Examining barriers to more efficient gas markets

• The integration of the eastern Australian gas market with the Asia-Pacific market represents an opportunity for the Australian community to earn a higher return from its substantial non-renewable resources. This will result in a net benefit to the community.
• The opening of the export market is creating significant disruption for market participants and will lead to material costs for some gas users, including through higher prices. There are concerns about short-term gas shortages and some gas users have indicated that they are unable to secure supply contracts.
  • Policies that seek to counteract the pressures from structural adjustment arising from the opening of the export market, such as domestic gas reservation, could distort important signals for adjustment and are unlikely to be efficient or effective in the long run.
  • Governments should be mindful that policies that interfere with market signals could undermine investment incentives, including incentives to bring on new sources of gas supply.
• The mechanisms for allocating gas exploration and production rights should seek the optimal level and timing of such activities by companies that can perform them most efficiently.
  • Policies designed to accelerate production, such as use it or lose it mechanisms, risk bringing forward gas production in a way that reduces the benefits received by the community from the gas resource.
• The gas industry faces strong resistance from sections of the community, partly due to the poor early record of some companies in dealing with landholders and local communities. Some gas companies have increased their engagement efforts recently.
  • There is scope for improvements to legislated compensation provisions to better reflect the costs to landholders from negotiating land access agreements and from the decline in the value of their properties. There is also scope for measures to reduce the costs of negotiating land access agreements.
  • A well-designed voluntary industry-wide code of practice for community and landholder engagement may improve outcomes.
• Community concerns about the environmental and public health risks of coal seam gas (CSG) activities have led to CSG moratoria in Victoria and New South Wales.
• The expected benefits of the moratoria must be weighed against their expected costs - higher gas prices for users and reduced royalty and taxation revenue for governments.
• Sound risk management does not equate to eliminating all risk. The scientific evidence suggests that the technical challenges and risks can be managed through a well-designed regulatory regime, underpinned by effective monitoring and enforcement of compliance.
• Stakeholders have proposed changes to the way transmission capacity is allocated for some pipelines, including introducing open access principles and mandatory capacity trading provisions. Any benefits from these measures must be weighed against their costs, including the risk of undermining incentives for future investment in pipeline capacity.
• Some stakeholders have argued that gas producers and pipeline owners are exercising market power and distorting outcomes in the eastern Australian gas market. While the Commission has not presented any conclusions on this issue, the evidence used to support the claims of the existence and exercise of market power, such as higher prices or difficulties securing gas supply contracts, may reflect the risks and uncertainties in a market that is undergoing considerable structural adjustment.

The Eastern Australian Gas Market - Challenges and opportunities for reform

Today the Productivity Commission released its research paper 'Examining Barriers to More Efficient Gas Markets'. The paper identifies substantial benefits from the ongoing integration of the eastern Australian gas market with the Asia-Pacific region as well as a number of transitional issues.

The paper clearly cautions against proposals to regulate to reserve gas supply for domestic users.

Gas reservation policies are likely to require considerably more intervention than advocates imagine. Modelling by the Commission indicates that the level of intervention required to hold down long-term gas prices - at least 25% of production from new gas fields to be reserved exclusively for domestic use - would carry significant costs. There is also no guarantee that the policy will be effective because reserving some of Australia's gas supplies for domestic users would deter investment in new sources of gas supply.

The focus should instead be on policies that improve supply, lift the quality of engagement with local communities and encourage adjustment of the market to the new global environment.

The research paper examines one of the key policy hotspots for the eastern gas market - land use conflicts that arise from the pressure to develop new sources of gas supply on private agricultural land. The gas industry is facing considerable community resistance to its operations in some regions. This is in part a consequence of a poor past record of some of its members in engaging local communities and individual landholders.

Productivity Commission Chairman, Peter Harris delivered a speech to the 2015 Australian Domestic Gas Outlook Conference in Sydney on 25 March 2015. His speech can be viewed at: http://www.pc.gov.au/news-media/speeches/remarks-at-the-2015-australian-domestic-gas-outlook-conference.

• Preliminaries
  • Cover, Copyright and publication detail, Contents, Acknowledgments, Abbreviations and expanations.
• Overview
• Chapter 1 About this report
  • 1.1 The eastern Australian gas market is changing
  • 1.2 Analytical approach
  • 1.3 Conduct of the project
• Chapter 2 Framework for analysis
  • 2.1 Characteristics of a well functioning market
  • 2.2 Putting issues in gas markets into an economic context
• Chapter 3 Overview of Australian gas markets
  • 3.1 Australian gas markets
  • 3.2 Growth in LNG exports and linkage to the Asia Pacific
• Chapter 4 Designing and allocating gas exploration and production rights
  • 4.1 What is a tenement?
  • 4.2 Tenement design and the timing of exploration and production
  • 4.3 Allocation of exploration licences
• Chapter 5 Managing conflicting land uses
  • 5.1 Managing the effects on directly affected landholders
  • 5.2 Managing the effects of gas exploration and production on the broader community
• Chapter 6 Policy issues in markets for transmission pipeline capacity
  • 6.1 Pipeline capacity allocation and investment
  • 6.2 Potential barriers to efficiency in transmission pipeline capacity markets
  • 6.3 Assessing the case for policy change
• Chapter 7 A broad perspective on the case for policy reform
  • 7.1 Structural adjustment and policy reform
  • 7.2 Market power and policy reform
  • 7.3 What role then for policy reform?
• Appendix A Conduct of the project
• References

Please note: Appendices B and C are only available online and are not available in the hardcopy.

• Appendix B Eastern Australian gas market model
• Appendix C Gas market modelling results

Please note: Appendices B and C are only available online and are not available in the hardcopy.

Download the appendices

• Appendix B Eastern Australian gas market model (PDF - 753 Kb)
• Appendix B Eastern Australian gas market model (Word - 407 Kb)

• Appendix C Gas market modelling results (PDF - 1029 Kb)
• Appendix C Gas market modelling results (Word - 1010 Kb)