Gas debate fires up

A recent Grattan Institute report on the east coast gas market has further fuelled debate in Western Australia over the merits or otherwise of the gas reservation policy.

Grattan Institute energy program director Tony Wood said the east coast was about to undergo an increase in gas prices similar to that seen in WA in recent years.

He said the domestic gas reservation policy had a questionable outcome in terms of keeping prices down in the long term.

“In some cases you could almost say the opposite,” Mr Wood said.

“There are arguments that it is an impediment to gas development.

“What you want to do is have the incentive to find more.”

He said the reservation policy was effectively a hidden tax on gas producers, which could reduce investment, and a subsidy for gas users, which could be an impediment to growth.

However it could be argued that gas providers should pay through royalties or other mechanisms for production of the resources, which ultimately belong to the community, Mr Wood added.

But that mechanism should be clear and the revenue should not be used to specifically subsidise domestic gas consumption, he said.

Mr Wood said the US should not be used as a counter example, as it still exported gas to countries with which it has signed free trade agreements, and in other cases subject to approvals.

Such approvals were frequent, he said.

The WA domestic reservation policy states that LNG exporters will allocate 15 per cent of gas production to be used purely in the domestic market, hence substantially increasing the domestic supply.

The Grattan report follows comments earlier this month by local player Santos, when general manager (WA) Brett Woods said the state government needed to provide more certainty about its domestic reservation policy.

He said the uncertainty was leading to a lack of investment in domestic gas exploration, particularly in the Carnarvon Basin.

With such substantial production, the effect of major LNG projects coming online might be to dwarf production of purely domestic players, with the excess supply making their projects unviable, potentially overnight.

It also meant market participants were being forced into parts of the market they might not otherwise invest in.

The Economic Regulation Authority also proposed the abolition of the reservation policy in WA in its recent inquiry into microeconomic reform.

The ERA went as far as to warn that the policy could damage the state’s energy security by discouraging discovery and development of local resources.

The report said that, in addition to lowering long-term investment, the policy “perpetuates the existence of industries that may not have a comparative advantage in Western Australia at the expense of investment in other industries”.

“It inhibits dynamic efficiency and technological innovation ... the policy artificially depresses domestic prices, which discourages domestic gas users from investing in technologies to lower or substitute their gas consumption.

“It increases reliance on subsidised gas prices, leading to over consumption of the resource,” the report added.

The Grattan Institute report made a similar case for the east coast, noting that calls for domestic reservation would grow as gas prices grew.

Wholesale prices would more than double from $4 a gigajoule to $9 as the market was opened to international exports through the development of LNG in Queensland.

Australia is expected to be the world’s second largest LNG exporter by 2020.