GOT GAS? Will the $12/GJ price cap extension threaten new gas projects?

The Federal government’s moved to extend the $12 per gigajoule cap on gas prices on the East Coast by a further two years in a bid to keep gas prices under control.

However, its proposed mandatory code of conduct might include mechanism that would allow exceptions for gas producers that pump additional supply into the domestic market to ensure that investment into more gas exploration and production is not hindered.

Energy Minister Chris Bowen, Resources Minister Madeleine King, and the Industry Minister Ed Husic said in a joint statement that the gas code will “ensure sufficient supply of Australian gas for Australian users at reasonable prices, give producers the certainty they need to invest in supply, and ensure Australia remains a reliable trading partner by allowing LNG producers to meet their export commitments”.

Responses were mixed with the Energy Users’ Association of Australia saying that while the policy is a step in the right direction, detailed design of the regulations would be needed to ensure that the intent of the code is able to be delivered.

Meanwhile, oil and gas industry body the Australian Petroleum Production and Exploration Association (APPEA) said while the proposed code did recognise the need for investment in new gas supply, it failed to address investor uncertainty as most meaningful supply investments would require further conditional exemptions.

It noted that such exemptions could be varied or revoked at any time, meaning that long-term capital investments could not be made on the basis of one year of uncertainty.

Others claimed that the code could cost thousands of jobs in the gas industry.

Price cap impact?

But just how much of an impact will the price cap have on gas investment in Australia?

While the introduction of the cap has put the Senex’s $1bn Atlas expansion on hold, there is still a chance that work on the project might resume – particularly if the exemptions prove to be sufficient to ensure attractive returns on investment.

That is also an area that will need careful balancing. Just how do we ensure attractive returns that don’t result in gas prices that impact negatively on consumers?

Questions about whether these exemptions would even be needed have also been raised with the Institute for Energy Economics and Financial Analysis (IEEFA) noting previously that the industry (or at least some projects) could make profits with prices as low as $7/GJ.

There is some pretty solid ground for this claim given that projects on the West Coast continue to be profitable despite wholesale gas prices being about $5.50/GJ as of the middle of December last year.

It is also worth noting that small, domestic gas producers will receive automatic exemptions from price controls, which could – in small ways – ensure that some level of new gas supply will be brought on stream.

At the core of it, while the cap will undoubtedly prove to be too great an obstacle for some projects, other will push ahead regardless.