History shows value of intervention

The biggest challenge for any government is when and how to interfere directly in the market when it comes to resources development.

In Western Australia, the state government more so than its federal counterpart has a significant history of encouragement when it comes to a range of resources projects.

I have cited the development of natural gas extraction as an example, many times.

The Liberal government of Sir Charles Court pushed for the development of the Dampier to Bunbury Natural Gas Pipeline as a catalyst to later development of liquefied natural gas plants in the state’s north.

In that case, the state’s involvement in the market was to agree to a take-or-pay contract, whereby the state-owned energy utility was to take an allocation of gas each year whether it needed it or not.

That underwrote the pipeline’s development and provided cheap and plentiful gas for the state’s south, effectively subsidising industry in the south and the north.

An ideological view in support of this might be that the resources were WA’s and the subsidies provided were a strategic move that had a lasting and beneficial effect on the economy by unlocking the value of that gas.

Ultimately, it created the conditions for Australia to become a major exporter of LNG.

It could be argued the Goldfields Water Supply Scheme, – which amounted to building infrastructure to pipe water from Perth to Coolgardie in the early years of the 20th century – was another such strategic move.

While the gold industry had thrived in the Goldfields previously, the extraction of the precious metal was getting harder, and the scale of operations and the population required for that could not be served by transporting water by vehicles or burning forests to desalinate local supplies.

The cost of the pipeline was enormous and could have bankrupted the state many times over if it failed.

It could also be argued that the state agreement with Alcoa signed more than 60 years ago was a very generous package that promoted an industry to develop an underutilised resource and employ thousands of people over decades.

Not all interference is encouragement, however. As the LNG industry grew it wanted more of the gas it extracted to be processed and exported, rather than piped untreated to local demand in the south.

To protect its interests, and those of industries that used gas and employed many people, the state demanded a 15 per cent reservation of all offshore gas fields that were to be processed onshore and required that 100 per cent of onshore gas be available for domestic use.

This has been a fraught policy. Major gas exporters try to manoeuvre around it and somehow even one onshore producer – Beach Energy and Mitsui joint venture’s Waitsia gas project – has been allowed to export.

Now, more onshore gas companies want the right to sell their output in international markets, claiming higher prices for exports make their projects more feasible.

This is an arm-wrestle between gas producers and users as to whose interests are more important and which industries are more strategically valuable. There are dozens of worthy arguments for and against both cases.

Meanwhile, requirements for Alcoa’s resource exploitation have been tightened as the long-term interests of resources development have been usurped by immediate and strategic interests in forest conservation.

It has responded by shutting down its oldest processing plant, at the cost of many jobs.

But the real dilemma over interference is in the future-focused resources of battery and critical minerals.

In this area, strategic value includes the long-term ability of democracies to defend themselves by having access to rare earths that are vital in many technologies, including but not limited to military applications.

Governments are being lobbied to subsidise this sector’s development so economies of scale, including in processing plant and skills, might make Australia an important and valuable player in sector.

By contrast, perhaps it is worth noting that interference in the nickel sector by the government of Indonesia – banning exports that have not been processed – has helped it capture the lion’s share of the commodity’s trade and hurt Australian producers.

In summary, WA has a track record of interfering in markets for reasons that were meant to provide long-term benefits for the state.

Anything that fails to meet that test risks being construed as something different than strategic intervention.