New Australian Gas Policies Rattle Asia

by Ewen Levick | Melbourne

Australia’s recently-elected government is causing concern amongst Asian allies such as Japan and South Korea, as it introduces price caps and potential export controls on natural gas to secure domestic supplies – though it is too soon to say whether this will have an effect on Mongolian energy exports.

Australia’s electricity grid, like Mongolia’s, is reliant on ageing coal-fired power stations. As coal becomes less cost-competitive against renewable sources of energy like wind and solar, several of these power stations have announced they will close earlier than anticipated:

Australia’s largest electricity generator, AGL, announced in September that it intends to close its largest power station 10 years early, in 2035.

Renewables, however, are not ready to fill the gap. As a consequence, Australia is increasingly turning to natural gas to stabilise the energy grid when demand spikes. When combined with rising prices, there are concerns that the country could face major electricity shortages in the coming years, particularly as a forecast El Niño climate phenomenon drives higher temperatures.

In response, the Australian government, led by Prime Minister Anthony Albanese, has intervened in the energy market with policies intended to protect consumers from rising prices and ensure Australia has sufficient domestic supplies of natural gas.

These include a price cap of A$12 per gigajoule for natural gas sold in Australia, an agreement in which gas producers will first offer uncontracted gas to the domestic market, and legal mechanisms that allow the government to force gas producers to supply the domestic market in an emergency.

These policies have caused major rifts between the Australian government and local industry. Mongolia Weekly understands that relations between the two have never been worse, and that there is in effect a freeze on all new gas investments in Australia as international firms seek to avoid risk.

There is even speculation that the Australian government is intentionally undermining investments in the natural gas sector in the hope that this will accelerate the country’s transition to renewable energy, though this cannot be proven.

Yet Australia is a major exporter of natural gas; it supplies more than 42% of Japan’s LNG imports and 34.5% of China’s. If Australia faced electricity blackouts and the government forced producers to supply contracted gas to the domestic market, it would in effect reduce the amount of gas available to these countries and threaten their own supply, as well as undermine trust.

This means Japan in particular is concerned about Australia’s new policies. Mitsui, a Japanese investment firm, has publicly voiced concerns – an extremely rare move for a Japanese company.

The Japanese embassy in Canberra is apparently ‘monitoring the situation’ and a trade ministry official told the Financial Times that they are ‘expressing their concern at every opportunity.’

Whilst China does not appear to have expressed such strong concerns, it stands to reason that it would see the uncertainty in Australia as an additional reason to accelerate its efforts to reduce reliance on Western energy imports in favour of domestic sources, or imports from Central Asia and Mongolia.

Informed sources, however, believe that it is too early to draw this conclusion. First, the Australian government would face strong backlash if it were to intervene in long-term Asian supply contracts.

Second, the small size of the Australian market would mean LNG exports are likely to be delayed rather than cancelled altogether.

It could also provide a tailwind for alternative fuels development in Mongolia, particularly green hydrogen (as covered by Mongolia Weekly in March 2022).

Nonetheless, the investment freeze in Australia and international concerns are evidence that strong market intervention policies carry an equally strong degree of risk. For a country like Mongolia – looking to develop a broader export portfolio – it is worth paying attention.

Ewen Levick is an international security analyst and publisher at the Australian Defence Magazine and online editor for Mongolia Weekly.