Swings and roundabouts for LNG

Global oversupply of LNG may work in local consumers’ favour.

Could the sharp downturn in the oil price, along with expectations the liquefied natural gas market could be oversupplied by a considerable margin, bring an end to a festering commercial and political dispute in this state?

Domestic gas users have complained bitterly for the past decade about the prices they have been charged for gas coming down the Dampier to Bunbury Natural Gas Pipeline, as they were increasingly brought into line with global oil and long-term contracted LNG prices.

After decades of cheap gas, which for a considerable period was subsidised by the state, Western Australia’s big gas users found their local advantage (due to proximity and a state-funded pipeline) had been eroded by the need for LNG producers to secure supply to feed their expensive facilities and meet demand from Asia.

That problem became a political hot potato in 2006 when then premier Alan Carpenter sought to reserve up to 20 per cent of all gas for domestic use, thereby ring-fencing a substantial portion of each gas field from international competition.

This was not something that pleased oil companies or the federal government, with the latter preferring the royalties earned from top dollar exports.

A search of the now common word ‘domgas’ in our archive shows it became part of our language in 2006, in a story about Mr Carpenter being attacked by then Woodside Petroleum boss Don Voelte and federal industry and resources minister Ian Macfarlane.

After around 10 years of lobbying and, in some cases, exploring for alternative onshore supplies, it’s possible our domestic users – mainly minerals processors and power generators – could find themselves being courted once more as gas owners seek to find a market for their production.

According to energy consultant Fereidun Fesharaki, spot prices for LNG could fall dramatically over the next two years as a 100 million tonnes oversupply washes over the global market.

Reflecting that outlook, oil companies are applying mechanisms such as write-downs to reduce the value of their LNG facilities, suggesting that, in accounting terms at least, return on assets is achievable at lower prices. Just this month, Woodside booked a $US865 million pre-tax impairment on the stake in the Wheatstone LNG project, acquired for $US2.75 billion a year ago.

And potential supply gluts are not the only change in the equation for domgas users. Between 1977 and 2015, the various joint venture partners of the state’s major domgas supplier, the North West Shelf project, had a regulatory exemption from competition rules in order for them to jointly market their gas.

My understanding is that the partners did not renew that agreement and now have to act separately in dealing with customers, at least on a domestic front. That puts domgas users in a much more favourable position when negotiating with gas companies.

If all of the above turns out to be true it will prove that markets work in cycles, and monopolies and oligopolies are hard to sustain in a free enterprise scenario.

Still, it might be wishful thinking from a domgas perspective to believe that a long-term glut will prompt gas producers to turn to the relatively small local market. Gas fields are finite and companies have to find new sources, with low prices tending to act as a disincentive for exploration.

Earlier this year we quoted a report from consultancy Wood McKenzie (see article ‘Domgas drop could cause price spike’, January 25) that flagged concerns of tighter domgas supplies as existing fields ran out and gas producers failed to make new discoveries.