Transcript
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Introduction
Thank you for inviting me today at this fascinating time for the gas industry.
Indeed, there appears to be a growing disconnect internationally on how the gas industry generally is performing.
In Europe and the EU, gas is being challenged and being displaced in the energy mix by a counter intuitive mix of renewables, which are being heavily subsidised in the EU by governments eager to address climate change, and by cheap coal which is more cost competitive than gas.
In the US, the cheap gas from the shale gas revolution is increasingly displacing coal as the fuel of choice and gas is contributing to what has been called a re-industrialisation of the American economy.
In the Middle East, gas use is increasing rapidly as governments scramble to substitute gas for oil in the energy mix, driven both by environmental concerns and, until the recent dramatic and unforeseen drop in the price of oil, oil being seen as a more valuable export commodity.
In Asia, and in particular East Asia, gas is playing an increasingly important role. It has contributed to the post-earthquake recovery of Japan as the nuclear industry was shut down.
Until recently, gas use in China had been growing spectacularly with LNG imports alone increasing at over 20 per cent year-on-year.
Gas was and is seen as a key fuel in the environmental debate in China, and the specter of ever increasing imports was a key driver of the boom in the international LNG industry over the past few years, including in Australia.
Here in Australia, the gas industry is similarly enmeshed in what in many ways can be seen as contradictory views as to its future.
There is no doubt that the staggering $200 billion invested directly in expanding Australia’s LNG industry to meet international demand has been and will continue to be a major contributor to the Australian economy.
In Eastern Australia, the investment of over $63 billion and an expected tripling of the size of the gas market due solely to the LNG exports is truly transformational.
However on the flip side, this is leading to significant challenges for the domestic gas users in the Australian economy.
Today I would discuss:
- The background to ACCC being directed to undertake an inquiry into Australia’s East Coast gas market;
- The role of the ACCC in undertaking market studies and how they relate to our other work; and
- The scope of the ACCC’s inquiry, and outline what we have done to date.
Background to our inquiry
It is just over one week since we released the Issues Paper for the East Coast Gas Inquiry.
The ACCC commenced work on this inquiry earlier this year following receipt of a Direction from the Minister for Small Business, the Hon. Bruce Billson MP in April this year.
This inquiry is being undertaken under Part VIIA of the Competition and Consumer Act 2010.
It is the challenges being faced by gas users, and in particular the concerns about competition in the gas industry, which led the Government, and in particular Minister Billson and the Minister for Industry and Science, the Hon. Ian Macfarlane MP, to seek this inquiry.
It is worth making a number of general observations about the inquiry.
First, on the genesis of the inquiry.
Undoubtedly, due to the flow on effects from the massive investment I have already described, there are continuing concerns by market participants and governments around the efficiency and effectiveness of an opaque, complicated and difficult to understand market such as the Eastern Australian gas market.
On the other hand, there is clearly “inquiry fatigue” in the sector. Our inquiry is but the latest in a line of reports and inquiries into the gas market over the past two or three years.
A consistent theme of previous inquiries, however, is that they have not been able to assess meaningfully the conflicting claims from gas suppliers and gas users about prevailing supply and demand conditions, or about the extent and practice of gas supply negotiations, or even about the actual prices available in the gas market.
Holding the inquiry under Part VIIA of the CCA allows the ACCC to use compulsory information gathering powers to cut through some of the opaqueness of the market, and the cloak of confidentiality that has left previous inquiries to some extent incomplete.
The ACCC is already using our statutory powers to collect and analyse information about the gas industry and build on the findings of the previous inquiries. It is a huge task.
We are also undertaking extensive industry stakeholder consultation to understand better the reasoning behind claims about particular market behaviors or about shortcomings in the market
I would like to emphasize that there is no preconception in the ACCC that there is illegal behavior, or that clout in the market is being inappropriately exercised to influence market outcomes.
Indeed, in an open economy and a well-functioning market, I would hope and strongly expect that industry would be striving to maximise returns for shareholders.
However, the ACCC is well placed to investigate and assess any structural or other issues in the gas market that limit competition or prevent the gas market working as expected. Questions around these structural issues may include the following.
Are there potential barriers accessing the key transportation, processing and storage infrastructure?
