Future Gas Strategy

2. Keeping gas affordable during the net zero transition

Principle 2: Gas must remain affordable for Australian users throughout the transition to net zero. A Future Made in Australia, our competitive advantage in abundant resources, and our standard of living requires reliable, affordable and clean energy. Continued gas development and more flexible gas infrastructure is needed to increase the resilience of Australia’s energy system and keep costs down as we transition. Government decisions on gas development rights should prioritise timely development and discourage repeated delays to ensure supply and affordability.

Summary

Helping Australians with the cost of living is a priority for the Australian Government. Gas availability and pricing affects cost of living though electricity prices and the prices of consumer goods including food and manufactured products. Domestic gas prices in Australia reflect complex market dynamics. Prices are likely to increase over time unless new supply enters the market or anticipated demand diminishes. Price uncertainty and volatility, including from international and domestic shocks, is also likely to occur over the transition period, as it has done in the past.

The complex and interdependent gas markets will need careful management. Sudden changes in one section of the market are likely to have unintended consequences in other parts of the market. The Australian Government will work closely with states and territories, AEMO, industry and our community to ensure our regulations remain fit for purpose.

To ensure the wellbeing of Australians through the energy transition, the Australian Government will focus on:

  • continuing to manage short-term affordability challenges through targeted intervention, such as the Energy Price Relief plan and the Gas Market Code of Conduct
  • ensuring First Nations people are partners in, and benefit from, the transition to net zero
  • continuing to maintain long-term domestic energy security through mechanisms such as the Heads of Agreement with East Coast LNG exporters, the Australian Domestic Gas Security Mechanism (ADGSM) and AEMO’s market powers
  • through the Net Zero Economic Agency (NZEA), ensuring plans are in place to support longer-term transitions in communities affected by declining fossil fuel demand
  • reviewing the regulatory regimes to ensure they enable gas markets to evolve to meet our energy needs
  • carefully managing changes to minimise unintended negative consequences.

Read Section 5 of the analytical report for analysis of natural gas supply outlook, and Section 6 for analysis of competition, costs and pricing.

Gas development is considered under Principle 3, while gas infrastructure is the focus of Principle 5.

Australian wellbeing

Australia’s gas markets support the livelihoods and wellbeing of millions of Australians. In some regional communities, gas producers and industrial gas consumers are significant employers and contributors to regional economies. Australian law requires all companies to protect the rights and interests of our First Nations people, the environment, water, our cultural heritage, land access and the safety and health of workers. Australia’s regulatory settings are designed and applied to promote community wellbeing. 

Structural change in Australia’s gas markets may impact the cost of living of Australian households and businesses. Australia’s southern gas markets would feel this the most, as gas fields that have produced gas for decades continue to decline and eventually stop producing gas. 

Price volatility can be due to external factors

Market uncertainty over future conditions and increased volatility in energy markets can substantially impact prices. As seen in 2022 and 2023, no economy is an ‘energy island’. Russia’s illegal invasion of Ukraine affected energy markets across the world. Combined with domestic outages in coal fired power stations, this substantially disrupted Australia’s gas markets. The events of 2022 clearly showed the connection between Australia’s domestic gas, electricity, and international energy markets. The interconnectedness of energy markets and supply chains holds important lessons for governments, industry and society as we navigate a complex and lengthy process to transform our energy system to cleaner energy sources and net zero. 

Regional economic and employment impacts

ACIL Allen (2023) estimated that the gas industry directly supported 81,940 full-time equivalent jobs and contributed $84 billion to the economy in 2021–2022. The production and use of gas underwrites economic activity directly through gas exploration, production, transport and wholesale and retail sales, and indirectly through a variety of industrial and commercial uses. Many more work across other parts of the value chain. For instance, in 2023, the ABS indicated there were about 7,600 gasfitters.

According to the ABS (2023) an average of 21,100 people worked in oil and gas extraction, a subgroup of the industry as a whole. The vast majority of those employed in extraction worked full time and are paid higher than average wages. Many of these jobs are in regional and remote areas across Australia. 

Over the course of the development of the gas industry, many tens of thousands of workers have been employed in construction, maintenance and ongoing operations. 

In 2021-22, oil and gas extraction employed 488 people within the council area, with $401.5 million in local sales … The MRC requests that the Australian Government ensure that any new gas strategy be carefully explored so that we will not lose jobs in our part of regional Queensland. 

