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House of Assembly - Fifty-Fifth Parliament, First Session (55-1)
2023-02-21 Daily Xml
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National Gas (South Australia) (East Coast Gas System) Amendment Bill

Second Reading

Adjourned debate on second reading.

(Continued from 30 November 2022.)

Mr PATTERSON (Morphett) (17:04): I take the opportunity to speak in parliament about the National Gas (South Australia) (East Coast Gas System) Amendment Bill.

The DEPUTY SPEAKER: Are you lead speaker?

Mr PATTERSON: I indicate that I am the lead speaker, if that keeps you happy. This amendment bill is another batch of reforms coming from the Energy Ministers' Meeting, this one from August last year. As was pointed out to me by one of the stakeholders we consulted with, it continues the trend of gas market reform delivering market transparency and increased powers to market bodies in an attempt to address gas supply issues—this has been going on over the last decade—rather than looking to find ways to increase the supply and get more gas into the actual market itself.

In terms of what the current gas market is like, it is based primarily on bilateral contracts between producers, retailers, infrastructure service providers and also larger users. These bilateral contracts have proved to be extremely reliable in ensuring contracted positions are met. Many if not all of the market participants mitigate their major supply risks through contracts, so you can see contracts are very important to the functioning gas market that is working in Australia.

As a result, though, this government intervention that this amendment bill is proposing into the gas market is a major change and may well result in unintended consequences. This uncertainty could very well have a significant effect on investment into gas production and gas infrastructure. That uncertainty comes at a time when the investment is crucial not only to South Australia's but to Australia's energy security.

More investment in natural gas and increasingly in renewable gas is going to be critical to addressing what is the fundamental issue in the east coast gas markets: the high prices and a challenging market for supply of gas that is occurring at the moment. In fact, more gas into the east coast gas market really is critical to keeping gas prices and ultimately electricity prices down—a lot of electricity prices are dictated by gas generation—for families, for industry and for business as well.

The reasoning that has been provided by the energy ministers for the changes that are being proposed in this bill stems from the fact that, unlike the National Electricity Market, which has well-established frameworks under which AEMO maintains reliability and supply adequacy, AEMO has limited powers and tools to identify and respond to supply and demand imbalances in the east coast gas market outside of Victoria.

This National Gas (South Australia) (East Coast Gas System) Amendment Bill is aiming to implement a framework that provides the Australian Energy Market Operator with the tools and power to monitor risks to supply adequacy in advance of those risks being realised, to signal those risks to the market and to seek a response. The amendments are meant to address the winter 2023 east coast gas supply adequacy concerns that have been raised by both the Australian Competition and Consumer Commission (ACCC) in their July 2022 gas inquiry interim report and also AEMO's Gas Supply and System Adequacy Risks report. Both those reports indicated gas shortages in the upcoming winter.

The amendment bill also allows AEMO to manage situations if adequate market responses are not forthcoming to ensure AEMO has multiple options to better manage the forecast threats for winter 2023. It is that part of the bill, certainly, that the stakeholder feedback has some legitimate concerns about, around really trying to insert AEMO into the market, which is run by contracts.

In terms of the Australian Energy Market Operator and the Australian Competition and Consumer Commission, I mentioned their reports from July 2022, but even preceding those reports they have consistently highlighted the risk of domestic gas supply shortfalls going back in recent years. A lot of this stems from a fall in the southern reserves—those legacy gas fields in Victoria, for example—and the result has been an increasing reliance on gas from Queensland.

Over the last decade, the country has gone from a long-selling position, one where there is a fair excess of gas that is being supplied to one that is now short, so demand is exceeding supply. Alarmingly, this supply-demand balance is expected to deteriorate further, with AEMO forecasting the risk of substantial declines in production in the southern states from 2023. This is going the wrong way for a country that really is blessed with an abundance of gas on the east coast itself.

Exports are a significant factor; they are pointed out and they become a bit of a lightning rod in terms of why there is a shortage. But maybe if we just worked through that export sector in ways that it can be mitigated. As I said, the exports of LNG are a major contributor to the amount of gas required to be produced in Australia. This is done out of the three major LNG export facilities. They each have a gas processing capacity for that facility and the ones that have been built were built in response to significant export contracts by other countries.

