Report: Gas price caps could put exploration investments and energy security at risk

Report: Gas price caps could put exploration investments and energy security at risk

A report, commissioned by the Australian Petroleum Production & Exploration Association (APPEA) and prepared by EnergyQuest, an Australian-based energy advisory firm, has found that gas price caps would decrease the incentive for exploration in Australia and risk security of long-term supply as the capital investment would be deferred or redeployed to markets with higher prices.

Illustration; Source: APPEA

EnergyQuest’s recently released report, called A Review of Gas Cap Pricinghas outlined that gas price caps would stifle new investment in domestic supply as market intervention leads to a string of “damaging economic consequences.”

As pointed out within the report, “a gas cap in Australia of $10/GJ would risk capital flight to countries which offer a faster and higher return on investment.”

According to this report, a price cap would have substantial long-term economic implications, including negative impacts on exploration, development of gas resources, gas storage economics in Victoria and the viability of LNG imports on the east coast.

“Price caps do not address the cause of high domestic prices – lack of new gas supply and volatility in demand from the electricity market with the transition to renewables. The long-term net effect of a price cap is to increase demand with lower prices, and decrease supply with lower economic returns – the opposite of what is required,” highlighted this report.

Samantha McCulloch, APPEA Chief Executive, commented: “The report shows that gas price controls won’t solve the pressures in the national energy system and would lead to even larger problems and higher prices down the track. We need to look at the entire energy supply chain for solutions, not isolate only one part of it.

“Gas can play a part in that solution by bringing on new supply to put downward pressure on prices. But this can only be done when positive investment policy settings and regulatory certainty encourage new investment. Intervention does the opposite.”

McCulloch further underlines that the report demonstrated the risk of intervention and that the government should allow the existing mechanisms of a Heads of Agreement (HoA) and Gas Industry Code of Conduct to work. In addition, the APPEA boss says that the unintended consequences of market intervention underscore the necessity of early consultation with the industry.

Back in October 2022, APPEA emphasised that Western Australia’s Mineral and Petroleum Review 2021-22 highlighted the importance of the oil and gas industry to the state and national economies, as this sector reinforced WA’s fourth straight resources sales record.

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Furthermore, APPEA recently reported that Australia’s LNG exporters were set to almost triple their financial contribution to the public this financial year and welcomed upward revisions for gas exports in the Australian government’s latest Resources and Energy Quarterly report.