WA faces long-term energy cost increases as world oil prices continue to rise.
RIVERTON Liberal MP Mike Nahan’s parliamentary report, ‘An Inquiry into Domestic Gas Prices’, offers a good snapshot of where Western Australia’s gas sector presently sits.
What’s missing, however, is the big-picture overview of what’s ahead.
Until the 1980s, WA endured high-priced electricity derived from Collie’s coal deposits that had been exploited by costly tunnel mining using a highly unionised workforce prone to striking.
Liberal premier and one-time development minister, Sir Charles Court, overturned all this when he cleared the way for the North West Shelf gas project by signing a domestic gas take-or-pay contract before the liquefied natural gas export segment of this pioneering offshore venture was finalised.
That pivotal move meant WA industry and domestic consumers gained access to cheap gas (priced around $2/gigajoule, GJ) and electricity for the next 25 years.
Not surprisingly gas, not coal-fired units, now meets most of the growth in WA’s electricity generation – a whopping 65 per cent.
That, however, is the past, and the only good news State Scene can offer. Let’s therefore look at the future, the harsh realities ahead.
In 2005, oil output from non-OPEC producers (US, Norway and Australia for example) peaked, and their production has been declining ever since.
Understandably, world oil prices began rising and continue to do so.
What very few politicians and their energy market boffins appreciate is that LNG contracts are now written at the oil price, so we’ll be burning natural gas at that cost to keep the wheels of WA’s South West processing industries turning and meeting domestic electricity demand.
Put otherwise, we’re set to outlay the same per unit of energy as if the gas burned was highly priced oil.
For the arithmetically minded, the real or market gas cost is calculated by multiplying 0.172 by the oil price/barrel to get the dollar price per GJ of gas.
We’ll return to this critical figure shortly.
Because OPEC oil output is predicted to peak around 2015 – about four years away – the oil price is assured to continue climbing.
World oil production can thus be expected to fall by around 2 million barrels daily before 2020.
Now, if that shortfall were to be filled by LNG it would amount to another 80 or so million tonnes of gas consumption annually on top of the current 170mt global LNG market.
So, back to the arithmetic.
The current Tapis oil price (the price that sets Perth’s petrol prices) is $US121/barrel or nearly $US100/barrel over what we were paying a decade or two ago.
And this huge price hike is largely due to growing Indian and Chinese demand, which has been compounded by growth from long-standing markets.
Now for the really crucial calculation: that current $US121/barrel means multiplying 0.172 by 121 to arrive at $20.81GJ, which is about 10 times what WA’s gas consumers paid during those golden Charles Court-negotiated 25 years.
Thanks very much Charlie, we all owe you greatly. Pity those days that you crafted are ending.
The world oil price is rapidly rising with one recent forecast, by Barclays Capital, putting it at $US185/barrel by 2020. Some, however, contend this will be reached earlier, around 2015.
Keying in the $185, not the present $121, equates to $US31.82GJ for gas, the energy source utilised by 65 per cent of WA’s electricity generating capacity.
At that gas price Perth, once ‘The City of Lights’, won’t be that for much longer.
But that price level is coming. The only uncertainty is when – 2015, 2017, or 2020?
Whichever, it’s not far off.
On top of that, the Indian energy conglomerate that recently bought Collie’s Griffin Coal deposits has flagged its intention to ship 10mt of Collie coal to the subcontinent each year.
Seeing the $800 million price tag the Indians paid for Griffin’s deposit, Wesfarmers, owner of Premier Coal, now wants to sell its nearby reserves. Presumably an Indian or Chinese buyer will be promptly snapping it up.
So cheaper, far cheaper, coal for electricity generation just won’t be able to be accessed to help ameliorate WA’s coming highly priced gas future.
Once WA’s two foreign-owned coal miners honour their existing coal contracts, the generation of far cheaper coal-fired base load electricity over Perth’s coolish winters and very hot summers won’t be possible, since both foreign owners will only be supplying their domestic markets with Collie coal.
What’s all this pointing to? Simple. A heck of a lot more screaming, placard waving, and consternation by WA electricity consumers.
It also means the winding down of this state’s big-employing processing industries, which operate because of 25 years of cheap gas-fired electricity.
State Scene won’t be naming any of these; just take a drive from around South Fremantle down towards Pinjarra/Bunbury and you’ll discover them.
All exist because far-sighted Sir Charles Court negotiated access to that long-term $2GJ gas.
Pity there’s no longer anyone like him in parliament, and has not been for well over two decades.
But the story is also bleak to Perth’s north, in the Mid West and Pilbara.
There’s a multi-billion dollar Pilbara project I also won’t name, soon to come on stream that’s based on massive usage of gas-generated electricity.
Its initial gas contract is set at $8GJ for the first three years, after which gas will be priced at the world oil price. A pattern set to become the rule.
State Scene cannot see a long-term future for this venture other than it being put on care and maintenance from around 2012-15, particularly if iron ore prices also slump.
Lots of jobs would therefore go down the chute when that occurs.
And what of all that talk about the Oakajee port facility and support rail network that’s to depend primarily on the mining of magnetite iron ore which, unlike haematite found in the Pilbara, must be crushed and ground before shipment?
Expensive ore crushing and grinding means massive electricity usage to keep crushers and grinders moving.
So State Scene isn’t overly optimistic about the long-term future for the Mid West and Oakajee.
Everything said above could have been easily foreseen years ago by our politicians and their highly paid boffins, but has been ignored.
During the past decade – the unimaginative Gallop-Carpenter-Barnett 2001-2011 years – there should have been moves toward weaning WA off its low-priced gas generation and a return to now more economically mined coal for base-load electricity.
But its price will also eventually follow oil upwards, so the day is coming when coal will become a feed stock for manufacturing liquid fuels for heavy haulage and farming, plus fertiliser.
When that occurs the most economical, reliable, and cleanest base load electricity generating option will be that ‘n’ word. Yes, nuclear.
Then we’ll again be confronting our Greens brethren who’ll no doubt still despise that clean green path.
All State Scene can thus say is that several drawn-out summer black-outs in Perth, plus a reversion to WA’s pre-Charles Court Cinderella-status times will very promptly put paid to that.