Those gas processing plants, as I said, have capacity and they have a buffer between what their contracts are and what they can process. They can process more than what their contracts require. Approximately 90 to 95 per cent of their plant processing capacity is tied up to supply those contracts, so you can see there is that extra capacity for them. It can be used to supply into the international spot market and there are very high prices internationally at the moment which then are drawing and competing with the same pool as the domestic market.

This really has had the effect of coupling the domestic market to the international market as well. It was pointed out by a number of stakeholders that, if a country can increase its supply, especially so it is in excess of the LNG processing capacity of these plants, that excess supply can only go into the domestic market. In a way, by doing that, it can decouple international pricing from domestic pricing as well, which I think is a worthy aim for this country because, as I said, we have an abundance of gas. It is a frustration for all Australian users that we do not have that abundance equate through to lower prices at the moment. Certainly, in the past we have had that; that is where we want to go again. But there are complex factors around how we can move forward.

It is also worth pointing out in terms of these export facilities, that LNG is going to countries that have committed to net zero carbon emissions by 2050. They are using the LNG as a transition pathway to reduce their emissions because that then reduces their reliance on coal-fired power. When people talk about Australia and its gas and trying to reduce gas usage, just remember that there are countries that are significantly further behind Australia that are actually using gas to help with their transition to help reduce their emissions.

The point really should be always pressed home that, as to these carbon emissions, it is global warming: it is not Australia warming. We benefit as a country when global emissions go down, unfortunately global emissions are going a totally different direction to where Australian emissions are going. But we should really try not to back away from the fact that other countries that actually have a commitment to reduce their emissions are using Australian gas, therefore why should Australia not also take up that opportunity?

Why should we not look to make sure our domestic gas supply is over and above and being used to help Australia decarbonise in a sensible, methodical way? I bring that point home because, worldwide, we are seeing countries revert back to coal-fired power generation because of shortages in natural gas. The world's three biggest coal users have boosted their output recently. I think China's coal-fired power use has risen up by about 9 per cent. India's has gone up by about 16 per cent and the US is by 14 per cent.

Without natural gas, the world is reverting back to coal. We need these countries to work with gas and, as I said, countries that are using our LNG exports are looking to do that. If we can increase the supply of gas into the domestic market, we will not be departing from pathways that other credible countries are using, which is part of their journey to net zero.

As I alluded to earlier, both the ACCC and AEMO cautioned that domestic gas supply adequacy has deteriorated substantially since early 2022. In July 2022, AEMO's gas inquiry report 2017-2030 noted that, under their 2023 progressive change demand scenario with high gas-powered generation, the east coast gas market could face a shortfall as high as 109 petajoules in 2023.

Similarly the ACCC forecasted in its July 2022 gas inquiry interim report that the east coast gas market is at risk of a 56 petajoules shortfall in 2023 unless more gas from Queensland LNG producers can be supplied to the domestic market. That potential shortfall, when you try to frame what 56 petajoules is, is roughly equivalent to 10 per cent of the east coast gas market's domestic demand. This is 40 petajoules higher than forecast in the January 2022 interim report. You can see that it jumped in July 2022.

This deficit means that the domestic east coast gas market has become more susceptible to external shocks and will continue to be susceptible until the core issue around the domestic supply of gas is overcome. That was a fragility in the market that has been building for a number of years. In 2022, of course, the global pandemic recovery was underway which meant that more gas was being used worldwide.

The gas resource availability impacts were therefore growing, and have been growing since 2021, and then unfolded significantly as a result of the Russian invasion of Ukraine, which substantially increased international demand for Australian gas. Concurrently, what happened in the winter of 2022—and which quite often is overlooked—is that there were significant coal generator outages on the east coast and this coincided with lower than usual renewable energy generation during the winter of 2022.

To make up for that shortfall, there was increased domestic gas demand for gas-powered generation. Where gas in Australia is typically used as a so-called peaker for these generators, with plants fired up when demand is strong in the evenings or on cold mornings, last winter many of these gas power stations were running around the clock, so there was a significant increase in the use of gas.

