Consumers are best served by competition between a large number of gas producers.
IN 2002, Senator Warwick Parer tabled his report on the Australian energy market. This seminal report set out a direction that has been largely implemented for reform of energy markets in Australia.
It interesting to note his comments on the gas market: “Nevertheless, Australia’s eastern gas markets can still at best be described as emerging. While these recent developments are encouraging, Australia’s gas markets remain immature – particularly when compared with the gas markets in the UK or US of America. The degree of supply competition in Australia’s eastern markets is still weak – particularly compared to Western Australia. This is reflected in lower gas prices in WA ...
“Compared to the eastern markets, Western Australia has a more diverse gas supply, with at least seven separate joint ventures marketing gas. This has arisen due to a number of factors, including the acreage management regime used to allocate the original exploration permits and is likely to have been influenced by the focus of the North West Shelf producers on export markets.”
Sustainable competition between a large number of producers is critical if gas consumers are to realise the full benefits of the reforms undertaken in other sectors of the gas market.
And yet, by 2009, we had only two gas suppliers, gas prices in WA were spiking to become the highest prices in the world, and that’s if you could find any gas to buy.
So what happened? And what could the government of WA do to overcome these problems?
Gas supply is critical to our state. We are the most gas-intensive state in Australia. Major processing industries, like alumina refining, depend on gas. Even though very little gas is used in homes in this state, every Western Australian still has a stake in these questions because most of our electricity is generated in gas-fired power stations.
On the other hand, WA has an enormous quantity of gas – the estimate is that there is 184,000 petajoules of gas offshore. That would supply WA’s 2009 consumption of 355 petajoules for nearly 550 years. We have lots of gas to use domestically, and still plenty to share with ‘energy poor’ countries such as Japan and South Korea.
The issue for government in WA is to set policies that will ensure domestic customers can have access to competitively priced gas, while still facilitating LNG exports.
A bi-partisan committee of the WA Legislative Assembly, the Economics and Industry Standing Committee, examined these issues. The committee has recently tabled a report entitled ‘Inquiry into Domestic Gas Prices’. This report is highly technical, reaching 189 pages, includes 34 findings and 18 recommendations.
The committee: received very detailed submissions from most of the major players in the gas market in WA; held public and private hearings that produced hundreds of pages of very interesting transcripts; and collated detailed evidence from across all segments of the gas market.
Anyone wanting to be informed about our gas market could do well to read the submissions and transcripts, available on the WA Parliament’s website.
The report’s key recommendations to the state government are focused on how to create an open, informed market that will provide effective “gas-on-gas” competition to keep prices competitive. If implemented, the recommendations would not result in the state government setting gas prices, rather they would ensure there are more gas processing facilities and gas supply into the market, and the market players would set the price.
The report strongly endorsed the ‘gas reservation policy’ developed by former premier Alan Carpenter, and continued by Premier Colin Barnett. This policy requires 15 per cent of gas in future LNG projects to be made available for sale to domestic customers.
Previously, domestic gas obligations on LNG projects have been negotiated on a project-by-project basis. However, as more projects come towards investment decisions, all sides of politics in WA believe that setting out a clear policy on domestic gas supply is appropriate.
The committee’s report provides recommendations to show how this policy can be implemented, but with necessary flexibility to ensure WA benefits from each potential project.
This is not about providing a subsidy to domestic gas consumers. There is no world price for gas – there is a price in Alberta, a price at the Henry Hub, a European Union price, a price in Japan, etc. The committee’s recommendations set out how to create a WA price that is not linked to the world’s highest price, the import price into North Asia.
It is important to note that the three LNG projects in WA – the North West Shelf, Pluto and Gorgan – all provide (or will provide) domestic gas because of specific obligations negotiated with the state government.
Without these specific agreements, it is not clear that any LNG project would provide domestic gas. As an example, just look at what Chris Sorensen, marketing manager, Gorgon Domgas Marketing, said to the committee:
WJ Johnston: “...but the reason you are building the [domestic] gas plant is because you are obliged to by the ...”
Mr Sorensen: “That is absolutely correct.”
WJ Johnston: “So the price is not relevant to that decision.”
Mr Sorensen: “It was not our decision; it was a state obligation.”
Energy supply is a key issue for every community. In some countries, governments will take over the energy market and all decisions are based around government commands. That is not Australia’s experience; indeed, we are the only country to export LNG that does not have direct government participation in the LNG projects.
The Economics and Industry Standing Committee’s report highlights the real challenges facing the state on energy policy in great detail, and its recommendations are not just broad-brush motherhood statements of good intention. At the same time, the State Energy Initiative is working through its processes.
The challenge for the State Energy Initiative is to provide recommendations that provide real detail and focus on practical actions for our energy future.
• Bill Johnston is the member for Cannington and a member of the Economics and Industry Standing Committee. The views expressed in this article are his and not necessarily those of the committee.