Wed Jun 5

Santos just copped a large fine. What did the oil and gas company do?

Written by: Samantha Hepburn, Professor, Deakin Law School, Deakin University

South Australian oil and gas company Santos has been hit with a A$2.75 million fine for breaching its record-keeping obligations.

The Federal Court ordered the fine ^[1] for Santos Direct, a wholly owned subsidiary, for over 4,700 breaches of the National Gas Rules. The fine follows proceedings brought by the Australian Energy Regulator.

It’s not the first energy company the regulator has pursued recently for breaches to the gas rules. Last year, energy retailer EnergyAustralia and chemical company Incitec Pivot paid $406,000 and $223,000, respectively, for alleged infringements ^[2]. Energy distributor Jemena also paid an infringement ^[3].

So what are these rules? Why do the breaches matter?

Of gas rules and record-keeping

The breaches themselves sound dense. They concerned the non-reporting of what are known as “renominations” for uncontracted gas in day ahead auctions, which are conducted to determine if there’s excess capacity in pipelines which can be sold.

The fossil gas used in homes and industries is transported around Australia largely by pipeline. To boost competition in the east coast gas market, Australian state and federal governments introduced the day ahead auction in 2019 to let companies bid for access to unused capacity in these pipelines.

Day-ahead nominations determine the transportation capacity available in gas pipelines available for auction. To make this auction possible, companies that have existing entitlements to capacity have to make a nomination a day in advance of when they intend to move gas from one location to another, specifying how much capacity they intend to use the next day. Any spare capacity is then made available in the auction.

Renominations occur after the cut-off times on a gas day and they vary an earlier nomination for the use of transportation capacity.

Renominations can only be made in limited circumstances for specific reasons. Recording renominations is important because variations can affect auction prices if, for example, there ends up being less capacity so that participants pay more than they needed to.

Santos admitted it failed to make contemporaneous records for material gas renominations across six different gas auction facilities in breach of the National Gas Rules.

The Federal Court held that while the breach was not intentional and arose from inadequate internal compliance mechanisms, the significant penalty was necessary. It took account of the multiple reporting breaches, as well as the size and financial position of Santos, whose net profit from 2019 to 2022 ranged between $720 and $894 million per year.

Justice Penelope Neskovcin noted compliant record keeping is a critical part of ensuring the integrity and capacity of the auction. Proper records allow the regulator to understand the nature and frequency of renominations, and in so doing, ensure it is able to properly monitor the market.

While no actual loss occurred, the court focused on the potential damage that could have occurred given this action could have meant participants paid more in the auction.

Gas pipeline capacity is sold at auction. huyangshu/Shutterstock ^[4]

Why did the AER pursue this?

As the regulator states in its media release:

timely and accurate record keeping is crucial in allowing the AER to effectively monitor the compliance of participants in the capacity auction.

In particular, the AER’s role of investigating and enforcing provisions […] [prohibiting] participants from making false or misleading day ahead nominations may be significantly hampered without the benefit of compliant records of material renominations.

In her judgement, Neskovcin said the penalty should be a “deterrent” against such conduct. She separately stated:

[t]he failure to comply with [the rule], which has a substantive role in protecting the proper functioning of the capacity auction, heightens the need for deterrence in respect of this conduct

The court emphasised the public interest underpinning clear, transparent and compliant reporting in accordance with the requirements of the National Gas Laws. It noted that Santos, as a major Australian gas and oil exploration and production company making hundreds of millions of dollars in profits over the relevant period, had to take full responsibility for its contraventions.