1
Oct
2013

WA industry addicted to cheap gas

by


By Lucy Carter

Published in the West Australian, 1 October 2013

WA industry has become addicted to cheap gas. The State Government should be trying to break the cycle of dependency. Instead, its decision to reserve 15 per cent of gas from export projects for domestic use is just feeding the habit.

The reservation policy has descended from a gas deal signed by the first Court government in 1979. The government underpinned the development of the North West Shelf Venture by developing the Dampier to Bunbury gas pipeline and buying a lot of gas for the domestic market. However, unlike the current policy, the logic behind the earlier deal stands up to economic scrutiny.

When it was built in the 1980s, the 1500km gas pipeline was the biggest infrastructure project in WA history. The project’s size, the need for land acquisitions and the regulatory uncertainty around how much the pipeline could charge customers made the State government a logical developer. In 1998, the pipeline was sold to private investors.

The deal between the government and project developers benefitted both parties. Developers could diversify their revenues and receive stable, long-term cash flows. In exchange, the government received cheap gas at stable prices and the deal kickstarted the domestic gas industry.

In the late 1970s, stimulating jobs in the WA economy was also more of a priority. In 1979, the trending unemployment rate in WA was 7.3 per cent, one per cent above the national average. In 2013, it is 4.9 per cent, more than one per cent below average.

But the NWS deal created a substantial problem – gas-intensive industries became accustomed to getting long-term gas contracts at relatively cheap prices. As that gas started to run out, those industries were exposed to a tougher market.

In response, the State government instituted a policy to reserve 15 per cent of gas from export projects for onshore users. Since WA households use only 2 per cent of the State’s gas, the reservation policy mainly supplies gas to industry.

There is a stark economic contrast between the reservation policy and the original NWS deal. The WA gas market is now well established and there is no longer a need for government involvement in the market. If big gas buyers in WA want to buy gas, there’s nothing to stop them from negotiating directly with developers.

Gas users want the government to continue the reservation policy. Negotiating with gas developers may force industry to pay more for gas through higher gas prices or sharing the cost of developing onshore processing facilities. Users may also need to enter into shorter contracts than before, leaving them more exposed to shifting gas prices.

However, why should the Government interfere in the gas market to support the interests of industrial gas users? Gas reservation is a bad deal for WA taxpayers. By forcing the gas exporters to sell to the domestic market market, the policy acts as a de facto tax on export projects. Yet, unlike a tax, it does not deliver revenue for government and taxpayers. Instead, all benefits flow to gas users.

The reservation policy also undermines gas market competition. Compelling a few sellers to sell big volumes of gas may bring down prices in the short term but it also reduces the incentive to develop onshore gas supplies. In the longer term, this may limit competition between suppliers, exposing buyers to big price risks when contracts expire.

Finally, the reservation policy benefits incumbent gas users at the expense of new entrants. Long-term contracts and limited access to pipeline capacity may make it difficult for new gas users to enter the WA market. This can hinder economic activity and reduce competition across industries.

While continuing to protect WA industry from the market is bad policy, the Government can help to ease the transition to a more competitive domestic gas market. The Government’s support for an annual gas market report and development of a short-term trading market are steps in the right direction. Both actions improve transparency and support competition.

Beyond this, improving the regulation of gas pipelines should be a priority. If new gas supply contracts have shorter tenures, buyers will need more flexibility to negotiate shorter-term transport contracts. The market for pipeline capacity also lacks transparency, and regulatory arrangements discourage developers from building spare capacity into new pipelines or expansions. These issues need to be resolved.

Competition between gas developers should also be encouraged. The Australian Competition and Consumer Commission has allowed projects with multiple developers to market and sell gas as a group. Letting these arrangements lapse would improve the bargaining position of domestic gas users.

The NWS deal provided WA with cheap, stable gas supplies for a generation. However, the reservation policy cannot recreate the market conditions of the 1980s. Instead, it encourages a culture of industry subsidies. The Government should stop supporting the policy and focus on aiding the transition to a more transparent and competitive market.