Lack of transparency plagues gas market

04/06/2009 - 00:00

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The true price of power will soon become apparent to Western Australians.

Lack of transparency plagues gas market

I'VE spent quite a bit of time talking to people about the issue of domestic gas shortages and the woes of local companies upset about the growing preference for developing resources for LNG exports.

I have a lot of sympathy for both sides of the argument. As a state we underwrote the development of the gas sector with massive subsidisation in the 1980s and 1990s.

By doing so we sent a signal to business located here that energy was abundant and cheap. We backed that up with political rhetoric.

But through these subsidies, relaxation of laws governing joint selling and general political support, the state also signalled to the gas producers that we wanted their industry to grow and develop export potential.

The great conundrum we face today is the success of both these policies has created a conflict between domestic users and gas producers.

As a believer in markets, I'm of the view that the market - bound by the laws of the day - should be allowed to work. That includes meeting agreed deadlines with regard to the development of commercially viable fields.

However, what concerns me is that there may not be enough transparency for the market to really work properly.

Furthermore, both sides of the debate are asking for special treatment - the domestic gas users want reservations while the gas producers want to be able to act together, maintain leases they have not developed and avoid emissions trading scheme costs - without allowing the public to fully understand the cost implications.

As an aside, the three partners in the Gorgon project have recently applied to the Australian Competition and Consumer Commission to be allowed to have joint selling restrictions waived. (See story, page 3.)

Given two of these partners are in the North West Shelf, the major domestic gas supplier which has been jointly selling for decades, this puts the producers in a unique position with regard to pricing disclosure - one that's not available to their customers.

The secrecy of domestic gas pricing became apparent to me during the Varanus Island incident, when gas users complained that emergency gas supplies were being offered at extortionate prices.

This was a great line but it was difficult to establish the facts of the case. The problem was they couldn't talk about the prices because of confidentiality agreements with suppliers. One of the rare companies to break this code of silence was Brisbane-based Norton Gold Fields, the Australian Securities Exchange-listed company that operates the Paddington Gold Mine north of Kalgoorlie, which released pricing data as an ASX announcement.

Norton told investors that, due to a force majeure called by its electricity supplier, Alinta, the miner had agreed to an interim power supply agreement that would result in energy costs rising more than four-fold, from $90 per megawatt hour to about $400/MW hour.

Apart from a few exceptions, most businesses were silent on the issue - not just domestic gas users but also at export level. Unlike most commodities produced in WA, gas export prices are not made readily available and remain vague and mysterious to the outsider. With access to right information and industry knowledge you can, apparently, do back-of-the-envelope calculations; but that typically gets left to boffins.

Even the overall state production figures are difficult to compare. The traditional measures of British Thermal Units for LNG and gigajoules for domestic gas have been dropped for million of tonnes and metres cubed respectively, making it tougher to compare them (see graphic).

I am aware that many companies like to keep their pricing secret, but that is just convenience.

In the past, CEOs' salaries were secret. Now we know them but it hasn't put the CEO industry out of business, has it?

Even the notoriously secretive iron ore miners seem to be able to reveal their prices - and they don't sell domestically. On Thursday last week, South Korea's POSCO, the world's fourth largest steelmaker, said it would buy iron ore for $US58.2 ($A75.02) to $US68.9 ($A88.81) per tonne.

According to AAP, the group, which imports up to 50 million tonnes of iron ore annually, has been in talks with major suppliers including BHP Billiton of Australia and Brazil's Vale about prices for the current contract year.

I'm sure some of the nuances of iron ore remain hidden but overall this is very transparent compared to LNG.

If governments want the best outcomes for both sides of the gas debate they ought to make sure that, firstly, laws governing all players are enforced and, secondly, that proper transparency is created through some form of readily available pricing information to help create a real market.

It's worth going back to the Norton example during the Varanus shut down. While the situation was extreme, the release of information attracted attention, including that of then state opposition leader in the upper house, Norman Moore, who asked in parliament: "If there is no gas at $90 per megawatt hour, how can there be gas at $400 per megawatt hour?"

Very soon after that the company announced it had reinstated its power supply agreement at normal pricing levels, backdated to cover June power costs, even though it had previously agreed to pay the higher rate.

Isn't it amazing what happens when a little sunshine gets into a dark recess?

We all have a very serious interest in this subject.

Western Australians are about to see their energy prices increases substantially to reflect the true price of power. The announced rises may not be enough if gas prices keep going up as we compete with the rest of the world for our own resources.

We would all be better off if we understood the pricing mechanisms involved in gas. Then all of us could better judge whether the current situation and future scenarios painted by different parts of industry were in our best interest.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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