Vulnerability still plagues energy supply

WHEN Alcoa of Australia announced that it was embarking on a joint venture to develop the $100 million Warro gas project north of Perth, it underscored the biggest business issue of 2008 - energy security.

While Alcoa's news broke just a week after an incident at Varanus Island resulted in Western Australia's domestic gas supplies being cut by a third, the aluminium producer's move into directly funding an energy development, its second such deal, was not a sudden reaction.

The Warro deal follows Alcoa's 2007 agreement with ARC Energy, in which Alcoa pre-paid $40 million to support ARC Energy's gas exploration program in the Canning Basin.

The joint venture with unlisted Perth company Latent Petroleum was part of an ongoing search for a cure to rising energy prices, which were making WA uncompetitive after years of cheap gas provided by the state-underwritten development of the North West Shelf.

From a price below $3 per gigajoule, domestic gas had risen to above $8Gj. Worse still, offshore demand meant that gas from new developments was destined for overseas markets as lucrative LNG.

"Western Australia is experiencing a serious shortage of gas with commercially viable supply failing to meet the state's growing demand," Alcoa managing director Alan Cransberg said at the time.

"This has been exacerbated by the loss of supply from Varanus Island, and reinforces the importance of progression in finding new energy sources.

"The time to act is now. By partnering with Latent Petroleum, Alcoa is doing its part to find solutions and create a secure energy future for the state."

Of course, Varanus Island brought this simmering issue to the forefront of business and political agendas, ultimately costing the state billions of dollars as it shut down large operations in the south-west corner of the state, hampered small enterprises in Perth and the regions, and forced many mining operations to lose production as the very height of the commodity price cycle.

It is a problem that remains unsolved. The state government that went head to head with energy producers on reserving gas for domestic use lost the election.

No new gas developments offering domestic supply are imminent, especially with the shelving of the Apache Energy-Santos joint venture development of the Reindeer gas field and associated onshore production hub at Devil Creek.

With the global financial crisis in full swing, cutting the benchmark oil price from more than $US147 a barrel in mid-July to less than a third of that today, demand for gas and the capital to fund new developments have evaporated. At least that's in the short term.

Having received environmental approval this year, Chevron remains committed to the giant Gorgon production plant on Barrow Island, while Woodside Petroleum said it was equally committed to its Pluto development. Lower construction costs might help these projects stay on track.

But the slow approvals process may have already cost WA another project - that of Japanese-based Inpex, which now plans to process its Browse Basin gas in the Northern Territory.

Back in Perth, energy security remains a troubling issue, even if retail consumers are somewhat insulated from the issue by heavy subsidies on their electricity.

The once mighty Alinta, reduced from national energy utility giant to a bunch of local gas and power assets by private equity, has been on the block since the financial crisis enveloped the Babcock & Brown group that controlled it.

And the dismemberment of Western Power had made transparent the cost of ageing plants and lack of investment prior to disaggregation - leaving Perth and surrounding systems vulnerable to energy shortages.

Newly elected premier Colin Barnett's proposal is to re-merge the costly Verve Energy with state electricity retailer Synergy, a back-to-the-future move few in the business community or energy sector think is wise.