This confluence of factors, amongst others, led to record high spot prices during the middle of 2022 and resulted in interventions from AEMO to address supply adequacy risks. No-one wants to see that. There were really devastating impacts on business especially, buying it on the spot market. For that reason, this amendment bill seeks to try to avoid a gas crisis happening in 2023 as well.

As I said before, if domestic production meant supply increased so that it was over and above the excess of the LNG processing capacity—which, at the same time, was experiencing unprecedented global gas prices in these processing plants—then Australia would have been decoupled to much more of an extent from those big international prices. That excess gas over and above the plant capacity could then have made its way to the domestic market and domestic market prices would have been decoupled to much more of an extent.

What are the factors? Why are we seeing this deficit in terms of supply and demand? You would have to say that Victoria's moratorium on onshore gas development has played a big part. Their existing gas reserves are depleting, and they are not looking to replace them with onshore gas development. At the same time, New South Wales is going slow on some key projects in their state, such as Santos's $3.5 billion Narrabri scheme. This really has not helped the east coast gas shortage. Both those states are significant users of energy. It is beholden on them to really do some heavy lifting for their states, rather than rely on gas from South Australia or Queensland.

That is not the case at the moment. It was in this environment that the energy ministers met in August 2022, looking to address the challenge that the east coast gas market could potentially face in the winter of this year. That saw this amendment bill drafted, but it was consulted on in a very short period of time. In fact, on 29 September 2022, while this was happening, the consultation period went on. At the same time as the consultation in September, east coast LNG exporters and the Australian government renewed and updated their heads of agreement.

Under the terms of the new heads of agreement, excess gas produced by the LNG exporters must be first offered to the domestic market for reasonable supply periods, with reasonable notice, on competitive market terms and at internationally competitive prices, before being offered to the international market. That was a way of circumventing the excess in production capacity of those LNG exporters. In fact, LNG producers committed to offer 157 petajoules of gas to the domestic market in 2023. Should that be taken up, that would overcome any of those projected shortfalls.

Talking of those shortfalls, in January this year the ACCC provided their updated gas inquiry report. The report itself outlined that the east coast gas market is still facing a shortfall, down a bit on their previous report, down to 30 petajoules in 2023, but only if the Queensland LNG producers export all of their uncontracted gas.

While this is an improvement since the July 2022 report, uncontracted gas demand and uncertainty about the level of demand and production still represents a key risk for the supply outlook in 2023. Having said that, LNG producers have a heads of agreement in place that they will step up to the plate and supply sufficient gas into the domestic market—under firm contracts as well, avoiding going on to the spot market. That is where we saw a lot of the pain last year.

The ACCC report identifies 146 petajoules of uncontracted gas that the LNG exporters are producing. The shortfall would occur if all of this went offshore. That reiterates what I said previously. If at least 30 petajoules of this can be contracted domestically for winter 2023, the predicted shortfall would be able to be overcome. However, there certainly still is uncertainty around what the final level of demand in 2023 will be, because it will be influenced heavily by what the gas demand will be for gas-powered generation. It is difficult to forecast what the gas-powered generation demand will be, because it does depend on the weather and on conditions in the electricity market.

I think a big hurdle for the market to overcome is coming up very quickly, which is the massive coal-fired power station in Liddell closing down in New South Wales in April this year, just preceding winter. This may well cause increased gas-powered generation over a colder winter as well. They are not out of the woods just yet.

I think we have been talking around figures of between 30 to 50 petajoules as a shortfall predicted over those three reports by the ACCC where there is available uncontracted gas in a nation which does, as I said, have plentiful gas, so you would expect that this shortfall will be overcome in the short-term. I think it is also the longer term that we need to have an eye on as well, and certainly that is the more problematic information that has come out of the recent ACCC report, and it relates to what those longer term forecasts are.

That report, the ACCC report, outlined that without additional gas supply, transportation and storage infrastructure, there remains significant risks to domestic energy security over the medium to long-term. Even under the most optimistic scenario, for a fast as possible shift to electrification, which would see a reduction in demand for natural gas, the ACCC report warns that ongoing use for residential, commercial and industrial purposes means forecast production will not be sufficient to meet both domestic and export demand as soon as 2027.

