Woodside warns drilling for more gas ‘hard to justify’ due to government intervention

While Australia is one of the world’s top shippers of LNG, most of it is produced in the nation’s north and is sold on long-term contracts to buyers in China, Japan and Korea. The Australian Energy Market Operator (AEMO) has issued warnings about winter gas-supply “scarcity risks” emerging in southern states during high winter demand periods as output from legacy offshore fields dries up.

Meanwhile, the federal government remains locked in talks with gas producers over the details of a mandatory code of conduct for the industry and the requirement for “reasonable” terms. Of particular concern is the government’s insistence on using the “cost-plus” model to determine the reasonable price, which factors in the cost of gas production plus a profit margin. Producers, however, argue they also need to pay for exploration and development of new gas fields on top of the cost of production.

Shell and Woodside, two of the biggest gas producers on the eastern seaboard, last month hit pause on plans to offer new large-scale gas contracts to local retailers or heavy industry as they assessed the legal ramifications of the federal government’s price controls. If gas producers breach the rules, they will be fined $50 million or three times the value of the company’s profit from the deal — whichever is the higher amount.

Shell’s Queensland-based gas company QGC on Monday notified customers it was again accepting bids for 8 petajoules of wholesale gas supply for 2023.

Woodside has already completed its domestic gas contracting for 2023, but on Wednesday said it remained in talks with the national consumer watchdog and still needed greater clarity about the regulations before it could offer any domestic gas sales agreements for 2024.

“Everything that we have for 2023 we are selling into the market today … the challenge with executing contracts for future periods is they will be subject to rules which are not clearly defined at this point in time,” O’Neill said. “We need greater clarity on how the rules will affect the whole value chain to ensure we comply with those rules and do our best to meet our customers’ needs and also meet the expectations of our shareholders.”

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A spokesperson for acting federal Resources Minister Catherine King said Shell’s decision to resume bids showed the government’s price caps were working. The government said it was consulting with the Australian Petroleum Production and Exploration Association (APPEA) and gas producers to implement the code of conduct.

However, APPEA, which represents large gas producers, said the government’s market interventions were deterring investment in bringing on new gas supply.

“The continued uncertainty over the operation and administration of the government’s proposed mandatory Code of Conduct and permanent regulation of gas prices is hampering investment, and will ultimately leave Australian households and manufacturing worse off,” APPEA chief executive Samantha McCulloch.