Critics warn of 'Santos-sized loopholes' in gas reservation plan

A giant LNG plant blamed by critics for driving up east coast gas prices could largely or totally escape a federal scheme designed to protect local buyers, observers have warned.

The Albanese government last month released a draft plan to force gas exporters to set aside up to 20 per cent of their production for the domestic market in a bid to force prices lower.

But analysts and industry players say the draft is full of loopholes that will allow some exporters to reduce or even eliminate their exposure.

They point to the Gladstone LNG project, a plant on Curtis Island in Queensland that is operated by Adelaide-based Santos, as the exporter most likely to benefit.

An investigation by the ABC revealed GLNG had sucked up and exported the equivalent of 20 per cent of eastern Australia's domestic gas demand over the past 10 years.

This was because the venture built an LNG plant with a capacity of 7.8 million tonnes a year despite not having nearly enough gas of its own to fill it.

By contrast, the other two LNG projects in Queensland — run by global super-major Shell and Australian company Origin along with US firm ConocoPhillips — had overwhelmingly been supplying the local market in net terms.

Paul Farrow, the national secretary of the Australian Workers Union, said "Santos-sized loopholes" threatened to turn the government's reservation plans into a joke.

Mr Farrow said that, compared with earlier iterations of the plan, the draft had been watered down in significant ways that appeared to favour GLNG above all others.

"Australian industry and Australian consumers deserve to derive an advantage from Australia's gas because it's our sovereign wealth," Mr Farrow said.

"The government is so close to getting it right.

"But the exposure draft, as it stands, contains a bunch of Santos-sized loopholes.

"That's a major, major worry."

Policy 'watered down'

Under the draft policy, the Australian Energy Regulator would be able to reduce an exporter's supply obligation below 20 per cent, while the minister could cut it to zero.

But critics say a raft of other provisions in the bill could enable Santos and its GLNG partners to slip the net themselves.

They say the draft, unlike earlier iterations, effectively allows GLNG to count contract extensions as "existing contracts" that are exempt from consideration.

Crucially, this would allow GLNG to extend for five years from 2030 a supply agreement with South Korea's KOGAS.

The current deal is for 3.5 million tonnes of LNG a year, an amount equivalent to about 40 per cent of annual east coast gas demand.

Observers also say the draft will give rise to "take-or-pay" deals that allow Santos to generate paper sales to the domestic market without actually supplying any gas.

And they argue the government has given too much ground to Santos over questions about whether the company can "reasonably" find enough gas without breaking export contracts.

Mr Farrow said the provision should require Santos to explore all practical options such as buying gas from other providers in the local market, substituting LNG cargoes from its international operations or using flexibility in its contracts to reduce overseas sales.

Instead, he said the draft appeared to allow Santos itself to set those terms, which he argued the company would do so however it liked.

"If a massive project like GLNG wants to claim that it simply doesn't have enough gas to share with the Australian market, it should have to prove it's actually explored all practical options to get hold of that gas," Mr Farrow said.

"These options might incur a small cost for Santos' shareholders.

"That's OK.

As well as these provisions, Mr Farrow said the draft contained other clauses that would allow GLNG off the hook.

Among them was a so-called "additional gas" test.

While Mr Farrow said the test was theoretically supposed to encourage new production and increase supplies, in reality he said it was likely to be gamed.

He said an exporter might simply be able to buy a company supplying the local market, count their production as "additional" and even export volumes that would have stayed in Australia.

On top of this, the AWU and others have also noted the draft does not carry forward reductions from a producer to future years, meaning deficits may be extinguished.

An industry divided

Santos was contacted for comment, as was federal Resources Minister Madeleine King.

The widening gap between the supplies taken out of the domestic market by GLNG and those provided by the other two Queensland producers has led to growing tensions that have spilled into the open.

Last month, Dan Clark from Origin's and ConocoPhillips' Australia Pacific LNG project took the rare step of publicly, albeit obliquely, singling out the GLNG venture.

In an opinion piece, Mr Clark said exporters taking gas out of the local market should "first have to contribute at home with no carve-outs, leave passes or exemptions".

He also noted domestic prices had fallen after "one exporter", widely interpreted as GLNG, "chose to reduce domestic purchases".

Santos chief executive Kevin Gallagher, in turn, hit out at his rivals.

"It would appear that I'm living rent-free in a few of the heads of our competitors around Gladstone at this point in time," Mr Gallagher said last month.

Adding to the drama, China has taken the step of voicing its concerns about the changes that are being made to the reservation plan.

The Australian Embassy of the People's Republic of China, in a submission to the government, called on Canberra to ensure its interests were treated fairly compared with those of other countries.

Through its state-owned oil and gas producers Sinopec and CNOOC, China is a major owner — and customer — of both Asia Pacific LNG (APLNG) and Queensland Curtis LNG (QCLNG).

GLNG counts among its financial underwriters two other Australian trading partners: South Korea through KOGAS and Malaysia via its oil and gas arm PETRONAS.

"We hope that the draft legislation will uphold the principle of fairness and apply the relevant requirements consistently to all LNG exporters, while ensuring equitable treatment of Australia's trading partners and foreign investors," the Chinese embassy wrote.

Question of fairness

Saul Kavonic, an oil and gas analyst at MST Financial, said China's warnings were extraordinary and unprecedented, and that, until recently, Beijing did not have a problem with the reservation idea.

Mr Kavonic said any support the policy enjoyed would crumble if the government failed to design a scheme that was equitable and fair.

He said the government seemed to be failing that test and had put forward a proposal that was closer to the "spot restriction policy" taken to the last federal election by the Coalition.

"Whether Queensland LNG projects share the domestic reservation burden equally, or if one gets special treatment and protections, remains one of the most contested areas of the policy," Mr Kavonic said.

"[It] presents wide-ranging ramifications for how and if the policy will work.

"Special treatment would see the policy function less like a true reservation policy and more like a spot cargo restriction policy."