Examining barriers to more efficient gas markets
Commission research paper
This paper was released on 31 March 2015 and it examines issues relating to different stages of the gas supply chain in the eastern Australian gas market, against the backdrop of integration with the Asia-Pacific market.
The stages of the supply chain considered include exploration, production, processing and transmission. The Commission's analysis has also considered the role of government in the market, and examined whether there are barriers to efficiency that would be amenable to policy reform.
Please note: Appendices B and C are only available online (in the tab below) and are not available in the hardcopy.
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Examining Barriers to More Efficient Gas Markets (PDF - 1616 Kb)
Examining Barriers to More Efficient Gas Markets (Word/Zip - 1410 Kb)- 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.
Appendix B Eastern Australian gas market model (Word - 406.2 KB)