The Australian Government recently announced that it was seeking feedback on reforms to the Australian Domestic Gas Security Mechanism, which will allow the government to control the export of liquefied natural gas every quarter in order to meet local supply needs.

Since Russia's invasion of Ukraine, European and Asian liquefied natural gas ("LNG") buyers have been competing for alternatives to Russian gas, which is causing prices to rise and prompting Australian producers to export more uncontracted gas. Demand has also risen in Australia on account of coal-fired plant outages and increased heating needs.

In response, on 9 February 2023, the Department of Industry, Science and Resources of Australia announced that it was seeking feedback on its proposed reforms to the Australian Domestic Gas Security Mechanism ("ADGSM") that will come into force on 1 April 2023. The ADGSM was first adopted in 2017 to avoid supply shortfalls of LNG on the east coast of Australia. The proposed amendments to the ADGSM grant additional powers to the government to review domestic needs quarterly and curb LNG exports to satisfy local demand. If triggered, LNG producers would have to seek permission to export gas during any quarter that is forecasted to have a shortfall of gas supply.

Although the Australian government has never used the ADGSM, a decision to invoke it could affect the availability and cost of gas for worldwide consumers.

The reforms to the ADGSM

The revised ADGSM grants the government the power to impose LNG export restrictions until 2030. It establishes a process for the Minister for Resources to determine whether there will be an insufficient supply of natural gas for Australian consumers in the forthcoming quarter:

• Advice to Minister: A decision to invoke the ADGSM is to be based on forecasts and advice provided by several national entities including the Australian Competition and Consumer Commission ("ACCC") and the Australian Energy Market Operator (“AEMO”).
• Notification: The Minister's notification of intent to consider determining a domestic shortfall quarter must be issued at least three months prior to the commencement of the domestic shortfall quarter.
• Consultation: There is then a 30-day consultation period with the relevant LNG projects.
• Determination: The Minister makes a final determination within 45 days of the notification. The Minister has broad discretion, but must have reasonable grounds for believing that there will not be a sufficient supply of natural gas for Australian consumers unless LNG exports are controlled and redirected towards the domestic market.

Permissions to export volumes of LNG may be issued under conditions that the Minister deems necessary and appropriate. Further, the ADGSM mentions that the Minister will consider protected long-term contracts when giving permission to export a certain level of gas.

Australia uses different measures to curb LNG exports

In September 2018, in parallel with the ADGSM, a Heads of Agreement ("HOA") was signed by the Australian Prime Minister and representatives of three major LNG exporters to maintain a secure supply of gas in the Australian east coast market. Under the HOA, the LNG exporters agreed to offer uncontracted gas to the domestic market on reasonable terms in the event of a shortfall.

In December 2020, the HOA was replaced with a similar agreement expiring on 1 January 2023. Following the ACCC's warning that there might be a shortfall in 2023 and an indication that the Minister was considering triggering the ADGSM, the HOA was once again revised in September 2022 to provide an additional 157 petajoules of gas to the Australian domestic gas market in 2023.

The Australian government has imposed a $12 gigajoule price cap on uncontracted gas for the next year and required gas to be sold under "reasonable" pricing on an ongoing basis. Under this framework, producers breaching those rules could face severe penalties.

Possible challenge by foreign investors who invested in the sector

The imposition of such measures is not without risk for Australia, which is a signatory to several investment treaties where key LNG companies are incorporated. These include a bilateral investment treaty with China, free trade agreements with Korea and China, the ASEAN-Australia-New Zealand Free Trade Area ("AANZFTA") to which Malaysia is a party, and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") which includes Japan. By restricting the export of LNG and imposing a price cap, Australia may risk claims under such treaties.

These investment treaties provide protections to investors and their investments in Australia, including protection from expropriation without compensation, the obligation of "fair and equitable" treatment, including by respecting investors' legitimate expectations, and to refrain from discrimination.

Many of the investment treaties to which Australia is a party permit foreign investors to present a claim for damages in arbitration when the State breaches its commitment to accord those protections. So far, Australia has been able to negotiate with LNG producers instead of triggering the ADGSM, limiting the possibility of such claims.

Foreign investors who have invested in LNG projects in Australia and who are adversely affected by the State's measures in the sector are nevertheless carefully assessing their rights and legal options.