Australian Federal Government Publishes Proposed East Coast Gas Market Code of Conduct for Consultation

On 26 April 2023, the Australian Federal Government published its proposed Mandatory Code of Conduct for the supply of wholesale gas in the East Coast Gas Market. The draft Code continues the existing $12/GJ price cap (subject to certain exemptions), introduces "good faith" conduct requirements for negotiations between producers and users, and requires producers to publish uncontracted gas volumes. It stops short of implementing all of the Government's initial proposals but uncertainty remains particularly around how the exemptions will apply.

The Federal Government has released its Consultation Paper and Exposure Draft for its proposed Mandatory Code of Conduct for the East Coast Gas Market (draft Code). The key aspects of the draft Code are:

• continuation of the $12/GJ price cap through what is described as a "price anchor" for commercial negotiations, subject to certain automatic and discretionary exemptions;
• introducing conduct requirements for negotiations between users and producers. These requirements will apply to all gas producers and are intended to address bargaining power imbalances between producers and gas users and establish minimum conduct and process standards for commercial negotiations;
• introducing a civil penalty regime to be enforced by the ACCC to ensure compliance with the Code, including compliance with the conditions of any supply commitments; and
• requiring all gas producers to publish details on the uncontracted gas they have available, and, to provide greater market transparency, divulge when the uncontracted gas would be brought to the domestic market over the forward 12 months.

The Government has stepped back from its original proposal for a reasonable pricing provision requiring gas contract prices to reflect production costs plus a specified rate of return and a binding arbitration framework for gas contract prices.

Pricing and Exemptions

The proposed $12/GJ "price anchor" for commercial negotiations will continue to 1 July 2025 (when it will be subject to ACCC review). The Code also establishes an exemption process as follows:

• Automatic exemption: Small gas producers (i.e. those who produce less than 100 PJ of gas in the preceding financial year) who supply gas exclusively into the domestic market are automatically exempt. Importantly, they lose this exemption if the gas they supply is onsold into the export market; and
• Conditional exemption: The price cap will apply to large producers (i.e. those who produce more than 100 PJ of gas in the preceding financial year) and small producers who sell some of their supply for export. Such producers will be eligible to apply for an exemption from the Code's pricing provisions if they negotiate a "satisfactory" voluntary enforceable supply commitment, which may include conditions relating to volume, price, new production, and conditions on how gas is offered to the market.

The Minister for Climate Change and Energy and the Minister for Resources will jointly determine whether an exemption is granted, after consulting with the Treasurer, Industry Minister and the ACCC. The Ministers have been afforded a great deal of discretion and may consider the following factors in exercising their discretion:

• the extent to which the exemption would promote;
  • a workably competitive east coast gas market;
  • the affordability and availability of gas in the east coast gas market;
  • the sufficiency or adequacy of investment in, and production of, regulated gas to meet demand in the east coast gas market;
• the effect or expected effect of other related decisions or government policies; and
• the impact on trade and exports if the exemption were granted.

The Consultation Paper indicates that firm commitments to supply gas are required for the undertakings to be considered "satisfactory".

Good Faith Obligation

The draft Code introduces conduct requirements for negotiations between users and producers for both pre-contractual and post-contractual obligations. Importantly, the draft Code introduces a "good faith" obligation in negotiations, and the exercising of rights and the performance of obligations under a gas supply agreement. The good faith requirement will apply regardless of the volume of gas supplied or the term of the agreement. The draft Code does not define "good faith"; however, it includes a list of factors that may be taken into account in determining whether a person has acted in good faith, including whether they have:

• acted honestly;
• cooperated to achieve the purposes of the agreement;
• not acted arbitrarily, capriciously, unreasonably, recklessly or with ulterior motives;
• acted in a way that constitutes retribution against the other person for past disputes;
• conducted the relationship without duress;
• recognised the need for certainty regarding the risks and costs of supplying or acquiring regulated gas; or
• undermined, or denied the other party, a benefit of any agreement.

The draft Code also imposes specific requirements and timeframes for producer-initiated expression of interest (EOI) processes, the making of an initial offer by a producer following notification to successful EOI participants, and the making of a final offer by a producer. The requirements relating to the making of a final offer will apply to all producers, covering contracts of 12 months or longer, even if they did not issue an EOI or initial offer.

Next Steps

While the draft Code is less intrusive than the Government's original proposal, concerns remain in relation to the case-by-case basis on which applications for exemption from the $12/GJ price cap will be determined and its consequential impact on investment certainty.

Large gas producers are requested to make submissions on the supply and price commitments they would be prepared to make under the proposed exemption framework by 5pm AEST 8 May 2023. Submissions on the policy design of the draft Code close 5pm AEST 12 May 2023.

The Federal Government has proposed that the draft Code will come into force in early June 2023.

As reported in our earlier alert, the imposition of the above-mentioned measures is not without some risk to Australia, which is a signatory to several investment treaties where key LNG companies are incorporated. 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

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