Better late than never: The gas fix to a problem that should never have been

In the pantheon of policy mistakes, the train wreck that is Australia's east coast gas export industry is a stand-out.

For a decade, it has pushed up the cost of living by elevating electricity prices, contributed to higher interest rates, hindered the switch to renewable energy and cut a swathe through the ranks of eastern Australia's energy intensive industries, many of which have either been forced to shut or move elsewhere.

It was a mistake that created a ludicrous contradiction. Australia, one of the world's biggest exporters of liquefied natural gas (LNG), was suffering from gas shortages.

Finally, after years of kowtowing, the federal government has announced moves to correct the market failures that, for so long, have been allowed to fester and infect the economy.

In future, gas exporters will be forced to deliver up to 25 per cent of their gas production to the local market.

By opting for a national plan that puts the onus on gas exporters, the government appears to have chosen the correct path.

The alternative was to make the entire industry — domestic and export suppliers — responsible for shoring up supply.

A third option, and probably the most efficient — to apply a tax to exports — was never really considered.

The big question now is: Will it work?

The new scheme won't come into force until 2027. That's partly because the industry is so complex due to the numerous, but largely ineffective, laws and rules that have been enacted to correct the gas export disaster.

The other problem is that the three big east coast exporters control more than 90 per cent of east coast gas reserves and have the power to manipulate the situation in their favour,

It will take the best part of 2026 to design a workable scheme and legislation to unpick and then recreate what should have been enacted back in 2010 when the push for east coast exports first began.

What will success ultimately look like? Greater supply for Australian households and industry, and hopefully, lower and more stable prices.

How did we get here?

A shortage amidst an abundance. You wouldn't read about it. Well, read on.

The problem mostly stemmed from a catastrophic decision by Adelaide-based energy giant Santos a decade ago to double the size of its export plant on Curtis Island just off the Queensland coast near Gladstone.

It wasn't sure it had enough gas to justify the expansion, but went ahead anyway.

When it discovered it was short of gas, Santos then decided to plunder the domestic market. And it continues to do so. To this day, it draws gas from the domestic market and ships it offshore, leaving barely enough supplies to power the nation.

There are three big exporters: one consortium led by Santos, one by Origin and the other by Shell.

Both Origin and Shell have been pumping gas into the domestic market, and so, they would be relatively unfazed by the federal government decision.

But Santos has been hoovering up huge amounts of domestic gas to fulfil its export contracts. Since 2017, it has drained about two years of gas supply from the domestic market, according to Josh Runciman from the Institute for Energy Economics and Financial Analysis.

Until recently, all three consortia presented a united front, arguing the best way to solve the issue was to allow more gas fields to be developed.

As soon as it became clear that all three may be targeted in any fix, Origin and Shell stepped back and pointed the finger at Santos. They weren't prepared to pick up the tab for Santos's mistakes.

The cost to the Australian economy has been enormous, particularly through the energy spike following Russia's invasion of Ukraine, which sent our inflation rate soaring as electricity prices leapt ahead in consecutive double-digit bounds.

Bad for the nation, lucrative for some

This could have all been avoided.

In 2009, when the proposal to export onshore gas was put to the Queensland and federal governments, there was a torrid debate about the impact on domestic prices.

Western Australian premier Alan Carpenter had insisted on gas reservation for his state several years earlier, facing off against gas industry threats they would abandon Australia.

Former Queensland premier Anna Bligh raised the alarm from the get-go.

"First, in relation to domestic gas, it is clear that before we set about exporting, we must secure our own domestic gas needs," she said.

"Today, we will formally issue a regulatory impact statement on two options to maintain domestic gas supply."

Option one was gas reservation. And that's when the gas industry, backed by an unlimited purse of lobbying cash, began a relentless campaign.

The Gillard government held a cabinet vote on gas reservation but discarded the idea, succumbing to arguments that it shouldn't interfere with free markets, even though there would be a near monopoly on gas production.

Then-resources minister Martin Ferguson in 2011 openly acknowledged that east coast exports were likely to increase prices.

Ferguson, like almost every resources minister since 2001, later became an industry lobbyist and maintained his vehement opposition to gas reservation. (Keith Pitt is the only name missing from the ranks of recent former ministers who have succumbed to the warm embrace of fossil fuel lobby groups.)

"APPEA [as the energy producers' lobby was then known] is also pleased that most Australian governments have rejected calls for the protectionist policy that is gas reservation," Ferguson told a Committee for the Economic Development of Australia gathering.

"This type of subsidy does not just harm the oil and gas industry, but it also hurts residential, commercial, and industrial customers."

Will this get through the parliament?

It's unlikely the opposition will object. At the last election, one of Peter Dutton's signature policies was to tax gas that was being exported above and beyond existing contracts.

Both Origin and Shell, in addition to supplying the domestic market, were sending uncontracted surplus gas offshore into what's known as spot markets.

Dutton's policy would have delivered more immediate results than that put forth by the federal government, as it would have made the domestic market more lucrative.

But it also could have simply opened the door to Santos having access to a bigger pool of domestic gas to funnel through to its contracted buyers in South Korea.

Under the federal government's new gas policy, the Santos-led consortium will be responsible for adding extra domestic supply. That will force it either to export less or buy gas from offshore to add to the domestic market.

The gas export industry has cost the nation dearly. East coast prices trebled soon after exports began.

On cue, industry lobbyists yesterday were calling for more new projects to be approved while, confusingly, arguing simultaneously that diverting more gas away from exports and into the domestic market may depress prices and stymie investment.

Depressing prices is the aim.

What they are really afraid of is that the much-touted new gas fields, such as at Narrabri, contain gas that is expensive to extract and may end up never being viable.

Many of our cheap gas fields, such as those in Bass Strait, are running out. While they've been in operation for decades, a lot of that cheap gas has been exported by Santos during the past 10 years at enormous profit.

All this has coincided with a looming global gas glut that will weigh on prices.

The International Energy Agency projects about 300 billion cubic metres of LNG export capacity is expected to be added each year until 2030, primarily supported by liquefaction capacity additions in the United States and Qatar.

Gas prices almost certainly will be in decline over the next few years, which will ease inflation, possibly interest rates and improve national competitiveness.

But much of the damage has already been done.