices below the market level," the PC said.
The PC found that the integration of the eastern Australian gas market with the Asia Pacific market is a net positive for Australia as the LNG plants at Gladstone allow the Australian economy to earn a higher return from its substantial non-renewable resources.
It furthered that while linking east coast and Asian gas prices will cause significant disruption for market participants and lead to material cost increases, this remains a fact of life when living in a capitalist economy.
The PC warned that governments interfering with market signals could make the situation worse.
The Ai Group proposed that a ‘national interest test' be applied to new or significantly expanded LNG export capacity to ensure there was adequate gas supply for domestic users, but BIS Shrapnel described national interest tests, such as that used in the United States, as ‘de facto reservation policies' because they allowed governments to limit export volumes and ensured that domestic demand for gas was met.
The PC said the distortionary effect of domestic gas reservation would be compounded over time and lead to investments being made in gas-intensive industries on the basis of gas prices that were below levels that would have otherwise prevailed in the market.
Further distortion would arise as companies with significant economic linkages to gas-intensive industries in turn made their own investment decisions.
Some empirical analysis supported the conclusion that domestic gas reservation would impose net costs on the community, the PC concluded.
APPEA welcomed the commission's findings.
"The commission's report is a welcome and thoughtful contribution to a debate that has been too often characterised by misinformation and poorly considered policies," APPEA acting CEO Paul Fennelly said.
"The commission rightly concludes proposals such as domestic gas reservation should be consigned to the scrap heap. Advanced economies underpinned by competitive markets, such as Australia, should not rely on one industry to subsidise another.
"Over many years, the benefits of freer markets and freer trade have been championed by the commission and accepted by successive Australian governments, and indeed by most developed economies.
"The commission's key finding - that developing a gas export industry in eastern Australia will deliver a net benefit to the community - is particularly welcome."
Fennelly said the commission found that removing regulatory burdens restricting exploration and production of natural gas, particularly in Victoria and New South Wales, provided a clear pathway for both the market to work more effectively and to bring on more gas supply.
"The gradual removal of market distortions has delivered significant economic benefits to the nation. The commission should be congratulated on its findings that interventions such as domestic gas reservation would reverse those gains," he said.
"This also means Western Australia, the only Australian state with reservation in place, should now abolish the policy as the costs imposed on the economy far outweigh any perceived benefits.
"The commission's report should be embraced by all involved in this debate. We need to move beyond misguided campaigns for gas reservation that offer no sensible or viable solution to impending gas challenges and instead focus on the real issue - providing the regulatory environment to enable more gas to flow into the eastern Australian gas market."
The commission also found that any policies designed to accelerate production, such as use it or lose it mechanisms, risked bringing forward gas production in a way that would reduce the benefits received by the community from the gas resource.
On the other side of the ledger the commission found there was scope for improvements to legislated compensation provisions to better reflect the costs to landholders from negotiating land access agreements and from the decline in the value of their properties.
In addition, the group found that community concerns over the environmental and public health risks of coal seam gas activities had led to CSG moratoria in Victoria and NSW, but said the benefits of the moratoria must be weighed against expected costs — higher gas prices for users and reduced royalty and taxation revenue for governments.
The group said risk is a part of life and while technical challenges can be managed, they cannot be eliminated.
The commission also said that while claims gas producers and pipeline owners were exercising market power and distorting outcomes in the eastern Australian gas market had not been borne out by any evidence presented to it so far, the evidence used to support the claims of the existence and exercise of market power - such as higher prices or difficulties securing gas supply contracts - could reflect the risks and uncertainties in a market that was undergoing considerable structural adjustment.
