Gas report stirs debate

Does it make sense for a gas producer to retain title over a gas field for 27 years without proceeding with development?

That is a question thrown up by a thought-provoking report by Deloitte Access Economics, which calls for more rigorous enforcement of retention lease ‘use it or lose it’ policies.

The report, commissioned by iron ore miner Fortescue Metals Group, also threw a curve ball at the DomGas Alliance – whose members include FMG and other big buyers of gas.

It called for the phasing out of the state government’s contentious domestic gas reservation policy, which has been a bedrock of the alliance’s policy platform.

The DomGas Alliance put on a brave face, welcoming the planned changes to the retention lease system while acknowledging it didn’t agree with the proposed phase-out of the domgas reservation policy, which requires 15 per cent of LNG production to be set aside for domestic customers.

Petroleum producers’ body the Australian Petroleum Production & Exploration Association took delight in the Deloitte report, noting that the Economic Regulation Authority also called recently for abolition of the domgas reservation policy.

Its stance has bipartisan support in Canberra but has failed to cut through in the states, which welcome any policy that might keep energy prices down.

Premier Colin Barnett made this point in no uncertain terms in his unusually blunt address to the APPEA conference in Perth last week.

“It’s a hard narrative to sell, to a community, to a government, that we are going to increase production of gas, and we are going to export it, and in the meantime domestic supplies might be diminished and domestic prices will go up,’’ Mr Barnett said.

“I’m a politician and I’m pretty good at selling a story, but I’d find that a tough one to sell.”

The Deloitte report should help to shift the debate, because it argues persuasively that the domgas reservation policy can be counterproductive.

In particular, the report says the policy adds to the costs facing project developers and results in LNG producers dominating domestic supply, but at a price – local customers pay the ‘LNG netback’ price, which it argues is much higher than necessary.

The second part of Deloitte’s policy package – toughening up the ‘use it or lose it’ policy – attracted a predictable response – it was welcomed by the DomGas Alliance and knocked down by APPEA.

APPEA chief David Byers said the current policy framework already incorporates a rigorous approach to testing commerciality. 

Deloitte tested that view by conducting detailed modelling on the development of two unnamed gas fields off the Western Australian coast.

Drawing on actual costs from recent projects, it concluded that the two fields could be developed and deliver gas at a lower price than competing projects, while also delivering a commercial rate of return.

This isn’t proof that the current system is broken, but it’s enough to trigger more scrutiny.

Deloitte explained that the process of renewing retention leases lacks transparency – it’s a joint ministerial decision but the criteria and process is not clear.

The DomGas Alliance put forward one recommendation that is hard to argue against – as a starting point we need greater transparency in the retention lease process and greater external scrutiny of the claims being made by producers to justify their applications.

This might make the process a little more costly and time consuming, but the stakes are high.

If another company is willing to develop a field that has been ‘locked up’ for 15 years or more, the commercial benefits would be profound.

BHP Billiton, which is in the unique position of being both an iron ore miner (a buyer of gas) and a petroleum producer (a seller of gas), developed its own domestic gas supply when it built the Macedon plant.

Wouldn’t it be fascinating of another iron ore miner, such as FMG, recognised the same opportunity?