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Gas Pipelines Access (Commonwealth) Bill 1997

House:

House of Representatives

Portfolio:

Primary Industries and Energy

Commencement:

Items 2-4 of Schedule 1, which make amendments relating to the Moomba-Sydney gas pipelines, commence at the commencement of the later of sections 13 and 14 of the proposed Gas Pipelines Access (South Australia) Act 1997 (SA) (dealing with the conferral of functions and power on the Commonwealth Minister, the ACCC, the NCC and ACT), or corresponding provisions of the relevant New South Wales Act. Items 27-56 of Schedule 1, which make amendments to the Trade Practices Act 1974 (Cth), particularly the minor variation, revocation, and substitution of authorisations, commence on Royal Assent of this Bill. The remaining provisions commence on the commencement of the sections 13 and 14 of the proposed Gas Pipelines Access (South Australia) Act 1997 (SA).

Purpose

The principal effect of the Bill is to provide for the application of the national legislative framework for third party access to natural gas pipelines to areas within the Commonwealth's jurisdiction, namely, offshore waters, external territories and adjacent areas, the Jervis Bay Territory and the Moomba-Sydney gas pipeline.

The Bill also makes amendments to the Trade Practices Act 1974. The major amendments provide for the minor variation, revocation, and substitution of authorisations for restrictive trade practices.

Background

Introduction

Australia's natural gas prospects were once considered poor relative to proven overseas reservoirs. Petroleum exploration companies targeted oil primarily and considered gas a second best result if encountered. Exploration has proven that Australian hydrocarbon resources are prone to be dominated by gas. Oil remains the prime exploration goal, but natural gas is assuming a prominent role in Australia's energy production and consumption mix. After coal and oil, natural gas is the third most important energy source for Australia, particularly in the manufacturing industries. Relative to diesel and petroleum fuels, natural gas has positive greenhouse and local air quality contributions. Domestic consumption of natural gas is forecast to increase with some degree of substitution of natural gas for other energy sources. Significant moves to use natural gas as a transport fuel within Australia have commenced.

Primary natural gas supply as a percentage of total energy supply in Australia has risen from 6 per cent in 1973, to 12 per cent in 1979, 17 per cent in 1994 and to 18 per cent today. 1 The industrial sector is the largest user of gas, accounting for 40 per cent of total primary demand in 1995.

Natural gas occurs in underground reservoirs generally juxtaposed in the pore spaces with oil, called associated gas. Natural gas may also be produced by the gas drainage of coalfields, which may in the future prove to be a significant source for Australia. The exploitation of natural gas as an energy source is comparatively recent; vast quantities have been 'flared' as a waste product to facilitate crude oil production. As recently as 1985 some nine percent of international gas production was flared, the majority of this in Nigeria, Iran and Saudi Arabia. 2

Naturally occurring gas is composed of the lighter hydrocarbon fractions, mainly methane (CH 4) with some ethane (C 2H 6). Depending on the source of the gas it may contain minor propane (C 3H 8), butane (C4H 10) and longer chain hydrocarbons, nitrogen (N 2), carbon dioxide (CO 2) and hydrogen sulphide (H 2S). Pure methane gas is colourless, odourless and lighter than air. Impurities such as hydrogen sulphide can give natural gas an odour.

Due to the low thermal density of natural gas the fuel is extremely bulky to move or store in its gaseous state. A given pipeline can only carry around one fifth of the quantity of natural gas as compared to oil. This factor is the main disadvantage of natural gas compared to oil and other fuels. Processing of natural gas at the individual well head is variable, as is the product from individual wells. 3

Gas and the Environment

Natural gas combines with oxygen on burning to release heat, forming carbon dioxide and water. This reaction is similar for all fossil fuel sources such as petrol, diesel and coal. Benefits may be derived from the use of natural gas relative to the convenient liquid and solid fuels. The energy produced in proportion to the amount of carbon dioxide released is low for natural gas relative to other fossil fuels. Levels of particulates (minute solid matter) released to the atmosphere are also low for natural gas, which can improve local air quality. Lead is not required for natural gas vehicles as an octane enhancer. Additionally carbon dioxide, aromatic and nitrous oxide emissions are reduced. The reduction in the emission of carbon dioxide achieved by a Natural Gas Vehicle is around twenty percent. Figure 1 shows the relative emissions of carbon dioxide per gigajoule of energy produced.

