The Australian Competition and Consumer Commission (ACCC) has released its Draft Determination on an application for authorisation lodged by the North West Shelf (NWS) Project participants on 5 September 1997.
The applicants sought approval for the participants in the NWS Project to discuss and agree on common prices, terms and conditions for the sale of natural gas made available from the proposed expansion of the NWS Project to domestic customers. The applicants also sought approval to coordinate their method of marketing and selling gas.
Authorisation is a public process whereby the ACCC, in response to an application, has the power to grant immunity from court action for arrangements that would or might otherwise breach the competition provisions of the Trade Practices Act. Authorisation will only be granted if the ACCC is satisfied that the arrangements confer a net benefit on the public.
On the basis of the material before it, the ACCC concluded in its Draft Determination that, after weighing the public benefit and anticompetitive detriments of the proposed arrangements, there is a balance of public benefit in favour of coordinated marketing and selling by the applicants. The ACCC proposes to grant authorisation to the applicants to coordinate their marketing and selling of gas produced by the Incremental Venture for a term of seven years, so that the applicants, interested parties and the Commission could take account of the state of development of the market and the level of risk faced by the applicants in continuing with or departing from coordinated marketing at the end of that time. The proposed authorisation would also be subject to certain other conditions outlined in the attached summary of the Draft Determination
ACCC Deputy Chairman, Mr Allan Asher, noted that the Draft Determination is not a final decision. He invited interested parties to request a conference with the ACCC if they wish to make further submissions concerning the Draft Determination. The closing date for interested parties to call a pre-decision conference is 27 January 1998.
For further information about this media release: Ms Suzie Copley, Senior Project Officer, (02) 9230 9112 Alana Woods, Acting Director, Public Relations, (02) 6243 1108 MR181/97 23 December 1997 North West Shelf Project Application for Authorisation Background Information The application
On 5 September 1997 an application, No A90624, was lodged by the participants in the North West Shelf Project (the NWS Project) under sub-section 88(1) of the Trade Practices Act (the Act) for authorisation to make a contract or arrangement, or arrive at an understanding, a provision of which would have the purpose, or would or might have the effect, of substantially lessening competition within the meaning of section 45 of the Act.
The applicants are seeking authorisation to discuss and agree together the common terms and conditions, including price, at which gas produced together by them under the NWS Project will be offered for sale to customers and to discuss and agree on methods for marketing and selling such gas (coordinated marketing).
Under sub-section 90(7) of the Act, the Australian Competition and Consumer Commission (the Commission) will only grant authorisation if it is satisfied that the subject arrangements will result in a benefit to the public and the benefit will outweigh any detriment resulting from any lessening of competition.
The application concerns an expansion of the natural gas producing facilities of the NWS Project for gas supplied in Western Australia (WA) under the Incremental Pipeline Gas Joint Venture (the Incremental Venture) and other proposed expansion. The applicants are proposing to double the domestic production capacity of the NWS Project from 550 Tj/day to 1 100 Tj/day. Gas for the domestic market is currently produced by the Domestic Gas Joint Venture (the Domgas Venture) and is subject to authorisation No. A18492, which was granted in 1977.
The 1977 authorisation does not cover the marketing activities of the parties to the Incremental Venture owing to the inclusion of an additional party, Japan Australia LNG (MIMI) Pty Ltd (MIMI), which was not a party to the 1977 authorisation. The applicants propose that the 1977 authorisation would operate in conjunction with the current application, if authorised.
The applicants also seek to have the authorisation:
cover future ventures which may follow with the development of the NWS Project; and expressly include a clause under sub-section 88(10) of the Act so that the authorisation applies to any party that becomes a party to the proposed contracts, arrangements and understandings after they are made or after authorisation.
Gas supply contracts
The gas supply contracts between the applicants and gas users are not covered by the current application. Those contracts will be assessed separately by the applicants for competition issues and, if considered at risk, the applicants will notify such contracts to the Commission, seek authorisation for the contracts, or hold discussions with the Commission to determine the most effective means of overcoming any problems.
