Shell calls Australia's gas reserve plan a 'sledgehammer' that risks market failure

Energy major Shell on Tuesday criticised the Australian government's ​plan to force liquefied natural gas producers to ​reserve a portion of their output ‌for domestic ​use, calling it a "sledgehammer to crack a nut" for an already functional market. The government is set to introduce legislation this week to parliament to ‌implement its new domestic gas reservation policy to address supply shortfalls and bring down energy prices.

Cecile Wake, chair of Shell Australia, which exports gas from the Queensland Curtis LNG project, said that while she did not oppose ‌the concept of a domestic gas reserve, there were major flaws in the current policy's design. "Fundamentally, ‌it's a sledgehammer to crack a nut. And it is an extraordinarily heavy-handed intervention into a market that is actually working well," she told a conference in Sydney.

Shell, along with Origin Energy and Santos , would be most affected by the reservation scheme ⁠as operators ​of the three LNG ⁠export projects on the east coast. The draft proposal requires energy exporters to reserve up to one-fifth of their production as determined ⁠by the energy regulator from January 1, 2028 to deliberately oversupply Australia's east-coast gas market by 110% of forecast demand.

The ​government has maintained that the producers "must supply" a certain percentage of their output to the local market, ⁠and not just offer it to any prospective buyers. Wake said those measures would drive prices down too far and potentially "sow the ⁠seeds ​of tomorrow's market failure".

"It is such a blunt instrument. It is not talking about modest downward pressure on prices. The architecture, and that may well be the intention, but the way it would ⁠play out … is to drive prices below the long-run marginal cost of bringing new production out," she said. Australia is ⁠one of the ⁠world's largest LNG exporters and ships more gas overseas than it consumes domestically.

But most of the country's large gas reserves are located in the northwest, far from ‌the more ‌populous southeast where demand is concentrated.