Supply scramble stokes gas debate

When Business News last explored the sector in a feature story, the focus was billionaires battling for control of projects in the state’s hottest exploration region: the Perth Basin.

The billionaires are very much part of the furniture 12 months on from that story, which detailed the battle for control of Warrego Energy and the jostling that came with it.

Gina Rinehart, Chris Ellison, John Poynton and Kerry Stokes remain among the headline names with business interests in the region, where gas project development has progressed significantly during the past 12 months.

Chaired by Mr Poynton and cashed up after losing the battle for Warrego to Mrs Rinehart’s Hancock Prospecting early in 2023, Strike Energy has taken over joint-venture partner Talon Energy and brought its Walyering project to production.

Walyering is the first of four in Strike’s government-endorsed gas acceleration strategy, outlining its plan to bring multiple projects to production by the middle of the decade.

That includes the West Erregulla gas field previously held under its JV with Warrego, and now with Hancock. Mr Ellison’s Mineral Resources – which at this time last year was planning to break into the basin – has brought the Lockyer gas project, included with its 2023 acquisition of Norwest Energy, to the point of a final investment decision (FID).

At time of writing, MinRes was ready but yet to push the button.

Mr Ellison is a leading voice in a growing chorus pushing for change to the state’s domestic gas policy, which currently forbids Perth Basin projects from supplying export markets with liquefied natural gas.

The basin battle is no longer one for project control, as it was in the early months of 2023.

Those in the region are now pushing for the right to export some of the gas they produce.

The lone ranger

A policy requiring onshore projects on existing state pipelines to supply only the domestic market is nothing new. It was put in place by then premier Mark McGowan in August 2020.

However, seeds for the public debate currently playing out were inadvertently planted in December of 2020 when Mr McGowan – at the time enjoying public approvals above 90 per cent – granted a contentious exemption to one of the region’s first movers.

Months after Mr McGowan closed the export door, Kerry Stokes-backed Beach Energy and its Japanese joint venture partner Mitsui & Co were formally given an LNG export exemption.

The move was pitched as a tradeoff, delivering a positive investment decision on the second stage of Waitsia by granting the project the security of access to international markets (allowing it to export 7.5 million tonnes of LNG through Woodside’s Karratha gas plant over five years).

Waitsia stage two has since been hit by delays and cost blowouts, but Beach reported first LNG cargoes to BP during the December quarter.

With it came a 37 per cent uptick in revenue, despite a 4 per cent drop in production across the company’s projects, highlighting the allure of international markets to local developers.

Waitsia stage two is on track for delivery mid-year and will produce LNG until 2029 when its exemption ends.

As they have pursued their development plans through 2023, Strike and MinRes were hoping to receive a similar export exemption for their projects.

Last August, the government removed the ability for onshore gas developers on existing state pipelines, such as those in the Perth Basin, to apply for export exemptions.

It came amid growing concerns over the supply of gas in Western Australia, and turmoil in the east coast market.

“A key priority for the state government is ensuring domestic energy security,” a spokesperson for Premier Roger Cook’s office told Business News at the time.

“The gas crisis on the east coast, which has triggered market interventions by the Commonwealth, highlights the importance of safeguarding our energy supply.

“We want to ensure that gas from the existing pipeline network goes to the WA industry and consumers only.”

Having already committed to delivery, Strike brought Walyering to production as a domestic-only supplier late last year and is now feeding local customers.

MinRes has been less forthcoming and is seeking certainty around the rules that will apply to the project, which it says will significantly influence the size of the infrastructure delivered.

“We would have got to FID two months ago had the government been able to make a decision on where they’re going,” Mr Ellison told investors after the company unveiled its quarterly results in January.

“We can’t make a decision on FID until we know what size of plant we’re going to build.”

Having left the political sphere, Mr McGowan is now working with MinRes as a strategic adviser.

Concerns over the policy’s impact on investment commitments appear to have had an effect on government messaging.

Mr Cook has softened his stance on export exemptions in the early months of the new year, leading many to believe the door will open again.