Public benefits and anti-competitive detriments
The applicants state that coordinated marketing, which is the subject of this application, will not substantially lessen competition. Nevertheless, they seek authorisation to provide certainty because of the significant financial and other commitments being dedicated to the expansion of the production facilities. The applicants argue that the relevant market is the energy market in WA and that they face competition, not only from other existing and potential gas producers, but also from other forms of energy, such as electricity, coal and fuel oil.
According to the applicants, considerable public benefit will flow from the expansion of the NWS Project in terms of economic development, greater efficiency, business and employment opportunities, import replacement, export enhancement and increased international competitiveness. The applicants contend that coordinated marketing is such an integral facet of the proposed expansion that it cannot proceed without authorisation. They have advanced several arguments concerning the impracticality of separate marketing in the context of the Western Australian market at the present time.
Interested parties opposing authorisation contend that the gas market in WA has matured sufficiently since 1977 to support the proposed expansion with separate marketing. While not disputing the benefits to be gained from the expansion, they argue that further economic benefits will follow from the development of high value-added resource-based projects resulting from more competitive gas prices. Whereas some parties who oppose the application maintain that separate marketing will increase competition and lower gas prices, the applicants, and others supporting the application, argue that prices would rise because of increased transaction and other costs.
Parties opposing the authorisation have not substantially countered the applicants arguments concerning the viability of separate marketing. Nevertheless, the Commission accepts the concerns of users and appreciates that they and other interested parties are at a relative disadvantage in obtaining the necessary information to assess satisfactorily the applicants arguments in favour of coordinated marketing.
The Commission must form a view of the balance between the public benefit and anti-competitive detriment, if any, of the application and whether the expansion would proceed in the absence of authorisation by the Commission. On the basis of the evidence presented, if the Commission accepted that the expansion could proceed without coordinated marketing, it would have to demonstrate how the practical problems outlined by the applicants could be overcome, particularly in an environment of few producers and buyers, a predominance of long term contracts, and the absence of spot and secondary markets.
On the basis of the material before it, the Commission concludes that the public benefit of the proposed arrangements outweighs any anti-competitive detriment and proposes to grant authorisation to the applicants to coordinate their marketing, subject to certain conditions, the reasons for which are outlined.
The scope of the authorisation Parties covered by this authorisation
The applicants seek inclusion in the authorisation explicit provision to allow the substitution or addition in future of a new party to the authorisation. The applicants state that the inclusion of such a clause in the 1977 joint venture would have allowed MIMI to participate in the Incremental Venture without the need for the NWS Project participants to seek further authorisation from the Commission.
While understanding the applicants wish to avoid a similar situation in the future, the Commission is concerned that the gas producers could potentially enjoy the benefit of an authorisation for conduct that could have a marketplace effect equivalent to a substantial merger of the interests in the North West Shelf, yet not technically fall for consideration as a merger or acquisition. Therefore, the Commission proposes to restrict authorisation to the parties to the present application.
The Commission notes that legislation has been introduced to the Commonwealth Parliament, in the Gas Pipelines Access (Commonwealth) Bill 1997, to amend the Act to provide for applications for minor variations to existing authorisations. Provided the legislation is passed, it would provide a streamlined process for considering minor variations to the authorisations. Anything falling outside the scope of that legislation the Commission would view as a matter that should be considered afresh on its merits, as in the present application.
Joint ventures covered by the authorisation
In addition to seeking authorisation of the Incremental Venture the applicants are seeking coverage under the authorisation of future ventures that may follow from the development of the NWS Project. The applicants have not provided the Commission with any information as to what further expansion projects may be contemplated by the NWS Project in the future nor the public benefits that are likely to result from such expansion. Given the lack of information on which to assess the balance of public benefits over detriment of all potential ventures falling within the authorisation sought by the applicants, and the already dominant position held by the NWS Project, the Commission considers that any future expansion proposal should be considered by the Commission separately.
