Can WA gas save the east coast?

More warnings today from industry, via The Australian:

The Australian Industry Group, which represents 60,000 manufacturing and industrial businesses, said the expected rise of gas prices on the east coast this summer back to near crisis levels threatens to dent the economy and reflects the government’s failure to sanction sound energy policies.

Ai Group chief executive Innes Willox writes in The Australian today: “Under the current policy regime of oil-linked export parity pricing, the federal government’s hope of driving pricing into single digits per gigajoule look doomed to fail.

“Sustained prices at the $15 level, more than four times their historic average, threaten the long-term viability of many high-employing and strategically critical Australian businesses.

Domestic gas prices are tipped to jump more than 40 per cent to $15 a gigajoule in January and February compared with this year’s average to date of $10.68, according to the Australian Competition & Consumer Commission.

Dow chemical head Jim McIlvenny is back promoting an West-East pipeline, at the AFR:

“We look more like a country that has no energy, yet we are one of the largest energy producers in the world and yet we have some of the highest energy pricing, that makes us very unique,” he said in Sydney.

Mr McIlvenny said other countries such as Saudi Arabia, China and the US have a more direct national interest objective in their debate around the best use of fuels. While policies are there to support exports, exports are not promoted at the expense of domestic interests.

…”LNG imports as a long-term solution condemns Australia to other peoples’ prices of energy.”

It’s even worse than that. LNG imports condemn us to other people’s energy costs multiplied by the currency. If it is weak then the prices skyrocket.

The West-East pipeline solution is better than imports but it’s not a silver bullet. Colin Barnett has made the following points:

“It won’t be cheap gas from the west, but it will be affordable and it will be reliable,” Mr Barnett will say.

“The pipeline will provide security of supply and price, and can be built in a comparatively short period of time.

“What is required from government is a policy commitment to go ahead with the project and a determination to resolve all of the detailed issues that will inevitably arise. After all, it is our gas and our needs come first.”

Mr Barnett estimates the 3000km pipeline would cost about $5bn to build, and could feasibly charge a tariff of $3 per gigajoule of gas.

Wholesale east coast gas prices are trading between $9 and $12 a gigajoule, he said, compared with equivalent prices in WA of between $3.50 and $4 a gigajoule.

If the pipeline is publicly built and owned it could deliver for perhaps a $2GJ tariff. WA prices are still trading at $3-4Gj so that would be a great outcome.

The problem is such gas prices would also trigger buying from the east coast cartel, unless they were prevented, so the first 2 million tonnes would be sucked up by Curtis Island and shipped offshore.

We might make the pipeline feed domestically reserved. But the cartel could then buy up the displaced gas and ship it instead so you’d be back to where you started. Without east coast reservation, the WA pipeline would need to be large enough to overwhelm cartel export capacity and domestic demand without skyrocketing the WA domestic reservation price.

Obviously this needs to be carefully thought through.

David Llewellyn-Smith
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  1. We need to dump fossil fuels and go hard renewables. The economics of it is going to win in the long run so why not lead the charge and make Australia the lowest carbon economy on the planet with the cheapest energy to boot?

    What is there not to like?

  2. Check out historical gas prices in WA. Have been above $10/GJ. To make a $5B pipeline equate to $3/GJ would likely require massive firm throughout. Surely this would rocket WA gas prices and negate the value of the pipeline? Would $5B be better spent developing east coast reserves for domestic use?