A brawl is looming between Canberra, the East Coast gas industry and some investors over plans the federal government has to force the producers to fix their sales contracts based on their cost of production plus an agreed profit margin after a one-year price cap expires.
Companies such as Santos, Exxon/Woodside, Beach Energy, Origin, Shell and Senex Energy – which is owned by South Korean steel giant Posco – will be in the crosshairs if the government’s plan becomes law.
It is certain to involve big investors such as industry and retail superannuation funds, especially if the government tries to press its case for restricting future returns.
The government has set a December 15 (this Thursday) deadline for comments on the plan to effectively limit profit margins after the planned one-year price cap expires.
The move was revealed late Friday. In it the government said it would cap gas prices at $A12 per gigajoule (GJ) and coal prices for power plants at $A125 tonne for one year in what Prime Minister Anthony Albanese said were “extraordinary measures” to drive down energy bills.
The emergency price cap would apply to new contracts signed while the cap is in operation for supply in the period when the cap is in place, Federal Treasury said.
For multi-year contracts, after the cap expired, it said a “reasonable pricing provision” would apply for the remainder of the contract, giving producers a “reasonable return on capital” beyond the cost of production.
It would not apply to gas sales on the spot market, and would remain in place until the regulator advised the government that domestic gas prices were “reflective of the underlying costs of production”.
“This may be taken as a declaration of war on the gas industry on the east coast,” Credit Suisse analyst Saul Kavonic told Reuters.
The Commonwealth will provide up to $1.5 billion in funding, but with states and territories to contribute total subsidy support could exceed $3 billion.
In his Friday statement, Prime Minister Albanese broke the power bill reduction plan down into four parts: Subsidies to lower-income households to reduce their power bills; the $A12 a gigajoule cap on wholesale gas prices for 12 months and the $A125 a tonne cap on wholesale coal prices in NSW and Queensland and a renewable energy capacity mechanism that was released last Thursday.
Mr Albanese said the intention of the price caps is to reduce pressure on electricity generators, which should limit the pass-through of costs to households and businesses over the next 12 months.
Parliament will be recalled shortly to pass new laws creating a mandatory code of conduct for gas companies that will force them to comply with caps, while NSW will create its own code for coal mines.
It was agreed that Queensland will use existing direction powers to enact the cap on coal mines.
Government electricity subsidies will be paid to people receiving income support, such as JobSeeker, pensions and family tax benefits.
It will be paid through state governments and apply at the retailer level, so that discounts are applied before bills are sent to eligible households.
The temporary funding will begin from the second (June) quarter of next year.
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Meanwhile, Rio Tinto will get control of Canada’s Turquoise Hill after that company’s shareholders voted on Friday in favour of Rio’s $US3.3 billion mop up offer.
Turquoise Hill said 86.6% of its shareholders voted to approve Rio acquiring the 49% of shares that it does not already own, which will give Rio a 66% direct stake in Mongolia’s Oyu Tolgoi mine and the world’s largest known copper and gold deposit.
That vote included Rio’s 51% holding. The deal was also approved by about 60.5% of the votes from minority shareholders.
The meeting and vote ended nearly a year of toing and froing by Rio and some minorities in Turquoise Hill that at one stage late in the process, threatened to get nasty when Rio tried to a deal with several holdout minority holders.
Rio Tinto is paying $C43 cash a share and said at the weekend it expects the transaction to settle the deal by this Friday, December 16.
The company said it will apply to seek a final order from the Supreme Court of Yukon this week. The final order is expected to be presented before the court on Tuesday.
Rio Tinto still faces a US investor lawsuit led by Pentwater, one of the disputatious minorities in Turquoise, accusing it of concealing that it was falling up to 2-1/2 years behind schedule for the Oyu Tolgoi mine and coming in as much as $US2 billion over budget.
Oyu Tolgoi started as an open cut mine but is now being expanded by the development of an increasingly expensive underground operation that will cost close to $US7 billion.
At one stage the project nearly collapsed after Rio and the Mongolian government clashed over costs and the development. Rio eventually settled that dispute by writing off the Mongolian government’s $US2 billion debt to Turquoise Hill on the project.