Delivery point
An issue of concern to the Commission in relation to reform of the gas industry is the delivery point of gas. The Commission considers that contractual supply arrangements with provision for alternative or additional delivery points have the potential to foster more flexible and efficient supply arrangements. However, if delivery point provisions are rigid and open to dispute and protracted renegotiation, gas reform initiatives may be frustrated. In the Commissions view, a pro-competitive delivery point provision in a gas supply contract would, as a minimum:
provide for the nomination of alternative or additional delivery points, subject to consent for such nominations not being unreasonably withheld where the change or addition would not result in significant additional cost to the parties; and provide for dispute resolution, according to a fair and efficient process specified in the agreement, by an independent party acceptable to the parties to the agreement, so as to deal with any issues that might arise.
Accordingly, the Commission proposes that a condition of authorisation be that the coordinated marketing and selling arrangements of the applicants only extend to entering into supply agreements that have the two minimum features specified above.
Duration of the proposed authorisation
The applicants have argued that in order to confer a comparable degree of certainty to the producers, the authorisation be granted for a comparable term to that under the authorisation of the marketing arrangements for North West Shelf Project gas by the parties to the Domgas Venture.
The Commission is of the view that CoAG initiatives to reform the gas industry present some prospect of encouraging competition in the production and marketing of gas by gas producers. Whether and when these developments occur, and the pace of developments in secondary markets and in production and transmission infrastructure, are likely to have a substantial bearing on the level of upstream competition in the next decade, and on the capacity of producers in joint ventures to assume the risk (if indeed, in the future, there is any additional risk) of separately marketing their product. Should indefinite adherence to coordinated marketing by producers become unnecessary, its continuation may well hamper the development of a competitive gas industry.
In addition, the Commission considers that the application lacks specific detail on the critical contract mass necessary to underwrite the proposed expansion. Accordingly, the Commission proposes to limit the authorisation to seven years. The expiry of the authorisation is expected to coincide with a number of developments anticipated in the gas market in WA. At the conclusion of the seven year period, the Commission will be able to review the balance between public benefit and detriment in the context of a more mature market. The applicants, other interested parties and the Commission will be in a position to take account of the state of development of the market and the level of risk faced by the applicants in continuing with or departing from coordinated marketing.
Production Transfer Agreement
An issue related to the current application is the Production Transfer Agreement (PTA). The PTA deals, amongst other things, with the situation where the Domgas Venturers have entered into sales contracts that will require gas in excess of the production limits of the Domgas Venture. In that case, part of the gas commitments will be supplied by the Incremental Venture. Under the PTA, where Woodside acquires gas from other participants to the Incremental Venture to fulfil its commitments under a Domgas contract, Woodside will pay to those other producers the price payable by the customer under the Domgas sales contract, after deducting any relevant costs and liabilities.
The Commission proposes to authorise the PTA subject to similar conditions to the authorisation of the coordinated marketing arrangements by the parties to the Incremental Venture.
Draft Determination For these reasons, the Commission proposes that the authorisation:
be granted to the parties to the present application: to enter into or give effect to contracts, arrangements and understandings relating to common terms and conditions (including price) upon which gas produced by the Incremental Venture will be offered for sale to customers; to discuss and agree on a method for the marketing and selling of such gas, pursuant to contracts, arrangements and understandings relating to the Incremental Venture only; to enter into and give effect to the Production Transfer Agreement (as put before the Commission in this application), which involves parties to the Domgas and Incremental Ventures, provided that the conditions of authorisation of the Production Transfer Agreement correspond with the conditions of authorisation of contracts, arrangements and understandings relating to the Incremental Venture only;
be granted for a period of seven years from the date of the Commissions final Determination. only extend to coordinated arrangements to make customer supply contracts that make possible the renomination or addition of delivery points by provisions having the following minimum features:
provide for the nomination of alternative or additional delivery points, subject to consent for such nominations not being unreasonably withheld where the change or addition would not result in significant additional cost to the parties; provide for dispute resolution, according to a fair and efficient process specified in the agreement, by an independent party acceptable to the parties to the agreement, so as to deal with any issues that might arise
not extend to customer supply contracts entered into by the parties to the present application for gas produced by the Incremental Venture.