Natural Gas Price Caps Proposed in Australia

Coming on the back of several months which have been anything but tranquil for Commodities markets, a few factors have been converging recently and could be poised to send further ripples through Natural Gas (NG) fields around the globe. Let’s take a closer look at what’s been going on with this crucial fossil fuel:

Policy Shift Down Under

Policymakers across the industrialised world have been struggling to ease the strain of inflation throughout much of the post-COVID pandemic recovery era, and a newly-proposed policy in Australia to protect consumers’ pocketbooks has some major energy producers concerned. Last Friday, December 9th, Australian Prime Minister Anthony Albanese revealed to the public that his nation’s government would intervene in the country’s domestic market by capping the prices of key energy sources as well as providing household bill relief.

According to the plan, for the next year, the cost of Natural Gas in Australia will be kept at or below A$12 ($8.14 USD) a gigajoule, and the price of Coal will be capped at A$125 ($84.77USD) per ton. This far-reaching decision comes in the wake of the significant distress experienced by households across Australia in the face of skyrocketing global energy prices throughout much of the year. In addition to the aforementioned price caps, local authorities throughout the country will disburse A$1.5 billion ($1b USD) in direct energy bill relief. In the words of the nation’s leader, ‘extraordinary times call for extraordinary measures.’ (Source:Bloomberg)

Producers’ Misgivings

Although Albanese’s administration considers this raft of measures as crucial to prevent the average Australian citizen from the financial stress experienced worldwide since Russia’s invasion of Ukraine began taking its toll on energy prices, not all players in the Natural Gas market have remained docile. 

Significant concerns are already being raised regarding the potential supply-side effects of the plan announced Friday. According to several major fossil fuel firms, including Chevron (CVX) and ExxonMobil (XOM), this major government intervention into price-setting mechanisms could have a seriously deleterious effect on future investment. Australia is one of the linchpins of the global Natural Gas market, having exported over 100 billion cubic metres of this essential energy source in 2021. Were new investment to truly become disincentivized in the wake of Albanese’s policy’s adoption, some worry that exports from gas fields down under could drop.

However, government representatives have countered that gas-producing firms have been consulted throughout the process of policy formulation, and an agreement to secure domestic Natural Gas supplies through 2026 was reached with several production plants on the country’s east coast this past September.

The intervention measures announced on the 9th were not the only potential policies considered by the Australian government, which also looked at the potential imposition of a windfall tax on the country’s gas producers, similar to those imposed in the United Kingdom and other nations on energy firms which have made significant profits in the current era of consumer price inflation.

Albanese’s proposal will be debated by members of the Australian Parliament this Thursday, December 15th, but it remains to be seen what the knock-on effects will turn out to be in the short- to medium-term. With the price of Natural Gas having risen by over 80% so far this year, and this Commodity’s cost predicted by the Australian government to rise domestically by a further 40% in the coming eighteen months, it may come as no surprise that the powers that be are intervening. Traders have pushed Natural Gas’ prices up by 9% since Friday as of the time of writing, but whether major producing firms’ concerns turn out to be justified in the end is, at this point, unclear.