Further to that, a domestic supply gap of some 300 petajoules is forecast to emerge in New South Wales and Victoria alone by 2034. Putting that into perspective, 300 petajoules equates to more than half the existing east coast demand for natural gas this year. This is going to place continued upward pressure on prices into the domestic gas market, and also at the same time place pressure on the electricity market through the role that gas-powered generation will likely play in meeting certainly peak electricity demands, and also maintain stability of the east coast energy system as well.

Again, getting back to what I said previously, you have Victoria's moratorium on onshore gas developments, and you have New South Wales's go-slow on key projects, such as Santos's $3.5 billion Narrabri scheme. These are already having massive impacts on gas shortages, which will continue into the future. Victoria is saying, 'Oh, we won't try to produce our own gas, but we are still happy to use it,' and via this bill try to force gas into that market, to try to amplify their green credentials. The point is: you have other countries who have committed to 2050. They are using gas as well.

The actions of Victoria are really disrupting the gas market. That has big impacts here in South Australia as well. As I said before, it is incumbent on both New South Wales and Victoria to develop their own gas industry. They need to open up their gas fields to help solve this east coast gas crisis, fundamentally.

It is important, and it is certainly important that governments continue to support the efficient, competitive and timely development of new sources of gas supply and infrastructure from both the existing basins, such as the Bowen, Surat, Cooper and Otway, and those not connected to the grid as well, including the North Bowen and Galilee basins, which are in Queensland, and also the Gunnedah Basin in New South Wales, which is the site of Santos's long-delayed Narrabri project.

These will need investment in new pipelines. Just as an example, if there was a 450-kilometre pipeline built that is all that is needed to link what is 150,000 petajoules of gas in the North Bowen Basin into the southern pipeline network, and this would effectively allow gas molecules to flow right from Townsville all the way down to Hobart as well.

We need to have investment certainty for the gas market because you can see just an investment such as that really would go a long way to unlocking and helping stabilise the east coast gas market, and so those concerns around investments that this bill potentially could bring up are of concern. If companies are not certain about investing because contracts could be broken, then that is a concern, and you can see what the effect is by that example there.

Averting shortages on the east coast, which will otherwise put upwards pressure on both domestic gas and electricity prices, requires more than 450 petajoules of new gas development for the domestic market, according to the ACCC. At these levels of gas shortage, you know when you are talking about 450 petajoules, the powers that are being put in AEMO's hands via this current amendment bill would just be overwhelmed. It speaks to much more fundamental economic basics of needing to return to a position where the supply of gas is needed to significantly overcome this shortfall. Regardless, we find ourselves at the moment with an amendment bill trying to insert AEMO into the gas market, amending the national gas laws, and that is what has been approved at the Energy Ministers' Meeting.

In terms of a time line, on 12 August 2022 the Energy Ministers' Meeting agreed to take a range of actions to support a more secure, resilient and flexible east coast gas market. Energy senior officials undertook consultation between 26 September and 21 October, seeking stakeholder comments on the proposed regulatory amendments, including the draft bill, draft regulations and what the initial set of minister-initiated rules would look like.

I made the point earlier that this consultation period is incredibly short. Previous bills that I have spoken on here that have come through and arrived in the South Australian parliament have had consultation—some for periods in excess of five years. That is probably really going down and making sure there are no unintended consequences, but you have that on one side compared with what we have here, which is a rushed consultation. A lot of the stakeholders feel pushed into a corner and, as a result, have genuine concerns around unintended consequences. That is what we do not want to see, because we do not want to try to give a reason for these companies not to invest when investment is so crucial.

On 28 October 2022, the Energy Ministers' Meeting agreed to the amendments to the national gas law to extend AEMO's functions and powers to manage reliability and gas supply adequacy for the east coast gas market over winter 2023 and also beyond. I think the 'beyond' part is where there were significant concerns from stakeholders—whether there was a need for the remit to be ongoing.

Regardless, on 30 November 2022 the Minister for Energy and Mining introduced the National Gas (South Australia) (East Coast Gas System) Amendment Bill 2022 into the House of Assembly in South Australia. As has been said previously, South Australia is the lead legislator for these national energy laws and we now see these changes for the east coast gas system being introduced. The convention for such changes to the national energy laws is that these legislative amendments are supported by the opposition, so I indicate that the opposition will be supporting this bill.

