‘Deep concerns’: Labor gas plan triggers alarm in Asia

Labor’s plan to hold back more gas exports for domestic use is threatening to strain critical trade relationships in Asia, just as Australia seeks priority access to the region’s dwindling petrol and diesel supplies amid a global fuel crunch.

Major buyers of liquefied natural gas (LNG) in Japan, Korea and Malaysia have been pressing their Australian suppliers for urgent answers about the scope of looming federal gas-reservation rules, many of which remain unclear. Their concerns were being elevated through official diplomatic channels to the Department of Foreign Affairs and Trade, according to industry sources familiar with the matter.

Under the new government scheme from July next year, LNG shippers will be required to hold back the equivalent of up to 20 per cent of what they export each year and ensure it is sold into the domestic market.

The policy is in response to long-held concerns that excessive LNG exports from Queensland are leaving local households and factories more exposed to the risk of gas shortfalls and high prices.

Despite Australia’s position as one of the world’s biggest gas exporters, regulators warn supplies in Victoria, New South Wales and South Australia will drop dangerously low before 2030, as ageing Bass Strait production fields deplete without sufficient new local drilling programs to replace them.

However, the market intervention has raised alarm for some of Australia’s most important trading partners at a sensitive time. The federal government has recently used Australia’s reputation as a reliable LNG partner to negotiate priority access to key Asian oil refineries’ petrol and diesel shipments, which are in increasingly short supply due to the Iran war closing the Strait of Hormuz and choking global oil flows. Crucially, some of the Australian LNG sector’s biggest customers are also the nation’s primary suppliers of petrol, diesel and jet fuel.

Samantha McCulloch, chief executive of industry body Australian Energy Producers, said the government’s release of the proposed gas-reservation rules and subsequent briefings last week had “only deepened the industry’s serious concerns” that the policy could stifle investment and damage Australia’s international standing if it was not designed carefully.

“Our trade and investment partners, including Japan, South Korea, Malaysia and Singapore, would rightly be concerned about the proposal, which comes just weeks after Prime Minister Anthony Albanese provided assurances that Australia would remain a reliable supplier of LNG,” McCulloch said.

Executives from major energy companies in Asia are unsettled by a lack of clarity from the government on key details concerning how the scheme may work and whether it will affect their longer-term energy security.

Speaking on the condition of anonymity to disclose private discussions between trade partners, industry sources said foreign buyers feared the 20 per cent reservation mandate could infringe on the crucial LNG contracts they depend on to power their grids, heaters and manufacturing plants.

While the government has promised that contracts signed before December 22 last year will be respected, and key details of the policy are still being worked out, LNG buyers have said it risks introducing severe regulatory uncertainty and could have “material impacts” on existing deals.

Among their concerns is that the significant degree of ministerial discretion in the scheme to alter reservation volumes or grant exemptions means there is “no clarity from one year to the next on what’s going to be required”.

Specific questions were also raised about how the scheme would apply to the Northern Territory, where Japanese giant INPEX runs the $US40 billion ($55.65 billion) Ichthys LNG project, Japan’s biggest-ever overseas investment.

INPEX senior vice president Bill Townsend said the project had been supplying emergency gas to Darwin since 2021, and welcomed the opportunity to continue consultations with the government on the gas-reservation design. But he said Australia needed to “reaffirm its essential role as a reliable LNG supplier to Asia”.

Other industry players are querying the specific implications for the Santos-led Gladstone LNG project (GLNG) in Queensland whose backers include the Korea Gas Corporation and Malaysia’s Petronas. Unlike Queensland’s other two LNG plants – which are run by Origin Energy and Shell and send large volumes of gas to the domestic market as well as buyers overseas – GLNG is fully contracted with no spare gas to set aside.

Under the draft rules, it will be required to prove it has exhausted all viable options to source additional supplies – such as buying the extra gas from third parties or lowering exports – before it could secure an exemption. Companies that failed to comply with the policy could face penalties of up to $100 million.

“You could argue that the contracts themselves are not impacted,” one source said. “But trade partners look at those requirements as having a material impact on contracts if there is a material cost involved in buying more gas.”

While the framework “leaves many key questions unanswered”, it appears that GLNG is “most at risk”, according to Saul Kavonic, head of energy research at MST Marquee.

“GLNG may end up securing relatively better treatment if Korea and Malaysia lobby hard for it,” he said. “But there is a widespread view within industry and government that GLNG has got off too lightly to date and must share the burden more.”

GLNG may be expected to pay for some extra supply in the near term, with the remainder of its annual domestic supply obligation accruing to post 2030, when its first large contract with Korea Gas Corporation rolled off, Kavonic said.

Meanwhile, smaller Australian gas producers, which do not export, warn the policy’s aim of forcing a “modest” market oversupply risks cutting prices to the point that many new projects will not be viable. Amplitude Energy, which operates in the Gippsland and Otway basins, said most gas piped to east coast consumers was supplied by domestic producers. “If they deliberately overcorrect, they will really hurt that industry,” chief executive Jane Norman said. “All they will achieve is a sugar hit of cheap gas for a couple of years, and then there’ll be no investment after that.”

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