[FIGURE 1 IS NOT AVAILABLE ONLINE]

Estimates made by the Australian Institute of Petroleum indicate that by converting half of Australia's road vehicles to natural gas, savings of two per cent would be made on the total Australian emissions of greenhouse gases. 4 Compressed natural gas is used for motor vehicles and stored in cylinders on the vehicle under high pressure. Operation of natural gas vehicles in urban areas in particular offers a sharp lowering in ash and particulate levels. 5 Other advantages include no lead emissions, low carbon monoxide and nitrous oxide emissions and very low aromatic emissions.

The growth projected in the use of natural gas as a vehicle fuel in Australia is concentrated in a few niche markets in the road transport sector. The main commercial advantage of natural gas for vehicles is the relatively low fuel price, which reflects the fuel excise exemption on natural gas. Changes in this excise arrangement could erode the natural gas price advantage. High mileage vehicles with ready access to refuelling facilities are best able to take advantage of natural gas. Urban fleet vehicles such as delivery vans and buses along with heavy trucks on intercity routes best fit these criteria. 6

Australian Natural Gas Usage

Although commercial quantities of natural gas were discovered in the 1950s, as late as the mid 1960s Australia's demand and supply of natural gas was virtually zero. 7 A pipeline to Adelaide from the Moomba Gidgealpa field was constructed by the South Australian Government by 1969; Brisbane commenced commercial reticulation of natural gas from Moonie in 1969; by December 1970 Melbourne was converted to natural gas from the Gippsland field; Perth was supplied with natural gas from Dongara in 1971; natural gas from Moomba reached Sydney in December 1976.

Even at competitive prices gas is only substitutable with other energy sources to a limited degree, solids and liquids have numerous advantages in terms of transport and storage. Gas turbines fuelled by natural gas are technically and economically a viable option for electricity generation. The capital costs of a combined cycle plant is approximately two thirds that of a black coal fired steam plant. 8 Gas has proved successful where alternative sources of fuel for electricity generation are expensive. Since 1988 the principal electric power stations in the Northern Territory have employed natural gas fuel. Gas for electricity has low capital costs and short lead times, and offers versatility in meeting peak and intermediate loads.

The environmental benefits of natural gas are clear in terms of the greenhouse gas emissions per unit of energy produced as shown in Figure 1. In December 1992, the Senate Standing Committee on Industry, Science and Technology recommended a switch to fuels which emit low volumes of carbon dioxide, such as natural gas. The Electricity Supply Association of Australia (ESAA) argues that a priority for natural gas is in the replacement of oil as a transport fuel. 9 Natural gas resources are substantial under the existing usage patterns but if natural gas were used more extensively for electricity generation the resource could be depleted.

Development of a Competitive Gas Industry

The Australian natural gas industry has evolved as a series of separate State supply entities. The mainland capitals and larger provincial centres are generally supplied by a single pipeline from each producing area. The Moomba to Sydney and Moomba to Brisbane pipelines are the only interstate natural gas pipelines currently operating in Australia. Most Australian pipelines connect supply with market within the one state. Australia's resources of natural gas are distributed unevenly through the country with the bulk of the reserve located in the north western areas of Western Australia.

The economics of the more remote gas fields is likely to improve due to an increased pipeline network and improved access to pipelines. To fully utilise Western Australian natural gas resources a pipeline to the large eastern markets is required. Only when the natural gas supplies of eastern Australia are nearing economic depletion will this pipeline become a viable proposition. The proposed development of the Chevron natural gas pipeline from Papua New Guinea into Queensland is likely to further delay the need for a pipeline from Western Australia to the eastern states. Potential exists for the utilisation of coal bed methane in the eastern states and the location of additional eastern Australian resources is probable.

