New Victoria reforms: enhancing the security of gas supply

Energy Oil & Gas

Two new bills aimed at enhancing the security of gas supply for the State

Gas regulation in Victoria is set for major reform after the Government introduced two new bills aimed at enhancing the security of gas supply for the State.

Lifting of onshore conventional gas moratorium

The first Bill is the Petroleum Legislation Amendment Bill 2020 (Vic) (Petroleum Bill) which allows for an 'orderly restart' of onshore conventional exploration and development from 1 July 2021. This Bill overturns Victoria's moratorium on onshore  conventional gas production that was imposed in 2017.

In 2017, the Victorian Government placed a moratorium on onshore conventional gas production until 30 June 2020. The Petroleum Bill extends the moratorium period to 30 June 2021 which has been cited by the Government as facilitating the orderly
restart of onshore petroleum exploration and petroleum production on 1 July 2021. It is expected that onshore conventional gas development could potentially start from 2023 to 2024. The Petroleum Bill also provides for submissions from the Victorian community to be taken into account in the making of certain decisions under the Petroleum Act 1998 (Vic) (including the grant of petroleum exploration permits, retention leases and production licences), and to enable prescribed social, environmental and economic factors to be taken into account in the making of certain
decisions under that Act.

The announcement comes after the Victorian Gas Program's (the VGP) studies concluded that there could be up to 830 petajoules of onshore conventional gas between the west, central and eastern areas of the onshore section of the Otway Basin and the central
onshore area of the Gippsland Basin and confirmed that new natural gas development will have minimal environmental impact.

Although these amendments have been welcomed by industry as a step in the right direction, the specifics of how these reforms will be implemented are yet to be revealed and we expect that a lot of the detail will be set out in the regulations. Once the Petroleum Bill is passed, the department will start working with industry and other stakeholders to amend the Petroleum Industry Regulations 2011 (Vic).

AEMO stated in the GSO that the lifting of the moratorium will allow the east coast gas market access to further sources of gas supply (which is expected to be sufficiently supplied until the end of 2023 based off existing and committed gas developments). However, AEMO stated that given the lead times required for exploration and development of projects, until exploration commences, the size of the resources and timing of any new supply remain unclear.

First opportunity for domestic customers to purchase petroleum

The Petroleum Bill will also amend the Offshore Petroleum and Greenhouse Gas Storage Act 2010 (Vic) to require a petroleum production licensee to provide domestic consumers with the first opportunity to purchase petroleum recovered under the licence. All production licences granted on or after 1 May 2018 will be subject to a new condition that provides a licensee must not supply petroleum to an LNG exporter unless the licensee has first taken all reasonable steps to supply that petroleum to a domestic customer on reasonable terms and there is no domestic customer willing to buy the petroleum on reasonable terms. A licensee who proposes to supply petroleum to an LNG exporter must also notify the Minister of the proposed supply. The criteria for what constitute 'reasonable terms' will be set out in regulations.

Developers of any possible new LNG projects located in Victorian coastal waters should be aware of these new requirements and factor these requirements into any gas marketing activities and offtake contracts required to be executed in order to underpin a final investment decision.

Although this proposed new regime does not go as far as to expressly reserve gas for Victoria domestic customers (unlike the 15% reservation in Western Australia), interestingly, the Productivity Commission found in its draft report that domestic gas reservation schemes can reduce investor returns, thereby discouraging investment in exploration and extraction and leading to higher gas consumer prices.

Ban on fracking enshrined in Victoria's Constitution

The second Bill is the Constitution Amendment (Fracking Ban) Bill 2020 (Vic), which enshrines in Victoria's constitution Victoria's ban on unconventional gas extraction, which includes hydraulic fracturing and coal seam gas exploration.

By way of comparison, South Australia and Tasmania also have a fracking ban and Western Australia and the Northern Territory have fracking bans over 98% and 51% of the State and Territory respectively. Despite there being no fracking ban in Queensland and New South Wales, there are certain limitations and  restrictions.

Interestingly, the Productivity Commission found in its draft report that bans and moratoria are a response to community uncertainty about the environmental impacts of unconventional gas operations, however, the evidence available suggests that these risks can be managed effectively by consideration on a project-by-project basis.

Although the Victorian unconventional gas industry is at a very early stage where there is currently no coal seam gas or shale gas production or confirmed resources, the passing of this Bill will prohibit any future developments of unconventional gas resources discovered if fracking is required. Having said this, it is possible that future governments could introduce legislation to remove this
ban if unconventional gas resources are discovered and could come under increasing pressure to do so once Victoria's conventional gas resources near depletion.

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