“We have a 100 per cent domestic gas reservation policy for onshore gas, but that will be to no avail if we have 100 per cent of no domestic gas,” he said at the start of February.

“We are working with the industry proponents and leaders to understand what their commercial needs are, to see what policy levers we need to pull to make sure we benefit from that domestic gas.”

Supply backdrop

As the posturing continues in the fight for offshore exports, the state’s natural gas supply picture is changing, with shortfalls forecast in the decade ahead.

WA has had a formalised LNG reservation policy since 2006, requiring offshore projects to deliver the equivalent of 15 per cent of their production into the domestic system.

The policy has been credited with saving the state from the gas shortages that ravaged east coast markets in 2022, and generally kept the price of supply lower than in the eastern states.

But it’s not without its issues.

The 15 per cent domestic gas supply requirement for offshore producers is applied across the decades-long life of a project, not on a pro-rata, per-annum basis.

In evidence provided to the ongoing inquiry into the state’s domestic gas policy late last year, a representative from the Department of Jobs, Tourism, Science and Innovation conceded that some producers were playing catch up on projects after prioritising exports in the past.

Meanwhile, moves to wean the electricity grid off coal power by 2030 with additional demand from industrial applications is expected to increase the need for domestic supply in the medium term.

The ambition to grow a critical minerals processing industry is also expected to be gas intensive.

The Australian Energy Market Operator expects a gas shortfall in WA starting this year and widening dramatically, above 100 terajoules per day from 2030 once the energy grid farewells coal.

The market regulator’s numbers factor in the supply projected to hit the market from Woodside’s Scarborough project in 2026, and the end of Waitsia’s export exemption in 2029.

Major customers currently dependent on gas say the shortfall is already here.

The DomGas Alliance, representing major gas users including Wesfarmers, Alcoa, Coogee and Yara Pilbara, was formed in response to customer concerns over gas supply insecurity.

These companies have experienced a significant uptick in prices paid in recent years, albeit from a low base. The spot price of gas traded in WA increased about four times since May 2020 according to the AEMO, from $2.13 per gigajoule to around $10/GJ last quarter.

DomGas Alliance spokesperson Richard Harris told Business News the outlook was dire for the sector, particularly given the premier’s recent “about face” on onshore gas development policy.

“There’s a massive gas shortfall in WA at the moment, and it’s not looking good,” Mr Harris said.

“We don’t see there’s any justification for changing the policy to allow those onshore fields to be exported.

“It’s always been a longstanding understanding that that gas is for WA industry.”

While eager to avoid specifics, Mr Harris pointed to the example of Strike, which has brought the Walyering field to production in a domestic-only capacity following supply agreements with South32 and others.

“The evidence is there that those gas fields in the Mid West can be developed and banked, based on domestic sales,” Mr Harris said.

“Developers can make a very good profit indeed by banking those projects on domestic sales, against contracts with triple-A rated companies: big companies that have the balance sheet you need when you go to a bank to make a project.

“We’d suggest perhaps the difference is between making a profit and making a super-profit.”

Producers view it differently.

Strike Energy investor relations and corporate manager Emma Alexander told Business News the company was committed to its domestic gas obligations but believed an export exemption was a powerful lever that could be pulled to increase regional investment.

“We’re getting domestic pricing now that is starting to trend towards LNG netback pricing in WA, and that’s because demand is going up because we don’t have increased supply coming online,” Ms Alexander said.

She said while the export exemption allocation was not make or break for Strike, given its status as a WA company supplying WA business, it could make or break the basin’s capacity to supply growing industry demand across the state.

“We are a very WA-focused company, and that’s all around supporting the transition away from coal-fired power and driving that energy transition with the growth of the critical minerals industry,” Ms Alexander said.

“There’s been a lot of demand coming out of that, but with all that demand we recognise the government somehow needs to increase investment in the Perth Basin to meet its future needs.

“All of that works into the rhetoric around the LNG export licence side of things.”

*WA domestic spot price data sourced via gasTrading Australia. 
**LNG netback refers to average price recieved for LNG, less gas conversion and shipping costs. Data sourced from ACCC. 