A general trend to promote competition in the energy sector through much of the developed world commenced in the 1980s. Programs to this end are in place for the natural gas pipeline sector in the United States, Canada, the United Kingdom and New Zealand. 10 The federal government introduced A National Strategy for the Natural Gas Industry in 1991 stating its position on natural gas pipelines. The strategy indicated that industry perceives interstate trade on a free and fair basis as the key to future development of an efficient and competitive industry and stated that open access to pipelines on non-discriminating commercial terms is essential for optimal interstate gas competition. 11 The National Competition Policy Review (Hilmer Report) reinforced these objectives and formed the basis for the Competition Policy Reform Act (1995). 12

As part of the gas industry strategy the major interstate pipeline, from Moomba to Sydney, was sold by the Commonwealth Government in June 1994 to the East Australian Pipeline Limited (EAPL) consortium. EAPL is owned by AGL (51 per cent) and Gasinvest (49 per cent). Gasinvest is a Malaysian and Canadian owned venture. 13 The South Australian Government sold the Moomba Adelaide pipeline in May 1995 to Tenneco Energy of the United States and in June 1996 the Queensland Government sold the Wallumbilla Rockhampton pipeline to Pacific Gas Transmission of the United States. Distribution of gas in Western Australian and Victoria is carried by government utilities but private companies perform this role in New South Wales, Queensland, South Australia, the Northern Territory and the Australian Capital Territory. Distribution and transmission is by the same company in some cases. 14

The production of gas has remained a private sector activity, whereas pipelines and distribution historically have both private and State government involvement. Successive federal governments have encouraged trade in natural gas consistent with microeconomic reform strategy, including the National Competition Policy (Hilmer Report). Resistance to these plans has been driven by uncertainties of particular states with regards to supply surety. Nevertheless, the development of a cross border grid is generally accepted as inevitable. However, restrictions will be imposed by the relatively immature state of the existing grid.

The Council of Australian Governments (COAG) meeting in February 1994 agreed on the removal of legislative barriers to free trade in natural gas by 1 July 1996. The key element of the agreement included:

. removal of legislative and regulatory barriers to gas trade;

. promotion of market access through a cohesive national regulatory framework;

. decoupling of gas transmission and distribution or retailing activities;

. development of a national pipeline grid;

. removal of cross subsidies; and

. implementation of gas franchise arrangements for local distribution. 15

The Australian natural gas industry has considerable regulation at all levels of production, transmission and distribution. The Australian Gas Association devised a code of practice for third party access to interstate pipelines in 1993. Further draft codes were produced by the Australian Petroleum Exploration Association, the Australian Pipeline Industry Association and the Australian Gas Association in 1995. 16 The Gas Reform Task Force was established in June 1995 to accelerate the development of a national framework for implementing reforms. The main focus of the task Force has been the development of a Third Party Access Code to enable effective access to pipeline facilities. The Task Force released a draft code in July 1996 and submitted a revised version in November 1996. 17 The Natural Gas Pipelines Access Agreement was signed by COAG on 7 November 1997. 18

The implementation of reforms to gas industry should bring a range of benefits including:

. increased security of supply through a competitive system;

. increased competition between alternative fuels and consumer price competition;

. lower unit gas supply costs;

. more cost effective gas pricing to end users (from an economic point of view) as cross subsidies are phased out;

. lower greenhouse gas emissions and pollutants generally; and

. gains in microeconomic activity, through investment, higher production and enhanced employment opportunities.

Early experience with open access in Western Australia provides a clear demonstration of benefits possible for gas reforms. Major energy intensive resource projects, particularly mineral processing and power generation have proceeded following contracts negotiated with gas producers. There have been few cases of third party access to pipelines being achieved elsewhere as yet. 19

Outlook for Natural Gas

Primary natural gas supply as a percentage of total energy supply in Australia has risen from 6 per cent in 1973, to 12 per cent in 1979, 17 per cent in 1994 and 18 per cent today. 20 The industrial sector is the largest user of gas, accounting for 40 per cent of total primary demand in 1995. Manufacturing is the single largest end user of natural gas in Australia. Mining, residential and electricity generation are the other major consumers of gas. The consumption of natural gas is projected to grow least rapidly in manufacturing and mining. The most rapid growth is forecast in the road transport sector, from a base near zero. However, total consumption in this sector is not likely to be large. Electricity generation is also forecast as a growth area for natural gas usage dependent upon gas fired power station construction in Western Australia, South Australia and possibly Victoria. 21

