26/09/2006 - 22:00

Gas reservation no energy solution

26/09/2006 - 22:00

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There is a significant debate at the moment about whether we should reserve natural gas for domestic use.

There is a significant debate at the moment about whether we should reserve natural gas for domestic use.

The call has been made by Premier Alan Carpenter and, surprisingly, backed up by some former Liberal leaders.

It has met resistance at a federal level and has split the resources industry, with producers opposed to such a plan while some users – especially those in the minerals industry and other wholesale buyers – are quite keen on the idea.

The details of such a plan have not been spelled out but the suggestion appears to be that a portion, say 20 per cent, of new developments will be earmarked for domestic consumption, possibly at cheaper prices than international customers.

Whatever the case, I think it’s a bad idea.

I am, as regular readers would know, a believer in letting the market sort things out.

Governments should interfere as little as possible.

I have no problem with governments addressing the concept of energy security. It is important.

But equally, if not more, important is the concept of sovereign risk.

Firstly, though, my amateur view of the history of the matter is worth addressing.

Unless I am wrong, the state government underwrote the investment in the Dampier to Bunbury Natural Gas Pipeline some decades ago in order to both encourage the development of the gas industry and provide an energy choice for consumers in the state’s south.

Through take-or-pay contracts, users have quietly paid for benefit of having gas piped to our doorsteps – from homes to giant mineral processing operations such as Alcoa’s.

In other words, we paid extra to ensure we had competition from coal, which is abundant but held by a duopoly and, in the 1970s, was threatened by union power.

That payment bought us energy security and reduced the sovereign risk for big users by providing choice and fallback options. Importantly, it helped develop the oil and gas industry.

Most of us assume this has been to our net benefit, but I haven’t seen this outlined in full against the cost of that development.

Strangely enough, many businesses are only just beginning to see the true benefits of that development with the break up of Western Power and the deregulation of the energy markets, which means customers can shop around for power.

While gas is a big energy source for miners, there is a distinct absence of sweeping changes to downstream processing of our minerals sector during the past 20 years, so you’d have to think the availability of energy has made little difference in that arena.

Therefore, I would look at the rise of the oil and gas industry as the biggest benefit of the subsidy consumers paid in their energy bills.

That industry is a big employer in the state and major developer of significant projects, with all the inherent benefits, such as the construction earnings generated in the state.

It has also spawned expertise that can be marketed around the world.

So why now, after decades of subsidising this industry to get it off the ground, do we suddenly want to act in a way to jeopardise it? Punishing success is such a dumb thing to do, and for what result?

Will cheaper gas bring more business here and encourage our minerals producers to value add? I doubt it.

Is it simply robbing Peter to pay Paul? Definitely. Except, perhaps, on the issue of who gets the royalties, there is little point of punishing a gas producer to favour minerals developers.

Could government take another tack? Possibly. The state could develop its own gas field for the benefit of all of us. That sounds pretty hairy, though, doesn’t it? It has a WA Inc feel to it.

Then there is the alternative to consider – paying world prices for energy.

My first thought on this is that history has shown energy importers are among the most economically successful nations in the world. While energy vulnerability is something many countries are concerned about, even to the point of going to war, some of the globe’s most prosperous communities thrive with little energy resources of their own.

Japan, Germany and South Korea are excellent examples.

On the opposite side of the ledger are the near-failed states where cheap energy has delivered little benefit to people, beyond those in power.

Venezuela, Libya, Nigeria and even Indonesia provide us with a notion of what cheap fuel can do for a country’s economic prospects. Even the vastly rich Middle East carries a lot of this baggage, with much development only taking place in states such as the United Arab Emirates because of the fear of running out.

Anyway, the threat of energy security is vastly overblown. We are minor consumers in the global scheme of things and we have plenty of access to fuel without making reservations.

In the context of a global economy, I have to question the point of having cheap fuel to power local minerals production. If the rest of the world is facing huge fuel bills they can’t pay, it’s hard to imagine they’ll be desperate for our slightly cheaper commodities. High fuel prices are a threat to our markets, not an opportunity for us to leverage an advantage.

It’s another robbing Peter to pay Paul argument.

Finally, there’s the prospect of using other fuels.

Coal is always there as a fallback. Dirty or not, there’s 100 years’ worth sitting beneath Collie, and its not going anywhere.

Of course, there’s always the nuclear option. While I am as tentative as many people, I think this must be explored.

Rather than reserving gas and corseting an existing industry, now is the state government’s opportunity to extract some concessions from the budding uranium industry in order to let this new resource be developed.

If government really must go down the route of managing energy sources, would-be uranium miners may be agreeable to a long-term domestic reservation of some of their production in order to pave the way for their right to mine.

Maybe this could be done without any take-or-pay deal that costs the rest of us; it would provide energy security and may well be viewed positively by an industry desperate to get off the ground.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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