Domestic gas reservation schemes have earned a rebuke from the Productivity Commission, while it has called for an end to drilling bans and warned on the massive cost of approval delays.
Domestic gas reservation schemes have earned a rebuke from the Productivity Commission, while it has called for an end to drilling bans and warned on the massive cost of approval delays.
In its draft resources sector regulation review released today, the commission said domestic reservation policies discouraged investment in the gas industry.
Western Australia has the most advanced domestic gas scheme, with 15 per cent of all production destined for the local market.
On the east coast, the Australian Domestic Gas Security Mechanism gives the federal energy minister power to control exports when the local market will have a shortfall, while the government has also flagged a reservation policy from 2021.
“Gas reservations, assuming they ‘bind’ and divert supplies that would otherwise be exported to the domestic market, effectively act as a tax on gas production and a subsidy to domestic gas use,” the commission said.
“On face value, lower gas prices would appear to be beneficial for domestic gas consumers (including residential and commercial users).
“However, because lower prices result in a lower expected return on investment, gas reservation policies will likely reduce incentives to invest in gas exploration and development and potentially limit gas supply.”
Business News reported earlier this year that a $1 billion Coogee methanol project in the Pilbara had been delayed because the company could not secure gas supply.
The market was frozen up awaiting major new gas developments.
But the Productivity Commission said reservation policies impacted the whole community, with WA’s gross domestic product about $600 million lower as a result.
“In the longer-term, domestic gas reservation would encourage investments in gas-intensive (and related) industries on the basis of gas prices that are below levels that would have otherwise prevailed in the market, pulling resources — land, labour and capital into activities using the cheaper gas, and out of more economically-valuable activities that would otherwise have taken place,” the commission said.
The commission criticised moratoria against onshore gas drilling, and said each project should be assessed on its merits.
Victoria moved earlier in March to lift a ban on conventional gas exploration but permanently ban fracking, while other states have similarly enforced moratoriums, some of which were later relaxed.
The Productivity Commission acknowledged onshore gas production created some risks.
“(But) strict application of the precautionary principle brings its own risks: in particular, that no effort is made to assess the potential upsides of the banned activity, including the benefits of increased gas supplies and additional royalty and tax revenues,” the report said.
“There is emerging evidence that onshore gas development has contributed to improved local employment outcomes and helped to prevent the outward migration of young workers from regional areas.”
The Productivity Commission also flagged big lead times on project approvals, highlighting data suggesting timelines of more than 1000 days on average.
“Project delays are costly because the delay of a net revenue stream in effect leads to net revenue forgone,” the commission said.
“The Commission has previously estimated that a one-year delay for a gas project could cost in the order of 10 per cent of its net present value, acknowledging that such estimates are highly sensitive to assumptions, particularly the cost of capital (discount rate), and projected revenue flows including future commodity prices.
“Given the size of most resources projects, delay costs can dwarf the direct costs of regulatory obligations such as assessment documentation and studies, even though these often run into millions of dollars.”
Improved coordination between agencies and allowing regulatory processes to run in parallel were both solutions, the commission said.