The Turnbull government will hit Australia's largest gas producers with limits on their exports in new measures to avert an east coast gas crisis and ensure there is enough supply to service the domestic market demand.
Despite warnings from Prime Minister, Malcolm Turnbull, and two high-level meetings, big gas companies have refused to promise they will no longer export more gas from the Australian market than they produce.
In response, the government has decided to impose an Australian Domestic Gas Security Mechanism on gas exporters from July 1, which gives it authority to limit companies' gas exports if they are emptying local gas reserves to meet overseas export contracts.
Santos’ $24 billion Gladstone Liquefied Natural Gas (GLNG) venture in Queensland is being blamed by many for causing the shortage because it sucks up large volumes of gas from the southern states.
The company is expected to face the most immediate risk of export bans under the new regime.
"The government expects the decision to be a targeted, temporary measure of repair to restore certainty to the market during this time of transition," Mr Turnbull said.
Mr Turnbull first warned gas exporters in March he could invoke constitutional powers to protect Australia's gas reserves.
Gas companies are aware they operate with a social licence from the Australian people
A week ago, he gave a final warning to the heads of the big gas companies that they faced punitive government intervention if they could not adequately assure the government how they planned to give Australian households and businesses reasonably priced gas.
This week it emerged east coast LNG exporters had failed to meet the government's demands for a commitment to add gas to the Australian market instead of sucking it dry to meet long-term export contracts.
The new export controls are expected to blunt Labor's increasingly vocal campaign that the Prime Minister was all talk and no action to solve the looming gas shortage that risked electricity blackouts in South Australia, NSW and Victoria unless extra gas supply could be diverted to electricity generators.
"It is unacceptable for Australia to become the world's largest exporter of liquefied natural gas, but not have enough domestic supply for Australian households and businesses," Mr Turnbull said.
"Gas companies are aware they operate with a social licence from the Australian people."
The export orders will be a dramatic escalation of the government's intervention in the gas market following the lacklustre reaction to last week's announcement that gas companies would have to report publicly their pricing and supply details to the Australian Competition and Consumer Commission for the next three years.
That "transparency" measure was criticised for being so tentative that some gas-reliant businesses could go broke before there was any improvement in the domestic gas market.
But the announcement is expected to meet strident opposition from the Australian Petroleum Production and Exploration Association, which has warned previously government intervention to overturn contracts was "almost unprecedented" in Australia and would destroy incentive for investing in new gas projects.
However former high-ranking bureaucrat, Paul Barratt, has argued export controls are a well-tested commerce power used by the Commonwealth since the Whitlam and Fraser years to protect domestic minerals supply in the national interest.
The new Gas Security Mechanism would not require legislation in Parliament, or the difficult task of securing Senate support, because it can be imposed as a customs regulation.
Similar arrangements exist for the export of rough diamonds and uranium exports.
Energy forecasters expect the Asian benchmark LNG price next year to be less than half the $15 a gigajoule the Australian manufacturers and businesses are currently being charged for gas over winter.
Many manufacturing businesses have warned they'll have to consider closing and shedding jobs if the unpredictable spikes in gas prices – contributing to a doubling in energy costs for some businesses – continues with government intervention.
The government's export orders will not dictate how the exporters must respond reduce their Australian gas exports, so companies can keep the flexibility of using their own commercial solutions such as gas "swap" contracts or the spot commodities market.
Resources Minister Matt Canavan will be in charge of imposing export controls on companies on advice from the Australian National Energy Market Operator and the Australian Energy Regulator, which will match forecast gas production and supply to the expected demand from domestic gas customers.
As an exporter draws more from the domestic market than they put in through local production, the company will be compelled to tell the minister how they will fill the shortfall of domestic gas as a part of their overall production and exports.
If they cannot adequately explain how they will fill the domestic shortfall, the minister will order them to limit their export of Australian gas in order to ensure local supply.
- This article first appeared in The Australian Financial Review