Future developments in the natural gas industry are likely to centre around partial substitution of natural gas for liquid petroleum, increased residential reticulation and possibly the development of natural gas fired power stations. Additional demand would be expected to reduce the realistic life of the gas resource, however, the current gas resources have only been estimated with regards to today's circumstances. 'Deliberate offshore exploration for gas is unlikely and even if gas is found during exploration for oil, it will have little effect on the current supply so long as adequate gas discoveries are made in the onshore Cooper and Eromanga Basins.' 22 The location of additional natural gas resources is likely to occur where there is a market incentive for securing the additional resource. The location by BHP of the Minerva field off Victoria during 1993 is an example of this. Similarly the Lark discovery made in 1993 and the Link field discovery made by Bridge Oil and Petroz in March 1994 are likely to be readily connected to the existing gas gathering system. These recent finds and others likely to be made in the future could supplement existing Eastern States gas output for some time. 23

The are significant price variations between States/Territories for natural gas. Prices are highest in the Northern Territory and Queensland and lowest in Victoria, reflecting regional development and transport costs. 24 The are cross subsidies within the tariffs of the utilities, typically advantaging household users. A reduction in cross subsidisation was recommended by the Industry Commission in 1995.

Main Provisions

The principal effect of the Bill is to provide for the application of the national legislative framework for third party access to natural gas pipelines to areas within the Commonwealth's jurisdiction, namely, offshore waters, external territories and adjacent areas, the Jervis Bay Territory and the Moomba-Sydney gas pipeline.

Application of the Bill, the Gas Pipelines Access (Commonwealth) Law and Regulations

Clause 8 applies the Bill, the Gas Pipelines Access Law and the Gas Pipelines Access Regulations to the external Territories (other than Norfolk Island and the Australian Antarctic Territory), the adjacent areas in respect of those Territories and the Jervis Bay Territory. However, the legislation and delegated legislation will not apply in relation to a Territory or its adjacent area if the gas pipelines access legislation of a State, or the Australian Capital Territory or the Northern Territory applies in that territory.

The Gas Pipelines Access Law comprises Schedules 1 and 2 of the Gas Pipelines Access (South Australia) Bill 1997. At the time of writing of this Digest the South Australian Bill has yet to pass both houses of the South Australian Parliament. The Gas Pipelines Access Regulations are regulations made under Part 3 of the Gas Pipelines Access (South Australia) Bill 1997.

Clause 9 provides that if the Bill applies in the adjacent area (basically, the area between the outer limits of the territorial sea and the outer limits of the continental shelf, excluding Area A of the Australian-Indonesian Zone of Co-operation) in respect of a State or the Northern Territory because of the operation of proposed subsection 9(1A) and 11(1A) of the Petroleum (Submerged Lands) Act 1967 (Cth), the Gas Pipelines Access Law will also apply in that area as a Commonwealth law.

Functions and Powers Conferred on Commonwealth Minister under State or Territory Law

Clauses 13 and 14 provide for powers and functions conferred by the gas pipelines access legislation of a State or Territory on a Commonwealth Minister, local Minister, local Regulator or appeals body to be exercised by such persons.

Clause 15 provides for powers and functions conferred by clauses 8 and 9 (see above) of this Bill or the National Gas Agreement on the Code Registrar to be exercised by that person.

Federal Court

Clause 16 confers on the Federal Court jurisdiction in relation to civil and criminal matters arising under the Gas Pipelines Access (Commonwealth) Law (ie. under clauses 8and 9, see above).

Administrative Decisions (Judicial Review) Act 1997

Clause 18 provides for decisions of Code bodies to be subject to the Administrative Decisions (Judicial Review) Act 1977 (Cth). Code bodies include:

the National Competition Council (NCC);

the Australian Competition and Consumer Commission (ACCC);

the Australian Competition Tribunal;

the local Minister (ie. the Minister having responsibility for the administration of the Bill); and an arbitrator appointed by the ACCC.

