Senate Economics Legislation Committee [Part 2], , 3:15:08 to 3:27:38
Officials explain the 'must-sell' condition and the 90/10 rule for domestic supply obligations (DSO) aimed at disconnecting domestic prices from international market volatility.
Topics: Energy prices, Exports
Speakers: Senator Susan McDonald, Robert Jeremenko, Paula Svarcas, Speaker 22, Unknown Speaker
to engage constructively in procurement processes, make counter offers on commercially reasonable terms, negotiate in good faith, and not refuse a reasonable offer made in reasonable circumstances,
>> Well, I will um thank you for uh reading that out because I don't recall saying that, but it sounds good when you read it out. So, I'm going to go with uh that's exactly what I said last Friday um because it makes sense. the um the experience in the gas market uh over the years that we've been working through the gas market review before that future gas strategy and up to today uh has been that there has been uh behavior by sellers that requires uh a very clear uh setting out of requirements. ments to counteract. So, uh we have not been aware of behavior that requires uh that level of um constraint uh in buyers. It's been uh from the from the other um party. So um this legislation as you've just um pointed to uh very much focuses on that and also because that is one of the key design principles here to make sure that it is a mustell uh condition to ensure that we have that downward pressure on
Can you see a situation where the over supply of gas could lead to a requirement to flare exo excess gas uh because there's not the demand or storage uh capacity. Is there protection against that?
>> We certainly wouldn't um we haven't uh advised government to design these uh bills in that way. that would not be an outcome we would be seeking and and the flexibility there for um the regulator in operating this scheme um should you know provide enough flex to prevent anything like that occurring.
I think Senator too going back to your original comments the idea that the gas market on the demand side is fixed not quite right at the margins obviously the scale of the gas market moves with gas price and there are uses of gas at the margin which are very sensitive to prices so the the if the reservation is effective in bringing the price down the scale the size of the gas market will increase the domestic gas market
>> given that part of the point I think are sitting around $10. How much further do you think they can
>> I really can't speculate.
>> I I think that's wise. But do you see my point? Is we had evidence from the AC yesterday about the different sectors, gas producing sectors and the average cost of production. uh we're seeking to push gas prices below what could potentially have been what will be the cost of production >> given it's currently traded at $10 $10.
>> But Sen, I mean you will be aware that um it wasn't that long ago that gas was being sold at $60.
>> Oh, very very short period. Mr. Jerermano, I think that's a bit cute.
But the point being that before this legislation uh the connection to the international market and that was during the Ukraine you know the beginning of the Ukraine conflict of course um that disconnection wasn't there. So this this legislation disconnects from the international market and through all of the levers in this policy definitely will make sure that the the price um is pushed downwards. Um, as we've discussed before, there's there's definitely no price target. And we have seen over the course of um the um conflict in the Middle East that the Australian um you know, gas prices both on both on the east and west coast have remained relatively um low um despite the uh you know prices internationally uh moving around. So uh I I will note the JK JKM price has gone up quite significantly last sort of week or so. But um the point remains that uh it is it is a disconnection of the international of the gas price from the international market under this um legislative
>> But when look there is so much to be said about why that statement is not entirely true. because the movements in the European uh were not reflected in the Australian market and you're going to point to Ukraine and then say now the Australian market's out of control and yet if you overlay the price graphs over the that would not be there's a lot of different actions in different markets around the world and you can I just think it would be misleading to say that Ukraine crane uh was what set the Australian market.
>> Oh, I wasn't suggesting that. I was just, you know, point in time and it's a fact that it was it was um that price.
So point in time
>> uh it is it is the case that there are a number of factors that affect price and um we are through this package uh hopefully for um you know uh certainly given the feedback that we've got from so many um stakeholders over the years that we've been looking at this for stability in the market and the removal of mechanisms such as the ADGSM that every quarter creates the uncertainty of of exports um um uh being um restricted potentially if that uh the is ever triggered. Uh this will provide the certainty will um set up the framework that all um stakeholders in the gas market can operate under and then um ultimately the aim is that those outcomes of lower price and um stable supply for the domestic market are met.
>> So under the coalition the ADGSM was only considered annually. was this government that moved it to quarterly then changed the heads of agreement. You introduced a price cap. We have had change after change. What makes you confident that we >> What makes you confident that this is the one of the five interventions since this government's been in? What's what Okay. So I want to understand how the mustell and 10% over supply provisions in this reservation scheme will work in practice. If we take east coast gas market demand the first year to be 500 PJs we can assume that the 10% over supply for that year will be 50 pedigogles. fair arithmetic that 50p over supply volume will be shared amongst Queensland's LNG exporters as part of their domestic supply obligation at least in the first few years of the scheme. Is that correct?
>> Subject to the carveouts that are all available for existing contracts.
>> These exporters will be required to sell at least 90% of their DSO to the domestic market in a given year. Is that
>> Yes.
>> Yes. In this scenario, that would mean 45 PJs of over supply gas must be sold into the market. The market is well supplied and exporters have been unable to find buyers for this over supply gas despite best endeavors. What is the expectation on exporters to sell this gas either 90% of their DSO to comply with their domestic supply obligation?
>> Sorry, Senator, can you just be clear on
the question? So if they must sell if they if you have asked them to to supply they must sell 90% of the over supply amount which we've just agreed is 50 pedigogles. So 90% is 45 pedigjles. If they must sell into the market but we've established that the market is already supplied and exporters have been unable to find buyers. What is the expectations on exporters to sell the gas to comply with their DSO? Do they just keep lowering
>> 90% Senator the 90% but it's the must supply obligation on exporters >> and the 9010 rule that you've explained 90% is on their total of their domestic supply obligation not on the over supply. So it's I think I think I mean we're very happy to go through this now or in a bit more detail tomorrow with you to go through the numbers and how it will and what the expectation is but the 9010 rule is on the total of their domestic supply obligation not on not on the over supply part. Does that
make sense? Well, so then the 10% is is just floating. Now
>> 10% is something they still 10% is something that must be offered to the market. >> And if um if if they have demonstrated that that they have tried to get it in into the market, then they able to carry that 10% forward that needs to be acquitted in the following three regulatory periods.
So potentially um 50 pedigles then is now carried forward to the next year.
>> It is also you recall senator that I also explained that um the market regulator will um will have a look at the market each year and determine that they will do an annual adjustment to and take into account the um the banked or borrowed amounts from the previous year. So it doesn't just continue to accumulate. It is taken into account when the calibrated amount is done each year. So we don't end up with a with a with a situation where we've got more than 110% of gas trying to be offered to the market in the following year. That's not that's not how it's designed. It is designed to self-regulate at 110% and
not be over that. So if you've got 10% carried forward the end of year one, >> so then your expectation is the calibration will now be set at 90% to pick up the 10% that couldn't be sold.
>> The calibration is done at the market level senator and then is um and then is provided to the their license holders.
understand that, but just the numbers. >> So then the calibration would under >> would
>> it would take that into account.
>> Well, but that's when you say take into account, what you're saying is that it should then be set at a lower percentage so that you don't end up with 10% from last year and then 5% from this year and
>> the regulator is always sewing for 110%.
>> Okay. And you have modeling that supports 11 110% as the as the supply into 100% market.
>> That's correct. Yes. Modeling analysis.
>> That modeling analysis must provide a figure, a number that is going to be pushed down to. I'm not asking you to provide me with that number, but it it is our absolute it is it is imperative that you do not end up pushing gas below the cost of production and you kill investment particularly into those Victorian and potentially the narr. So really then the market will need to the the sellers will need to keep lowering the price until they find a buyer. That's that's what over supply