Maranoa Regional Council (MRC)

Managing gas prices

Most gas is sold under contract

In Australia, most natural gas is bought and sold under bilateral contracts in the gas wholesale markets. As a result, there is no single market clearing price. The long-term nature of contracts gives producers the confidence to invest in new supply, while also giving consumers the confidence to invest in end-use production facilities. Wholesale spot markets, through which retailers or large gas users can buy gas without entering into a contract, is a smaller but growing component of the market.

Costs of production may increase prices

Costs are likely to increase over time in all gas markets. As gas reserves deplete and fields approach their economic end of life, sustained production will require additional investment. Eventually, production must shift to more expensive sources of supply. For example, a number of LNG import terminals have been proposed for the east coast. Any gas supplied through such LNG import terminals could be more expensive than gas developed closer to demand centres. This is because international LNG prices are historically higher than domestic gas prices and because of the costs associated with converting gas to LNG, transporting it by sea then re-gassing it at port, before its onward transport by pipeline.

The cost of abating or offsetting emissions associated with gas production, transport and use may increase with time. Typically, retail costs will also increase in line with wholesale cost increases.

Ensuring the wellbeing of Australians in changing times

In 2022, the Australian Government partnered with states and territories to deliver the Energy Price Relief Plan. This intended to address the immediate impact of price increases on Australian households and small businesses. Through the Energy Price Relief Plan the government:

  • made a targeted intervention to limit gas and coal prices
  • provided energy bill relief for households and small businesses
  • drove investment in cleaner, cheaper, more reliable energy for the future.

The Australian Government has also entered into the Australian East Coast Domestic Gas Supply Heads of Agreement. The Heads of Agreement is a voluntary, industry-led agreement between the government and east coast LNG exporters. Its objective is to ensure:

  • a sufficient supply of natural gas to meet forecast needs of energy users in Australia
  • Australian gas users have access to affordable gas.

The Heads of Agreement works together with the ADGSM to prevent a gas shortfall in the east coast gas market.

In 2023, the ADGSM was reformed to allow for flexibility in responding to domestic gas supply shortfalls. The ADGSM ensures there is sufficient natural gas supply to meet the forecast needs of Australian energy users. The ADGSM gives the Australian Government’s Minister for Resources the power to control the export of LNG if a domestic gas shortfall is forecast. It remains a measure of last resort to protect Australia’s domestic energy security.

On 11 July 2023, the government’s Gas Market Code of Conduct (the Gas Market Code) came into force and builds on the above measures. The Gas Market Code, which will be reviewed in 2025, ensures that east coast gas users can contract for gas at reasonable prices and on reasonable terms. It is designed to:

  • secure additional supply commitments to anchor domestic prices at $12/GJ
  • provide certainty to investors and incentivise new domestic supply to avoid projected shortfalls 
  • sustain reasonable domestic gas prices over the medium term.

While contract and spot prices vary across eastern Australia, the Gas Market Code sets a price anchor ($12/GJ) to which exemptions can be granted. These exemptions incentivise producers to commit extra supply in the short term and help investment in the medium term. This supports access to gas at reasonable prices and on fair terms. In January 2024, the Minister for Energy and Minister for Resources jointly announced that 4 exemptions under the Gas Market Code had resulted in the commitment of 564 PJ of gas to the east coast market from 2024 to 2033. This provides more affordable gas to the Australian market in the short to medium term. 

West coast contracting and pricing reflects the presence of large producers and consumers of gas, which enter into long-term take-or-pay gas sales agreements. The Western Australian Government’s domestic reservation policy requires delivery of 15% of export production to WA’s domestic market. Households and residential users, represent a small portion of WA’s gas market. 

Government policies that manage acreage release, tenement and permit allocation and reservation, among other policies, also influence the market structure and dynamics. In Queensland, an Australian Market Supply Condition may be attached to a petroleum lease, with the objective of increasing supply and lowering prices for domestic users.

The Australian Government’s focus through the net zero transition is to ensure all Australians have access to reliable, sustainable and affordable energy. The evolution of Australia’s gas markets and how this affects communities and businesses will occur in parallel with broader changes required to transition our economy to net zero. The wellbeing of Australians is central to a successful energy transition.