Shell has strongly opposed the Australian government's plan to ensure domestic gas supply by mandating LNG producers to allocate part of their production for domestic use. Cecile Wake, Shell's Australia head, stated at an industry event in Australia that this plan "is fundamentally a big hammer to crack a nut" and "an extraordinarily heavy intervention in a market that is functioning well."
Details of the domestic gas storage plan
This proposal for creating domestic gas storage was raised in May this year and was introduced to address concerns about gas shortages in certain parts of the country, particularly the eastern coast. The eastern coast of Australia is particularly vulnerable to supply shortages. Last year, the country's competition authority warned that the market could face a shortfall by December.
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Economic impacts and prices
Initially, the regulations stipulated that producers must reserve 20 percent of their production for the Australian market, but it has now been proposed that this amount be reduced to a maximum of 20 percent. This is likely still too much for large LNG producers operating on Australia's coasts, especially at a time when the global gas market has lost one-fifth of its supply due to Qatar Energy's force majeure. Given that prices are at their highest level since 2022, energy companies expect to make significant profits from LNG sales, making this the worst possible time to allocate reserves for the domestic market.
However, this plan is set to be implemented in 2028, giving large LNG companies enough time to capitalize on the current LNG crisis. According to Shell's regional head, the industry faces deeper issues related to the reserve allocation requirements. This problem pertains to the requirement for LNG producers to "supply" an amount equivalent to 110 percent of the demand on the eastern coast, not just to provide these volumes to potential buyers in the domestic market.
Shell warns that this action will have a detrimental impact on prices and "will plant the seeds of tomorrow's market failure."
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