I reiterate, labouring the point a little, that the time frame for this suite of reforms was unusually short in comparison to national energy law and rule amendments that we have previously considered here. The government will be beholden to take responsibility for that, to manage that. As I said, even though we offer bipartisan support in terms of it coming from the energy ministers' council, the government is beholden to understand that there are risks involved here and also that there are a multitude of questions that arose from the rushed nature of the reform. I would like to get some answers to those questions during the committee stage, indicating I would like to go into committee when the second reading speeches have been completed.

The bill itself has some key elements. They include function and rule-making, transparency, signalling, directions powers, and cost recovery and competition. If we look at function and rule-making, AEMO's new east coast gas system reliability and supply adequacy functions are proposed to encompass:

monitoring trends in supply and demand across the system;

identifying, communicating and publishing information about actual or potential threats to reliability and adequacy of gas supply within the east coast gas system;

reporting to energy ministers on these matters; and

giving directions and trading in gas (and any associated services) to maintain or improve the reliability and adequacy of gas supply in the east coast gas system.

There will be other functions conferred on AEMO by the rules for the purposes of the new east coast gas system reliability and supply adequacy functions.

The bill also provides a head of power for regulations to be put in place. It is intended that those regulations will specify the relationship between the operation of AEMO's east coast gas system reliability and supply adequacy functions, or a provision of these functions, and a law of a participating jurisdiction in the event of inconsistency. It also goes on to look into the extent to which a relevant entity is or is not required to comply with an east coast gas system direction in circumstances where the direction is inconsistent with a law of a participating jurisdiction. Also, the regulations are looking to the extent to which an east coast gas system direction is not valid in circumstances where that direction is inconsistent with a law of a participating jurisdiction.

Regarding transparency, to ensure AEMO has the necessary information to undertake its new function, the draft regulatory framework sets out additional disclosure obligations on certain industry participants over specific forecast periods. In addition to those explicit additional disclosure requirements, the regulatory framework enhances AEMO's ability to seek specific information relevant to the exercise of its functions from a wide range of entities, including gas producers, pipeline operators, storage providers and large users.

Signalling is another aspect of this bill. It provides AEMO with significant flexibility into how it will undertake its monitoring and signalling functions, the idea being that where there is an emerging risk or a system threat it can be identified, whether that threat is over a short or longer term. Having a signalling framework will allow AEMO to notify the market and seek market responses to address the threat. That is in terms of identifying threats.

As I spoke about before, another aspect to it is directions. That is, where there are concerns from stakeholders, the idea behind it is that where the market does not or cannot respond to AEMO's signalling of an actual or potential threat emerging, this bill provides comprehensive directions powers. Those proposed powers would allow AEMO to instruct a range of entities to take specific actions to maintain or improve the reliability and supply adequacy of natural gas across the east coast gas system. These powers have been made broad to ensure AEMO can take actions to manage the risk of gas supply shortfalls in the winter of 2023.

AEMO will be empowered to exercise a range of directions powers relating to reliability and supply adequacy, including to maintain and improve the reliability of the supply of natural gas with the east coast gas system and to maintain and improve the adequacy of supply within the east coast gas system. AEMO's directions may relate to the operation, maintenance or use of any equipment or installation, the control of the flow of natural gas or any other matter that may affect the reliability or adequacy of gas supply within the east coast gas system.

AEMO must, before making an order relating to an east coast gas system reliability and supply adequacy function, consider the extent to which the persons of the class to which the proposed order is addressed may make representations about the terms of the proposed order, and invite those persons to make representations to the extent that AEMO considers possible in the circumstances.

Of course, breaking contracts and ordering these directions will certainly have cost implications. There are cost recovery and compensation considerations brought into this bill. AEMO can already recover costs from all or a specific subset of market participants in relation to the exercise of AEMO's powers, but the bill provides additional cost recovery flexibility in relation to AEMO's directions powers. At this stage, noting the time, I seek leave to continue my remarks.

Leave granted; debate adjourned.


At 17:39 the house adjourned until Wednesday 22 February 2023 at 10:30.

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