The Woodside Petroleum Karratha Gas Plant is pictured on the North West Shelf Venture in Western Australia...The Woodside Petroleum Karratha Gas Plant on the North West Shelf Venture in Western Australia is seen in this undated handout photograph obtained July 24, 2009. Woodside Petroleum Ltd, Australia's No. 2 oil and gas producer, reported on Friday a 1 percent rise in second-quarter production, and reiterated its full-year production forecast.  REUTERS/Woodside Petroleum Ltd/Handout (AUSTRALIA BUSINESS ENERGY) FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS - RTR25ZDB
© Reuters

Australia, one of the world’s biggest liquefied natural gas exporters, said on Thursday it would introduce export control restrictions to tackle an acute domestic gas shortage that was pushing up prices and threatening local industry.

The dramatic move marks Canberra’s latest intervention in the domestic energy market, which has suffered a series of power outages and a rise in electricity and gas prices over the past 12 months.

“It is unacceptable for Australia to become the world’s largest exporter of liquefied natural gas but not have enough domestic supply for Australian households and businesses,” said Malcolm Turnbull, Australia’s prime minister.

“Gas companies are aware they operate with a social licence from the Australian people. They cannot expect to maintain that licence if Australians are short-changed because of excessive exports,” he said.

Under a new “gas security mechanism” due to enter into force on July 1 the government will be able to restrict exports when it believes there is not a secure supply of gas available to domestic users. The controls are expected to be a temporary measure until the supply crunch can be resolved through other market reforms.

Gas producers, which have invested tens of billions of dollars in LNG plants, described the controls as “almost unprecedented”, warning they created “sovereign risk” and could further disrupt domestic supply.

The share prices of local gas producers Santos and Origin Energy fell by as much as 7.5 per cent and 5 per cent respectively following the announcement.

Australia has emerged as an LNG superpower over the past five years following a $200bn investment boom that will enable it to surpass Qatar as the world’s biggest exporter by 2020. Royal Dutch Shell, Chevron, Santos and Origin have all invested in LNG facilities, which export gas to energy-hungry markets across Asia such as China and Japan.

But despite tripling gas production in areas along the east coast of Australia over the past five years some producers have failed to meet the output targets on which they based long-term LNG contracts with customers. State government bans on exploration and development of new gas reserves have contributed to a tightening of domestic gas supplies on the east coast, causing prices to rise sharply.

QGC Australia 2012 - Curtis Island BG GROUP Inside a LNG tank at the QCLNG project, Curtis Island, Queensland, Australia - The QCLNG project includes constructing a two-train LNG plant on Curtis Island near Gladstone where the gas will be converted to LNG for export
A worker inside an LNG storage tank in Queensland

“The main obstacle to developing more supply has been the opposition of some state governments,” said Malcolm Roberts, chairman of the oil and gas lobby group Appea. “At a time when we need billions in new investment to create more gas supply, any intervention which creates sovereign risk is alarming.”

In the past, large gas users in Australia typically agreed 10- to 25-year gas supply agreements with producers, with prices in the order of A$5 ($2.70) per gigajoule delivered. Many of these agreements were renewed on short-term contracts in 2014-2015 that will expire between 2017 and 2019.

Many industrial gas users are beginning talks on new contracts and have lobbied the government over a near doubling of prices.

Australian gas prices were 80-144 per cent higher in the first quarter of 2017 against the same period last year, averaging A$9-A$10.7 per gigajoule, according to a government analysis of wholesale and short-term gas markets.

Dale Koenders, Citi analyst, said the restrictions did not necessarily threaten the LNG producers’ long-term contracts with Asian customers as they could buy spot cargoes to meet their obligations.

But analysts warned the imposition of export controls risked damping investment in gas development at a time when more gas was needed.

“This creates uncertainty for producers, who remain unclear on how this mechanism will operate,” said Saul Kavonic of Wood Mackenzie.

LNG producers have already delayed or abandoned projects due to a sharp dip in international gas prices and cost overruns worth almost $50bn at Australian facilities, which have suffered from high labour costs and technical challenges.

Mr Kavonic said Australia’s gas shortage was one part of an energy security problem caused by successive policy failures at federal and state level.

“State governments have built renewables without battery storage, closed coal plants and banned gas exploration while the federal government does not have a climate policy,” he said.

Follow Jamie Smyth on Twitter: @JamieSmythF

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