Australia’s energy price caps and planned export controls threaten to stifle investment and upset relationships with key trading partners, as one of the world’s biggest gas exporters acts to cushion consumers from rising prices.
Prime Minister Anthony Albanese’s government this month proposed introducing laws giving it the right to limit exports in response to rising concerns about domestic supply. It introduced in December temporary price caps on uncontracted gas and a mandatory code of conduct that would enforce the sale of gas at a “reasonable price”.
Analysts and businesses warn that these interventions could have serious consequences for liquefied natural gas investment as well as trading relationships with countries including Japan and South Korea. Australian gas last year accounted for more than 42 per cent of Japan’s LNG imports, 34.5 per cent of China’s and 22 per cent of South Korea’s, according to consultancy EnergyQuest and official trade statistics.
“There is growing concern that Labor is undermining commitments to trade partners about gas exports. That should be a red flag for the government,” said Saul Kavonic, an energy analyst with Credit Suisse. “International companies will now see Australia as a country of increased sovereign risk,” Kavonic added.
Since the Albanese government was elected last May, it has won praise from the business community over its diplomatic efforts to end trade tension with China, the country’s biggest trading partner.
But the energy initiatives have raised questions over how the government intends to balance public concern over costs and supplies with the commitment to invest in Australia’s vast energy and mineral riches, the most important pillar of the country’s export economy.
It also marks a shift away from the previous rightwing government’s policies which were broadly supportive of the fossil fuel and mining industries. “This is the most anti-business, anti-market policy Australia has had for some time,” said Kavonic.
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The Japanese embassy in Canberra has said it is closely monitoring the situation and Japanese company Mitsui, in an interview with Australian media, warned of the “unintended consequences” of short-term interventions.
Despite reassurance from Canberra, Japanese trading houses with energy interests in Australia have expressed concerns about the impact of the export controls. “It is true that we are not currently facing any shortage of Australian LNG but we have expressed our concerns at every opportunity,” said a Japanese trade ministry official.
An official at South Korea’s Ministry of Trade, Industry and Energy said its concern was limited because South Korea received LNG from Australia mostly on long-term contracts.
Graeme Bethune, chief executive of EnergyQuest, said Japanese and Korean angst about the limits on LNG exports could have repercussions on the switch to green energy. “Australia is also counting on both countries to invest in Australian hydrogen export projects,” he pointed out.
Following a surge in the price of gas following Russia’s full-scale invasion of Ukraine, the value of Australia’s LNG exports hit A$90.8bn (US$61.9bn) in 2022, up 83 per cent from 2021, according to the Australian Bureau of Statistics.
The government brushed off the industry’s outrage in December. “I see no reason to jump at shadows,” said Albanese when asked about warnings by the sector that the policy would stifle investment. He similarly dismissed concerns about the impact on trade relationships.
Still, the impact on industry is tangible. Ian Davies, chief executive of Senex Energy, said this week that the “reckless intervention” by the government threatened to “suffocate industry investment confidence” and could lead to companies having to break export contracts to divert supply to the domestic market. The company suspended a proposed A$1bn investment following the intervention.
Senex, which produces oil and gas in Queensland and South Australia, is majority-owned by South Korean steelmaker Posco Group. Davies said the intervention would mean Posco would view the country as a “much riskier proposition”.
David Maxwell, head of Cooper Energy which last month suspended an expansion of its gas operations in Gippsland, Victoria, argued that the price caps and export controls would ultimately increase pressure on the domestic market because it would stop new supply coming into the market.
“Longer-term cost pressures and energy security concerns will very likely be much more severe if policy settings and regulations do not support needed investment in new competitive supply,” he said.
Analysts and bankers also cite government policy as a threat to the $12bn takeover bid of energy company Origin by Canada’s Brookfield Asset Management and US private equity group EIG Global Energy Partners. While talks continue, Origin has said the political climate makes it difficult to sign long-term contracts for gas supply.
The government’s energy policy has also sounded alarm bells in the wider resources sector. Geraldine Slattery, BHP’s Australia president, said: “Recent proposed changes to legislative and fiscal settings have created an element of uncertainty that could see Australia yield some of its competitive advantage.”
Additional reporting by Kana Inagaki in Tokyo and Song Jung-a in Seoul