ORG Origin Energy Limited

By Robb M. Stewart and Rob Taylor 

Australia threatened to impose restrictions on natural-gas exports as it extracted a commitment from global energy companies to supply enough gas to meet growing local demand and prevent a domestic shortage.

In a meeting with Prime Minister Malcolm Turnbull on Wednesday, local and international energy companies agreed to make more domestic gas available as soon as possible. They also vowed to supply gas in periods of high demand, such as during heat waves, to prevent more of the widespread blackouts that hit parts of the country's south late last year.

Mr. Turnbull offered no detail on how much additional gas would be required or where it would come from, but said the new arrangements to ensure sufficient supplies to meet surges in demand would be in place before next summer. He said the government wouldn't hesitate to regulate exports--possibly even establishing a legislated reservation for domestic use--if the industry wasn't able to guarantee adequate supply.

"All of the powers that we have under the constitution we reserve to be able to use as and when the national interest demands it," Mr. Turnbull said after the meeting. "What we've sought from the industry is the commitment to ensure that the domestic market has the gas supplies it needs."

It marks a change in tack for Australia's conservative government, which has previously argued a reservation policy could raise sovereign risk issues for producers and deter investment in new gas projects.

Mr. Turnbull was moved to respond after the operator of the country's gas and electricity markets last week warned of a shortfall in gas-power electricity generation in the populous southeast states as soon as next summer if no action is taken. He said Wednesday it was "utterly untenable, unacceptable" that Australian businesses and families couldn't access affordable gas.

The issue came to a head late last year when South Australia state was hit by several blackouts, including a statewide outage after a violent storm that left many homes and business without power for several days.

Last week, growing alarm at the prospect of further blackouts across the country's south prompted Tesla Inc.'s Elon Musk to offer--initially via Twitter, and later during a phone calls with political leaders including Mr. Turnbull-- his company's energy-storage technology as a solution to South Australia's electricity woes.

Yet Australia's fears of a looming gas shortage and soaring prices come as the country is on track to overtake Qatar as the world's top exporter of liquefied natural gas in the coming years.

Major projects are ramping up output for export. Three big plants on Curtis Island in northeastern Queensland state, which together cost about $60 billion, are tapping methane buried in inland seams of coal and chilling it to a liquid to send to Asia.

These projects--operated by Royal Dutch Shell PLC, Origin Energy Ltd. and Santos Ltd., along with partners--are viewed by analysts as the most viable near-term solution to meet domestic demand. Mr. Turnbull said Wednesday that the Shell and Origin-led projects agreed to supply more gas from the projects to the local market than they take out of it. The third project had taken the matter on notice, he said.

Following the meeting, gas companies said they were committed to working with the federal government.

"We understand that if we want a long term export industry we need to make sure Australians have gas available at competitive prices," said Andrew Smith, Shell's Australia chairman. He said the company had already reduced export shipments from one Australian project to supply more gas to the local market and recently signed supply contracts with local utilities.

Executives from Santos and Origin said they too would assist in addressing the country's energy challenges and help to boost domestic gas supply.

Still, to ensure it can meet future demand Australia needs to develop new onshore gas fields, but this would take years and require fresh investment by companies that have pulled back on exploration and new projects with the slump in world oil prices.

Some regions, fearful of environmental impacts and political backlash, have also imposed restrictions on gas exploration and development. Mr. Turnbull on Wednesday reiterated his call on state and territory governments to lift such restrictions.

Encouraging commercial arrangements to channel gas from the export market to domestic supply is a move in the right direction, said Innes Willox, chief executive of Australian Industry Group, which represents more than 60,000 businesses.

The risk, according to Saul Kavonic at Perth-based energy consultancy Wood Mackenzie, is a knee-jerk policy that would do more damage to the industry and worsen the long-term supply problem.

"There is no silver bullet here and you can't just turn a switch and bring on new large gas supply," he said. "Producers would love to produce more gas right now as prices are high, but the remaining gas sources out there are challenging technically, commercially or politically."

Write to Robb M. Stewart at robb.stewart@wsj.com and Rob Taylor at rob.taylor@wsj.com

(END) Dow Jones Newswires

March 15, 2017 08:45 ET (12:45 GMT)

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