Exemption from Commonwealth Taxes

Clauses 20 and 21 provide exceptions from prescribed Commonwealth tax laws and State and Territory stamp duty or other taxes in relation to exempt matters. An exempt matter is defined to mean a transfer of assets or liabilities that the Minister and Treasurer are satisfied is made for ensuring that a person does not carry on a business producing, purchasing or selling natural gas in breach of the Code (ie. the National Third Party Access Code for Natural Gas Pipelines Systems (see Part 2 of Schedule 1 of the Gas Pipelines Access (South Australia) Bill 1997), or the separation of activities of a person as required by the Code.

Amendments to the Moomba-Sydney Pipeline System Sale Act 1994

Item 2 of Schedule 1 repeals Part 6 of the Moomba-Sydney Pipeline System Sale Act 1994. Part 6 of the Moomba-Sydney Pipeline System Sale Act 1994 provides a third party access regime to the Moomba-Sydney pipeline. The repeal will allow the application of Gas Pipelines Access Law.

Item 3 of Schedule 1 provides for the payment of just compensation in accordance with paragraph 51 (xxxi) of the Constitution where the repeal of Part 6 of the Moomba-Sydney Pipeline System Sale Act 1994 results in the acquisition of property.

Amendments to the Petroleum (Submerged Lands) Act 1967

Items 8 and 9 of Schedule 1 insert new subsections 9(1A) - (1B) and 11(1A) - (1B) in the Petroleum (Submerged Lands) Act 1967 (Cth) the effect of which will be to apply the Bill in the adjacent area (basically, the area between the outer limits of the territorial sea and the outer limits of the continental shelf, excluding Area A of the Australian-Indonesian Zone of Co-operation) in respect of a State or the Northern Territory where they have not enacted gas pipelines legislation which operates in the area.

Amendments to the Trade Practices Act 1974

On 29 March 1995, the Competition Policy Reform Bill 1995 was introduced into Parliament for debate. The Bill implemented the then Government's response to the Hilmer proposals for national competition reform. That Bill was passed and received the Royal Assent on 20 July 1995. Essentially, the Competition Policy Reform Act 1995 (Cth) brings all business activity in Australia under the same rules of competition that apply to restrictive trade practices (Part IV of the Trade Practices Act 1974 (Cth)).

Another aspect of the Competition Policy Reform Act 1995 was to open- up, by way of third party access, competition with major business enterprises of national significance, such as electricity suppliers and gas pipeline operators. These large-scale enterprises have natural monopoly characteristics which involve both positive or negative aspects for consumers. Positive in the sense that they can deliver services more efficiently but negative in that consumers can become captive to a single supplier. These aspects apply whether the monopoly is private or public. National competition policy promotes competition to the benefit of consumers and business users. When competition requires access to networks, it is necessary to allow third parties access to existing large scale infrastructure, such as electricity grids, pipelines and rail lines on fair terms and conditions. As an example, electricity users are able to benefit if they can purchase electricity, via the existing grid, from innovative low cost generators. This process is referred to in the Trade Practices Act 1974 as Access to Services (Part IIIA of the Trade Practices Act 1974).

This access regime operates in a way that allows significant services to be 'declared' by the relevant Minister after recommendations from the National Competition Council (NCC). The declaration of a service means that it is considered that it will promote competition if third parties have access. Additional factors which must be considered in relation to a declaration include that a parallel infrastructure would be uneconomical to establish, that third party access will not cause undue risk to health or safety and that access is not against the public interest. If the significant service is a State or Territory owned enterprise, the relevant Minister is the State or Territory Minister.

Once a service is declared, parties are free to negotiate their own terms and conditions of access. If there is a dispute, the matter can be referred to the Australian Competition and Consumer Commission (ACCC) for determination. An alternative is for the service operator to first approach the ACCC and establish, by way of an access undertaking, the terms and conditions it would require of a third party applicant. If the ACCC accepts the undertaking then Ministerial declaration is avoided.