Strike has consistently argued that the current application of policy is inequitable, leaving it as one of the only current gas producers in the state required to feed the local market only.

The implications of a lack of consistent gas supply for industry go beyond energy.

Mr Harris pointed out that the gas supplied to several of the companies the alliance represented on behalf of the domestic market was used in processing, not power generation.

“For example, Wesfarmers use the gas to make fertiliser, they don’t burn the gas to make electricity,” he said.

“There is no substitute for that at the moment.”

That’s also the case for Coogee. Executive chairman Tim Martin told Business News the company only had one offer for its most recent gas contract, at double the price of its previous deal.

“We’re not asking for cheap gas,” Mr Martin said.

“We want a sustainable market that supports all the stakeholders that need it.”

He argued that WA risked losing a significant competitive advantage if it traded away its natural gas at the detriment of domestic industry.

“Energy is the one thing we’ve got an advantage on, and we’re giving that away and forcing locals to pay what they pay in countries where they have none,” Mr Martin said.

“[It’s the] one thing we’ve got in our favour and we’re kicking an own goal here, in my view.”

The closure of Alcoa’s gas-intensive Kwinana refinery could free up as much as 5 per cent of the state’s gas supply.

But Perdaman’s massive urea plant near Karratha, expected to come online in the latter half of the decade, will be a significant new domestic user, with a long-term agreement in place to buy more than half the domestic supply produced daily by Scarborough over 20 years.

Changing face

The posturing over Perth Basin takes place against a backdrop of significant image evolution for the oil and gas industry, which has been targeted by environmentalists as public enemy number one.

The operations of both Woodside Energy and Santos – among the state and nation’s largest oil and gas producers – were disrupted by court challenges in 2023 amid increasing legal activism.

Law reform to the environmental approvals process is under way on both state and federal levels.

Both governments have repeatedly stressed the importance of the gas produced by major new projects – in particular Woodside’s Scarborough project – to the energy prosperity of the state, nation and region.

Mr Cook went as far as conceding the state’s emissions could rise in the coming years as the industry grew to feed the energy transition of the regional partners reliant on Australian gas.

“WA may be in a position where we see slight growth in our emissions, but you will see a dramatic reduction in global emissions related to that activity,” Mr Cook said in November.

Though government is clearly on side, that messaging has not appeased everyone, and has led to changes in the way the oil and gas sector positions itself and its projects.

Woodside’s Scarborough LNG project off the coast of WA was quietly renamed the Scarborough energy project at some point in the second half of 2023.

That followed the company’s name change from Woodside Petroleum to Woodside Energy in May 2022.

Lobby group Australian Energy Producers, previously known as the Australian Petroleum Production & Exploration Association (APPEA), adopted a similar rebrand late last year.

“The world is changing, the energy system is changing, and our industry has already expanded its focus beyond oil and gas exploration and development to also cover low-carbon fuels and net-zero technologies,” AEP chief executive Samantha McCulloch said at the time.

In conversation with Business News fresh off reporting a new production record across its global organisation, Woodside chief executive Meg O'Neill said the company was focused on messaging its projects accurately.

“I think it’s important to make sure that people understand what our activities are all about,” she said.

“It’s about providing safe, reliable, affordable energy to customers, both in WA and overseas. It’s about making sure we’re using accurate naming to help the public understand what we’re up to.”

A series of high-profile actions directed at the nation’s offshore producers demonstrate there is work to be done in messaging the importance of gas to the energy transition.

The Climate Council’s Greg Bourne, who from 1999-2003 was BP Australia regional president, said it was important to frame the argument for gas as part of the broader energy transition picture.

“The argument continues to be put forward that gas is the transition fuel, but perhaps a better way of talking about this is that gas will be used less and less during the transition that needs to take place,” he said.

“Countries like Japan are basically saying ‘look, we need to have some certainty with regard to gas – we don’t want you to suddenly drop us in the shit’.

“They say supplies from Australia are a good pipeline out of most of the geopolitical problem areas ‘so please keep us in mind as we go forward’.”

Mr Bourne said he believed the nation’s producers were vying to be the last man standing in gas production.