Are there adequate incentives in key gas services such as pipeline capacity, to ensure its availability?
Does the joint marketing of gas adversely affect competition in the gas market?
Another area of inquiry is to investigate if there are any specific behaviours by gas industry participants that either restrict competitive access to the supply of gas or the provision of associated services.
While not pre-judging any sector of the industry, here we are entering the realm of the exercise of market power.
In this regard, of course, the ACCC’s assessment of competition will not be limited to behaviours that potentially contravenes the CCA.
Role of the ACCC in undertaking market studies
Over the past 12 months there has been considerable debate about market studies in the context of the Harper review. From the ACCC’s perspective it has been a very strange debate, with the Harper Review not wanting the ACCC to do market studies or to even be an advocate for competition.
It is not new for the ACCC to be called upon to undertake such market studies.
In addition to looking at issues in Australia’s east coast gas market, the Government has also this year asked the ACCC to do regional petrol studies.
These add to our continuing roles where the ACCC monitors competition and wider performance issues in stevedoring, our four largest airports, the broader petrol market, and the rural water market.
Market studies are widely used by competition agencies around the world to enable them to develop a sophisticated understanding of how well competition and markets are working in particular sectors.
For the EC, UK and USA competition regulators this activity is as core as cartel enforcement.
When agencies suspect a market is not working well for competition and consumers the studies help them understand if this is the case, and then identify what can sensibly be done to improve the working of the market, such as removing unnecessary impediments to competition.
Importantly, these studies also enable agencies to give a market the ‘all clear’; that is, to recognise that the market is working satisfactorily and that there is no need for intervention.
In relation to any findings from these studies, they don’t bind policy-makers, or substitute for the core policy-making process. Rather, our findings form part of the broader consideration by Government in their development of policy.
The International Competition Network conference that the ACCC hosted in Sydney in May 2015 made clear that competition regulators engage in competition advocacy on an everyday level, and that advocacy is a valuable tool for competition agencies in addition to enforcement
Market studies and investigations are regarded as sitting alongside competition rules by allowing the competition authority to focus on the functioning of the market as a whole rather than on the conduct of particular firms within it.
There is a simple logic at play here.
It is often not tenable for the ACCC to be asked to look into an issue and, after the examination, simply say there are no breaches of the law that can be seen. If agreements appear to reduce competition, or market power is being exercised, governments and industry participants and consumers will usually want more, and treat with disdain any narrower finding.
What is happening and why is it happening? Are there entry barriers or other issues that can be addressed?
It makes little sense, having examined a market, for the ACCC to not comment on what it has observed, or to pass the potential need for further study on to another organisation; the issues will then, inevitably, fall “between the cracks.”
And the skills needed for the further, narrowly focused study are often those uniquely possessed by the ACCC.
Indeed, in my personal view, the ACCC has not done enough competition advocacy and market studies in the past. This has led to a gap in Australia’s competition debate and focus, and for some to ask “who is the champion for competition”?
It is, and should be, the competition regulator, as it is in all mature economies overseas.
Scope of the inquiry
Our issues paper was released last week on 4 June.
There is significant change occurring in domestic gas markets given the extraordinary developments with LNG export projects.
To some extent, this may be better understood in Western Australia or in Darwin where they have existing LNG projects than on the east coast, where the market is still coming to grips with the implication of an LNG export industry.
Domestic gas users are being exposed, for the first time, to international gas prices, along with increased uncertainties about the future supply of gas for domestic use in Eastern Australia. This is at a time when many domestic gas users have supply agreements expiring.
These are new and difficult risks for gas users to understand and manage, especially in a gas market that is only just starting to develop the physical and financial mechanisms and instruments to manage those risks.
An example of where there are new risks is the uncertainty and the conflicting views about the ability of the coal seam gas fields in Queensland to produce the volumes of gas required to meet the large LNG export commitments.
In short, are the LNG projects short of gas, both in production capacity and the reserves to meet the long-term export commitments?
It has been widely reported that the respected commentator, Graham Bethune of EnergyQuest, has raised this very prospect most recently at the World Gas Conference in Paris as part of a wider criticism of the Australian Energy Market Operator’s 2015 Gas Statement of Opportunities.
