SYDNEY, (Reuters) – Australia has proposed forcing east coast gas producers to fix their sales contracts based on their cost of production plus an agreed profit margin after a one-year price cap expires, sparking furious condemnation from the industry on Saturday.
The government has set a Dec. 15 deadline for comments on the plan to effectively limit profit margins after an emergency one-year price cap expires, which an analyst said goes well beyond industry expectations for intervention in the market. Australian Petroleum Production & Exploration Association Chief Executive Samantha McCulloch said the plan represented a “fundamental dismantling” of the Australian gas market.
The move, detailed late Friday, comes as gas producers face fierce criticism over soaring energy prices that have resulted in windfall profits from their Australian operations.
The government said it would cap gas prices at A$12 per gigajoule (GJ) and coal prices for power plants at A$125 per tonne for one year in what Prime Minister Anthony Albanese said were “extraordinary measures” to drive down energy bills. The emergency price cap would apply to new contracts signed while the cap is in operation for supply in the period when the cap is in place, the Treasury department said.
For multi-year contracts, after the cap expired, it said a “reasonable pricing provision” would apply for the remainder of the contract, giving producers a “reasonable return on capital” beyond the cost of production.
It would not apply to gas sales on the spot market, and would remain in place until the regulator advised the government that domestic gas prices were “reflective of the underlying costs of production”. Producers that would be hit by the gas price cap and the new longer term pricing provision include ExxonMobil Corp (XOM.N), Shell Plc , Origin Energy (ORG.AX), Woodside Energy Group (WDS.AX), Santos Ltd (STO.AX) and South Korean steel giant POSCO International Corp’s Senex Energy.
“This may be taken as a declaration of war on the gas industry on the east coast,” Credit Suisse analyst Saul Kavonic said.
The government earlier this year forecast household gas and power prices would rise by 20% to 30% over each of the next two years.
