Prime Minister Malcolm Turnbull announced on April 27 the introduction of the Australian Domestic Gas Security Mechanism from July 1 which, If implemented as initially described by the government, could significantly impact LNG export operations by net gas exporters.
The mechanism will give the government the power to impose export controls where there is a shortfall in the domestic market and require net exporters to fill that shortfall.
The announcement of the mechanism comes at a time of constrained supply in east coast gas markets, moratoriums on non-conventional gas exploration in the Northern Territory, Victoria, Tasmania and New South Wales, and the ramp up to full commercial operations of LNG projects in Gladstone.
While the mechanism was squarely targeted at Queensland's LNG projects, Ashurst said "it may extend to west coast projects to the extent that proponents involved are net exporters".
However, the firm conceded that the west coast's domestic market was different to, and not interconnected with, the east coast market, and that WA's government already imposed a 15% domestic gas reservation requirement.
"We also anticipate that upstream LNG suppliers and pipeline operators may also be affected through the trickle down effects that the mechanism may have on the diversion of gas to domestic markets," Ashurst said.
Woodside Petroleum CEO Peter Coleman said at last Friday's AGM that his company had already spoken to east coast projects around gas swaps or cargo swaps at commercial rates, but were "yet to avail themselves of that at the moment".
"This debate around 'Is it available, yes or no? Can I get it at spot prices, yes or no?' The answer is yes, and it's always been yes," he said.
Former WA premier Colin Barnett and some analysts backed the idea of a pipeline from Karratha to Moomba to connect WA's gas to the east coast, but Coleman said that would take 5-10 years to build, so shipping gas east may be a better option.
Calculations
In calculating whether an LNG exporter is a net contributor to the Australian gas market, each company may be required to submit forecasted supply data for foreign and domestic markets.
Regulators will then analyse that data to determine whether a shortfall exists.
In meeting any expected shortfall, the government has stated that exporters will have flexibility to find commercial solutions such as swapping cargoes out of portfolios or on the spot market.
The government is also seeking industry feedback on the mechanism.
Ashurst said LNG exporters and suppliers should review their existing sales arrangements, particularly to determine whether the mechanism can be managed through force majeure, change of law or change of circumstance provisions.
Net exporters of LNG should also consider how to manage the impacts of the mechanism, including through domestic market commitments or swapping out export cargoes.
