Chairman’s Message

<Main Points>

Key lesson from the Iran crisis is the need to enhance energy security in Asia

Asia particularly needs alternative sources of LNG

Australia could be an even more important source of LNG for Asia

Proposed domestic reservation policy by Australia could discourage LNG investment in Australia

New policy does not help Australia’s domestic users but may instead hurt them

Policy to encourage investment could lead to a win-win for Asia and Australia

1. Lesson from the Iran Crisis: The need to enhance energy security in Asia by developing alternative sources of LNG

Russia’s invasion of Ukraine in 2022 was a wake-up call for Europe, which was heavily dependent on pipeline natural gas from Russia, to start thinking seriously about energy security. The Iran crisis was a shock for Asia, which was heavily dependent on energy passing through the Strait of Hormuz. Asian economies have learned a painful lesson that they need to enhance energy security.
　Various vulnerabilities of Asia have been exposed. Heavy reliance on crude oil and LPG from the Middle East, low level of emergency reserves, and insufficient refining capacity are now recognized as Asia's weaknesses. While these vulnerabilities must be addressed, I would like to focus on LNG in this Message.
　Due to limited pipeline connections, Asia has been relying on LNG for gas much more than other regions. To support Asia’s strong economic growth while reducing CO2 emissions, the demand for LNG in Asia is expected to grow. Asia is heavily dependent on the LNG passing through the Strait. As the risk of the Strait has been demonstrated, Asia needs to develop alternative sources of LNG at scale.

2. Australia could be an even more important source of LNG for Asia

Where should Asia get its LNG then? The alternative source must have reserves at scale. The proximity of the source is an advantage as an alternative. Sources requiring long voyages will add cost and affect the responsiveness to deal with contingencies. The absence of geopolitical concerns is another factor.
　From these viewpoints, Australia could be an even better source of LNG for Asia than it is today as an already major supplier of LNG. With the rising concern about the LNG passing through the Strait, Australia would be even more desirable as a source of LNG for Asia. Australia has substantial gas reserves. Australia is very close to Asia. Australia does not have geopolitical concerns such as those in the Middle East or Russia. In addition, the stability and reliability of Australia as a trusted LNG supplier have historically made Australia especially attractive to Asian users and investors. Australia could play a very important role in Asia’s efforts to enhance its energy security.

3. The proposed domestic reservation policy by Australia could discourage LNG investment in Australia

The Australian Government has announced a draft of the “Domestic Gas Reservation Scheme”. This new policy will require LNG exporters to sell gas equivalent to 20% of their LNG exports from new projects to the domestic market. While the motivation to ensure sufficient gas supply for domestic users at lower prices is understandable, the effect can be counterproductive.
　The “Must Sell” requirement could lead to compulsory sales of natural gas/LNG to the domestic market under non-commercial conditions. Such a requirement could reduce the attractiveness of investing in LNG projects in Australia. The requirement could also lead to higher prices for LNG importers in Asia as these projects must recoup their losses on domestic sales through exports.
　In the past several years, the Australian Government has introduced policies that could reduce the attractiveness of investing in Australia for LNG. The “Safeguard Mechanism” putting caps on GHG emissions from LNG projects is one policy negatively affecting investment. The “Australian Domestic Gas Security Mechanism”, which authorizes the Australian Government to require LNG exporters to divert LNG to the domestic market in case of emergency, is another example weakening the reliability of Australia as a trusted supplier. The new policy will be an add-on to these recent policies. The cumulative effect will be perceived as discouragement of investment in LNG projects in Australia. The stability and reliability that have historically been the basis of Australia’s attractiveness for investment may be further eroded by the new policy.

4. The new domestic reservation policy does not help Australia’s domestic users but may instead hurt them

Australia needs gas supply, especially to support the demand centers of Sydney and Melbourne, located in the southeastern part of Australia, to be sure. To ensure sufficient gas supply, new gas fields must be developed. But most gas projects in other parts of Australia are made possible by the LNG export portion. Without LNG exports, investment in much gas production will not be realized. The new policy may negatively affect investment in gas production, thereby becoming counterproductive to the objective of securing sufficient gas supply to Australia’s domestic users.
　There is a regional problem, too. The new policy is intended to cover all of Australia. But the Northern Territory does not have significant local demand for natural gas. It is not connected to the demand centers in southeastern Australia by pipelines. Even with the “Must Sell” requirement, the gas from the Northern Territory is unlikely to help the users in southeastern Australia.
　Western Australia has a different issue. There is already a requirement to supply 15% of the gas output to local demand. There seems to be considerable local demand to absorb the 15% local supply. This requirement can be satisfied through the whole project period, thereby providing flexibility. On the other hand, the new policy appears to require the 20% “Must Sell” on an annual basis, which will be much harder to satisfy. The additional 5% will probably have to be sold to southeastern Australia. But once again, there is no pipeline connection between the two regions. The users in southeastern Australia will not be helped.
　It is true that LNG receiving facilities are now being constructed in the Sydney-Melbourne area. But with a substantial portion of the capacity already likely to have been committed, the room to accommodate additional LNG from the Northern Territory or Western Australia may be limited.
　From an economic point of view, it will make better sense to develop gas fields near the demand centers in southeastern Australia and expand the pipeline connections between the gas fields and the demand centers. Pipeline gas is generally cheaper than LNG when gas fields are located near demand centers. This arrangement will enable the supply of cheaper natural gas to the users. The gas fields in other parts of Australia would be better used as sources for LNG exports.

5. Policy to encourage investment could lead to a win-win for Asia and Australia

The new policy is like trying to get a slice of a pie. But this attempt may result in the contraction of the pie by discouraging investment. Another approach can be characterized as an expansion of the pie by encouraging investment. This approach can be a win-win for both Asia and Australia. Investment in LNG projects in Australia can ensure an alternative supply of LNG for Asia. Expansion of gas production resulting from the investment can help ensure supply for domestic demand.
　How can this win-win be achieved? Improvement to the draft of the new policy may enable such a win-win. The “Must Sell” requirement may be made more flexible by allowing reasonable commercial conditions. The Northern Territory and Western Australia may be exempted from the requirement. The requirement may be satisfied through the whole period of the project rather than on an annual basis. Existing projects must be protected, not just respected, including built-in clauses for extension and additional supply. A phased-in approach may be introduced to facilitate adjustment by investors.
　In addition to the improvement of the new policy, complementary policies may also be introduced. Incentives for investment in LNG projects can be helpful to ensure supply for domestic demand and for export to Asia. Policies to facilitate and support expansion of pipelines connecting southeastern Australia to gas fields, especially in eastern Australia, will help ensure supply of cheaper gas to the demand centers.
　The necessity to enhance energy security for both Asia and Australia has been strengthened dramatically as a result of the Iran crisis. This win-win can be made possible if the new policy is improved as suggested above.

A copy of the comments submitted by IEEJ to the Australian Government on June 30 is available at the following link. The comments were prepared through consultation with the Japanese industry. I sincerely hope that the new policy can be improved by reflecting the suggestions made in the submission.
https://test-eneken.mvmt.jp/data/13371.pdf

The official comment period ended on June 30. But I believe that governments in Asia should be raising their concerns with the Australian Government. The Asian angle on the new policy will be very important as both Asia and Australia will have to enhance their energy security. The final outcome of the new policy will have a major impact on ensuring the supply of natural gas/LNG to Asia and to the users in Australia.