Changes to WA domestic gas policy expected following recent report

The interim report (92-page / 1499KB PDF) issued by the WA legislative assembly’s Economic and Industry Standing Committee (EISC), found WA’s current domestic gas policy is no longer fit for purpose. Released in 2006 as part of the state’s broader regulatory framework for gas, the policy was further amended in 2011, 2020 and 2023.

Over 60% of the estimated recoverable conventional gas reserves of Australia as a whole are in WA’s Carnarvon and Perth basins. While these gas fields support Australia’s LNG export industry, they are also crucial to the state’s own gas needs. As such, any new projects must ensure they comply with WA’s domestic gas policy as a precondition to project approval. The policy is usually applied via agreements struck individually with different LNG project developers.

The main aim of the existing policy is to ensure WA’s domestic gas commitments can be met, including the need for at least 15% of gas exports to be made available domestically for WA consumers, to complement supply from the domestic-only projects using the WA gas pipeline network. As part of the policy, all unsold gas is reserved in support of WA’s economic development.

According to the interim report, one of the policy’s main issues is an absence of consistency and clarity among the agreements struck with LNG project developers. The report also flagged a need for a link between supply and time periods outlined in the agreements.

Further complicating the outlook for the LNG market, WA has experienced a significant decline in LNG supply in recent years. In fact, the Australian Energy Market Operator (AEMO) has forecast that the WA gas market will fall short of demand by 5% in 2024 and by as much as 27% in 2033. 

As such, consistent with the interim report’s findings, increased government intervention seems likely going forward to ensure a sufficient supply of LNG for WA’s domestic market. This could involve lifting the current ban on the export of LNG by onshore gas developments in the Perth basin– something which the industry has argued would encourage investment in new projects, increasing overall production and boosting Australia’s domestic supply as much as export.

A final report providing more detail on next steps is expected by the end of the year.

Potential implications for the LNG industry

Noting that the WA state government will ultimately decide whether to implement any of the report’s findings and recommendations, the overall tenor of the interim report is that industry can expect government intervention to increase with the aim of increasing the delivery of domestic gas from current levels in order to meet the forecast shortfall. LNG producers are currently, on average, delivering around 8% of domestic gas relative to export – short of the 15% policy goal.

The report is clearly critical of the current contract-based model - where domestic gas commitments are negotiated between the gas producer and the state and documented in a gas commitment agreement or similar - and advocates for greater direct government intervention, including potentially through legislation.

What form that legislative intervention might ultimately take remains to be seen and the interim report is deliberately vague on this – the EISC frames its comments as “an attempt to solicit comment from industry” and advocates an industry-led approach. The EISC is clearly conscious of the sovereign risk perceptions that will come with direct government intervention – particularly in the context of ongoing projects. That said, while the EISC acknowledges that WA’s perception as being of low sovereign risk is an important policy factor, it is not determinative.

Whatever form the government intervention ultimately takes, there will be implications for industry. On the positive side, there would likely be some improvement in clarity and consistency. However, that consistency would come at the expense of flexibility to negotiate an agreement with the state that is specific to the particular project. In addition, a legislative approach would likely go hand in hand with a new enforcement regime, with associated penalties, and publication of both commitments and compliance – with associated financial and reputational risks for producers in both respects.

In addition, the potential lifting of the current ban on the export of LNG by onshore gas developments in the Perth basin is a significant development – potentially increasing the commercial incentive to develop new gas resources in this basin. However, whether that ultimately reflects the policy of the WA state government remains to be seen. A decision is expected before the end of the year.

Co-written by Gaganjot Gill and Morris Pang of Pinsent Masons.