Item 11 of Schedule 1 of the Bill inserts a new section 4N in the Trade Practices Act 1974 which basically extends the application of Part IIIA of the Act to services provided by means of facilities that are, or will be, wholly or partly within an external Territory or a adjacent area in respect of a State, Northern Territory or an external Territory.

Item 12 of Schedule 1 substitutes a new subsection 29B(2) in the Trade Practices Act 1974 which provides that the NCC may perform functions and exercise powers conferred on it by a Commonwealth, State or Territory law, provided the conferral is in accordance with the Competition Principles Agreement.

Items 25 and 26 of Schedule 1 insert new section 44ZZM and 44ZZOA in the Trade Practices Act 1974 which provide that the ACCC and Australian Competition Tribunal (ACT) may perform functions or exercise powers conferred on them by a State or Territory law that establishes an access regime, provided the conferral is in accordance with any relevant agreement between the Commonwealth and the State or Territory concerned.

Item 48 of Schedule 1 inserts new sections 91A-91C in the Trade Practices Act 1974 which provide for the minor variation, revocation, and substitution of authorisations. The Trade Practices Commission is accorded power under Part VII of the Act to grant authorisations of specified types of conduct (ie. restrictive trade practices) which are prohibited under Pt IV of the Act. An authorisation allows the applicant and others involved in the particular conduct to proceed with immunity. The amendments proposed by items 49-56 are consequential to that proposed by item 48 and relate to the review of Trade Practices Commission decisions concerning minor variations, revocations and substitution of authorisations.

Endnotes

1

Australia 1997 Review, Energy Policies of IEA Countries, International Energy Agency, Paris.

2

Hedley D., World Energy, The Facts and the Future 1986, Euromonitor Publications pp 27.

3

Armstrong, Graham., Energy Pricing, National Economic Review, no. 19 April 1992.

4

The Greenhouse Effect a Position Paper. Australian Institute of Petroleum Ltd. Submission to Senate Standing Committee : Reducing the Impact of the Greenhouse Effect 7/2/92.

5

Stephenson J., Natural Gas Vehicles 1990, International Association for Natural Gas Vehicles.

6

Holmes Naughten, Prospects for Natural Gas as a Vehicle Fuel, ABARE Outlook 93, Canberra 1993.

7

Petroleum Gazette 1992/93 pp16.

8

Gas for Electricity Generation, Electricity Supply Association of Australia Limited, July 1991.

9

Wilkinson R., Oil Patch, Australian Business September 25 1991.

10

Lawrey R., Competition in Natural Gas Pipelines : North American Experience and Australian Prospects, Queensland University of Technology, January 1996.

11

Department of Primary Industries and Energy, A National Strategy for the Natural Gas Industry, A Discussion paper, AGPS, Canberra, 1991.

12

Hilmer F., National Competition Policy Review, AGPS Canberra, 1995.

13

Lawrey R., Competition in Natural Gas Pipelines : North American Experience and Australian Prospects, Queensland University of Technology, January 1996.

14

Australia 1997 Review, Energy Policies of IEA Countries, International Energy Agency, Paris.

15

Council of Australian Governments (COAG) Communique, Hobart 25 February 1994.

16

Lawrey R., Competition in Natural Gas Pipelines : North American Experience and Australian Prospects, Queensland University of Technology, January 1996.

17

Australia 1997 Review, Energy Policies of IEA Countries, International Energy Agency, Paris.

18

Parer W., Boost to competition in natural gas, Press Release 7 November 1997.

19

Australia 1997 Review, Energy Policies of IEA Countries, International Energy Agency, Paris.

20

Australia 1997 Review, Energy Policies of IEA Countries, International Energy Agency, Paris.

21

Energy, demand and supply projections Australia, 1992-93 to 2004-05, ABARE 1993.

22

Gas Supply and Demand Study, The Australian Gas Association 1985.

23

Howarth I., Early production likely for Link field gas find, Financial Review 15 March 1994.

24

Australia 1997 Review, Energy Policies of IEA Countries, International Energy Agency, Paris.