There is anecdotal evidence and claims that the effects of these uncertainties are flowing through to negotiations for the supply of domestic gas.
Some domestic gas users claim that with domestic gas prices rapidly rising, gas producers are reluctant to enter into new long-term gas supply agreements, which have been the mainstay of the gas supply industry in the past.
In addition, there are concerns that the vertical integration of some suppliers with the LNG projects is symptomatic of a gas supply chain where there is a failure of real competition.
There are claims that some negotiations for the supply of gas are not conducted seriously, with producers wanting to hold reserves back and cash in on a potential future gas shortage brought on by LNG export commitments.
There are also claims that the contract terms and conditions offered by gas suppliers are onerous for gas users and leave them increasingly exposed to the vagaries of the international market, or with less surety and flexibility in managing their gas supply.
There are, of course, alternative explanations for what is being observed in the gas market.
The exposure to international markets and prices along with higher production costs are undoubtedly significant factors causing the gas price rises.
Real uncertainty from gas suppliers about the adequacy of reserves to meet long-term domestic contracts may be causing contract terms to shorten along with the uncertainty of international markets.
From a purely economic perspective, gas is simply flowing to where its highest value is; that is, the LNG export market.
There is a range of other potential contributing factors that may be exacerbating the current uncertainty pervading the gas market.
The Inquiry will test the veracity of these claims and seek hard evidence that either supports or disproves them.
Some gas users are testing alternate strategies to manage these new risks with less secure gas supply, shorter contracting terms and price uncertainty.
These include the types of deals struck supporting direct investment in exploration and development in return for gas supply.
Here again gas users are entering unfamiliar territory, taking on the large risks associated with developing unconventional gas supplies, well outside the core business of a fertilizer manufacturer or a petrochemical plant.
There are other factors that the Inquiry will be testing which could be acting to limit or even stifle the development of new gas supplies.
At a time when many governments are expressing alarm about the gas market, there continues to be concern that regulatory regimes and regulatory barriers may be making the development of new gas supplies more onerous than it needs to be.
The Inquiry is also seeking views and information about the potential for access to key gas production infrastructure to act as a barrier to the development of new gas supplies.
In this regard, a number of market participants have raised the Moomba hub as a particularly important gateway for both new and existing gas supplies between the southern states and Queensland.
Market information and market transparency
A common theme which is underlying many of the challenges facing the gas market in Eastern Australia is a concern about a lack of information, or an asymmetry in access to information, on key components of the market.
In the past, many gas users were not reliant on acquiring a comprehensive understanding of information about gas supply for the purpose of undertaking negotiations of new gas supply agreements.
However, rising gas prices, uncertainty about gas supply and the expiry of many long-term gas supply agreements has significantly increased the desirability of gas users gaining access to timely and relevant information about gas price and supply dynamics.
In this regard, a lack of market transparency and levels of supply uncertainty are not unique to the Eastern Australian gas market.
However, many other commodity markets have well-established trading arrangements and futures markets that provide the opportunity for suppliers and consumers to manage future price and supply risks.
This is an important area for industry participants to engage with the Inquiry.
The inquiry is especially interested in your views on what does increased transparency actually mean for participants, what specific gas market information do you need to underpin your decisions about the future of your businesses and how will you use it in your decision making.
Conclusion
Of course, Energy Ministers through the Energy Council, the Australian Energy Market Commission and the Australian Energy Market Operator all have work-streams underway to address issues in the gas and broader energy markets.
I see the work of the ACCC here as completely complementary to those work-streams.
The ACCC can be a powerful contributor to an informed debate on the future of energy markets, and information flowing from this inquiry can assist in shaping energy market reform.
While the gas distribution networks are not specifically included in our terms of reference, nevertheless, I would encourage you to read the Issues Paper and to make a submission by 2 July 2015 if there are concerns you wish to canvas.. If you have a wish to discuss issues relevant to the inquiry, there will be public hearings scheduled later this year, or if there are more confidential issues to discuss, please contact the ACCC Inquiry staff directly to assess the best way these can be aired.
Thank you again for your time today and I am happy to take questions or hear your views on these important issues.