Shell has spoken out against a plan by the Australian government to ensure domestic gas supply by mandating LNG producers to reserve certain volumes of their output for domestic use.
“Fundamentally, it's a sledgehammer to crack a nut. And it is an extraordinarily heavy-handed intervention into a market that is actually working well,” Shell Australia’s chairwoman, Cecile Wake, said at an industry event in Australia, as quoted by Reuters.
The proposal for building a domestic gas reserve was first tabled in May this year, in response to worry about looming gas shortages in parts of the country, notably the east coast. The east coast of Australia is particularly vulnerable to supply shortages. Last year, the country's competition regulator warned the market could swing into a deficit by December.
Originally, the rules stipulated that producers should reserve 20% of output for the Australian market. Now, the proposal is for up to 20% of output to be reserved for the domestic market. This is probably still too much for the supermajors running LNG facilities off the Australia cost at a time when the global gas market has lost a fifth of its supply due to the QatarEnergy force majeure. With prices running at the highest since 2022, energy companies are set to make a windfall from LNG sales, which makes it the worst possible time for domestic market reserve allocations.
Yet the plan is scheduled to take effect from 2028, which gives LNG majors plenty of time to cash in on the current LNG crunch. Based on the remarks made by Shell’s regional chairwoman, the industry has a deeper problem with reserve allocation mandates. The problem has to do with the stipulation that LNG producers “must supply” volumes equal to 110% of demand on the east coast, rather than just offer these volumes to potential buyers on the domestic market.
According to Shell, this would have a disastrous effect on prices, and “sow the seeds of tomorrow's market failure”.
By Irina Slav for Oilprice.com
