The long-simmering feud between gas suppliers and WA’s biggest gas buyers has been reignited by Woodside Petroleum chief Don Voelte’s celebration of a new price benchmark for domestic gas sales.
THERE’S no doubt what Woodside chief Don Voelte meant when he hailed a long-awaited price settlement with Alinta over gas supplies as providing a “new price foundation” for future domestic supply contracts.
The days of cheap gas were over.
“This is a huge new revenue exposure for North West Shelf and Woodside and my expectation is that when other new or existing contracts come up for review, there will now be a new price foundation to work from,” Mr Voelte said last week.
The Alinta deal followed arbitration last year, which ruled that changed market conditions entitled Woodside to demand significantly higher prices for the gas it supplies to WA’s main gas distributor.
Under the agreement, the price paid by Alinta is expected to rise at least threefold to more than $8 a gigajoule, in line with other recent deals struck in the WA market.
Alinta, which had to resolve the dispute in order to roll over $2.5 billion in debt and avoid bankruptcy, promptly wrote down its WA business by $175 million and borrowed $70 million to pay for the settlement.
Not surprisingly, then, Mr Voelte’s joy was not shared by the DomGas Alliance, which represents several major gas buyers including Alinta, Alcoa, Verve Energy, Fortescue Metals Group, Newmont Mining, and Burrup Fertilisers.
Alliance chairman Tony Petersen said the Alinta settlement set a disastrous precedent for WA.
“At these prices, most resource-processing and gas-fired generation in the south-west will no longer be sustainable,” he said. “The impact on jobs and communities will be severe.”
Mr Petersen said WA already had one of “the most anti-competitive gas markets in the country”, with the Woodside-managed North West Shelf and the Apache-run Varanus Island facilities accounting for almost all the state’s supplies.
Yet WA’s Australian Competition and Consumer Commission continued to allow the six North West Shelf partners to market gas collectively, rather than individually. Similarly, it allowed the three Gorgon LNG partners to market gas from the project collectively to WA buyers. Their resulting market power was reflected in the Alinta settlement, he said.
“Instead of six sellers competing with each other to offer the lowest price, customers are forced to deal with a single seller,” Mr Petersen said, adding that WA industrial users were now paying three times more than their Victorian counterparts, despite WA hosting 80 per cent of Australia’s conventional gas reserves.
At the heart of the matter is the historically cheap gas that some alliance members, Alcoa in particular, have enjoyed under long-term contracts which were vital in underwriting WA’s most critical infrastructure – the Dampier-Bunbury gas pipeline.
The alliance argues that without these contracts, the pipeline could not have proceeded, in turn preventing the development and expansion of a range of industries in the south-west, including Alcoa’s massive alumina refining operations.
Nor would the North West Shelf LNG project, Australia’s single biggest export earner, have proceeded because its development hinged on the success of its initial domestic gas processing facilities in 1984.
But as global energy demand has skyrocketed, global energy prices have soared. Consequently, gas reserves previously considered marginal can now potentially supply the global LNG market.
The alliance alleges that major gas producers are now warehousing reserves that could supply domestic buyers in order to develop them for the more lucrative LNG market.
Furthermore, the alliance argues that measures to encourage increased supplies for domestic buyers, including the state’s policy of reserving 15 per cent of gasfield reserves for domestic consumption, have to date been ineffective.
Consequently, it claims there has been a serious shortage of cost-competitive gas for local industry since 2004.
According to research commissioned by the alliance, WA gas demand will double to more than 2,000 terajoules a day as early as 2015 (see graph), yet proposed new supplies will meet only half of that added demand.
But the Australian Petroleum Production and Exploration Association argues there is plenty of gas available for customers willing to pay a fair price, and that the alliance is really seeking a cap on energy prices for companies that receive free market prices for their own products.
APPEA WA director Tom Baddeley said gas prices were now more reflective of both demand and the higher costs associated with developing gas resources, which were increasingly located in deeper water further from shore.
“But the DomGas Alliance wants to hark back to the good old days when ... its members, the big industrial gas-users, got cheap energy inputs to maximise their profits,” he said.
In reality, higher prices and the uptick in LNG-based development were vital in delivering new supplies to meet future WA demand.
“Market reflective gas prices in recent years have encouraged a significant increase in exploration and enabled projects to be developed, and as a consequence we are seeing the biggest domestic gas development effort in almost three decades,” Mr Baddeley told WA Business News.
“The important point about LNG projects is this, the domestic market alone is not large enough to support the development of many, large, high-cost offshore gas fields, so an expanding LNG industry should not be seen as a threat to future domestic gas supply but as an enabler for increasing supply diversity and competition.”
Ironically, the biggest impediment to developing new gas supplies was finding buyers, Mr Baddeley said.
“Developers ... are currently seeking buyers for thousands of petajoules of gas to enable their new projects to be developed, but the question being regularly asked is, where are the buyers?” Mr Baddeley said.
Apache’s $1 billion Devil Creek project is a case in point. Initially shelved when offtake talks stalled in late 2008, it was revived last year following a seven-year deal to supply Citic Pacific’s Sino Iron magnetite mine in the Pilbara. The contract represents half the Devil Creek project’s planned 200Tj/day capacity and will kick off next year. The price is indexed to prevailing market conditions but is expected to average almost $8 a gigajoule.
BHP Billiton’s 200Tj/day Macedon project is the next expected to come on stream, sometime in 2013. However it’s believed most of its output is earmarked for BHP’s rapidly expanding Pilbara iron ore operations.
Beyond that, new domestic supplies hinge on major LNG developments, notably at Gorgon, Woodside’s Pluto venture and Chevron’s proposed Wheatstone development.
The alliance says it is, therefore, the state government’s responsibility to take tougher action to ensure the delivery of substantial domestic gas supplies in a timely manner, and strictly enforce its 15 per cent domestic reservation policy.
Gorgon must supply up to 300Tj/day to WA buyers under its state agreement, but that represents less than 5 per cent of its total reserves. Operator Chevron also plans to produce only 150 Tj/day from 2015, deferring full domestic production until 2020.
Though the Pluto project is due to start exports next year, it is not required to start domestic supplies for another five years – and not even then if it can prove domestic production is not commercially attractive.
And while Chevron has publicly committed to a 150Tj/day domestic plant at Wheatstone after 2016, it is not yet bound by any formal obligations.
Looking further ahead, the government has not even started discussions with Woodside about domestic obligations at its planned Browse LNG plant at James Price Point.
A spokeswoman for Premier Colin Barnett told WA Business News that the government’s priority was to ensure that the gas was processed onshore so that WA and the Kimberley “benefits from the investment, business and employment opportunities this creates.”
But any efforts to make Browse gas available to local industry have been complicated by the premier’s opposition to allowing Browse gas to be piped to the Pilbara for processing.
In the absence of establishing heavy industry in the Kimberley, the most obvious domestic option for Browse would be a pipeline linking it with the Dampier-Bunbury pipeline.
Resolving that logic trap would be some achievement.
