Finding the balance between domestic needs and those of our trading partners is a challenge for policy makers.
WHEN Premier Colin Barnett got up to speak at the Petroleum Club of Western Australia's annual meeting last week, he would have known he was delivering a message they didn't want to hear - several messages, in fact.
Perhaps to soothe the audience before getting to the point, Mr Barnett talked at length, from memory as usual, about the impact of the oil and gas sector on the state, complete with a digest of facts and statistics.
The premier likes to make sure people understand that he knows his subject, especially this one.
After a long act of limbering up and establishing his credentials he got to his point, or should I say points.
In summary they were ...
- That the previous government's official policy of reserving 15 per cent of each gas project for domestic supply would stay.
- That the price of that gas would be part of the discussion, and that a price comparable with delivery cost to the LNG plant would be a good starting point.
- That the industry ought to make sure that competitive gas was available to domestic users.
- That the retention policy would be enforced.
- That the Browse Basin gas would be processed in the Kimberley.
The state government had previously enunciated most of those points, though the price element was new and provided far more detail on the shape of the government's reservation policy.
Mr Barnett did try to anaesthetise the audience further by adding that the government would be flexible on all of this, in terms of price negotiations and the ability to credit producers with production from other fields.
When it came to question time, it was only natural that there was a bit of cynicism from the room.
One of the first questions was why the petroleum industry was the only one subject to reservations.
Mr Barnett briefly answered that the industry was different because it is a fundamental input in all forms of activity in the state.
This is true. Unlike gold, for instance, there is no way we can live without energy, at least not at any level that we consider civilised.
However, there are many other commodities we produce that, ultimately, are also fundamental parts of our lives. Iron ore produces steel, which we would be hard pressed to do without. Copper, alumina and nickel are also elements in key pieces of infrastructure that help us get through our daily lives.
Yet, as the industry representative who questioned the premier pointed out, none of these has reservations for domestic industrial use.
I guess we don't have to look too hard to see why. These are inputs to the production of more complex materials, such as steel, stainless steel or aluminium, which we use but don't have an industry that creates them. In fact, we don't even have many industries that use these materials directly. Instead we tend to import the goods produced, such as vehicles, mobile phones or computers.
That we don't have such secondary level processing is often bemoaned as tragic.
Yet this is where the petroleum industry's concern about being singled out hits a snag. It may be alone in terms of reservations but the iron ore industry has long been subject to something similar.
In their various state agreements, the major iron ore producers have been required to invest in value adding. BHP Billiton has done this through the HBI plant at Port Hedland. Rio Tinto has built the $400 million HIsmelt pig iron plant at Kwinana.
Both could be classified as failures; and expensive ones at that. Whether HIsmelt is reopened next year after its recent closure will be a test of that.
Total failure or not, the investment in value adding has clearly been a requirement for local investment that is arguably more complex than being required to reserve some of its raw production.
The failure of this interventionist industry policy ought to be taken into account when the issue of reserving gas is debated. It is important that reservations don't simply become a vehicle for subsidising other industries that would otherwise not be internationally competitive. It is also important that poor policies don't create an environment where companies do silly or market distorting things just to avoid their obligations.
In addition, the petroleum industry might argue that, through the production of LNG, it has already achieved more downstream processing than any other sector.
It would be wrong to jeopardise that success by threatening future developments with an unproductive policy.
However, the politics of the situation requires that something be done.
The challenge for the government is to ensure that local energy users get access to gas at a price and quantity that doesn't make Western Australia a bad place to do business for LNG producers - or a bad place to conduct competitive and efficient value-adding to any other resources.