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Gas price argument runs out of steam

Ian Macfarlane, the Federal Opposition's resources spokesman, yesterday reopened an old WA wound by claiming it was the State's domestic gas reservation policy that sufficiently spooked Inpex and Total to move their $34 billion Ichthys LNG project to the Northern Territory.

Whether the recollections of Macfarlane, who was the Howard government's resources minister, are correct, WA's loss of the Ichthys project to the NT remains a big disappointment.

The main reason that Inpex and Total walked, of course, was their inability to see eye to eye with the then-State Labor government, in contrast to the NT leadership which bent over backwards to secure Ichthys, and won.

Macfarlane's reference to Ichthys yesterday, on the final day of the Australian Petroleum Production & Exploration Association conference in Adelaide, was part of a broader theme against domestic gas reservation policies as championed by the WA Domgas alliance of gas customers, led by aluminium giant Alcoa.

Macfarlane's argument against the policy and its attempted spread to the east coast, mirrored the views of Santos chief executive David Knox and Beach Petroleum head Reg Nelson among others. They argue it is the sort of unnecessary government intervention that discourages investment in the oil and gas hunt, and thereby actually threatens domestic gas supply, rather than encouraging it.

As Nelson said, nickel producers may have lobbied the WA Government for access to cheap gas, but then they did not sell their nickel at below-market prices to appease local customers. Alumina producers in WA are the same.

So why should gas producers be forced to sell their molecules at lower prices than they could get in export markets?

It is irrelevant, of course, for mega-projects such as Pluto, Gorgon and Wheatstone, which will deliver a step-change in gas supplies to the WA market late this decade when their commitments under domestic gas reservation kick in.

In the meantime the debate in WA about the disparity in domestic gas prices here versus on the eastern seaboard is running out of steam.

East coast players such as Santos are pushing up domestic gas prices to levels we have been used to in WA over the past five or so years, and the advent of more than $50 billion of coal seam LNG projects in Queensland will maintain pressure on the price of domestic gas in eastern Australia.

But, according to Knox, the fast-rising east coast gas price has also had the flow-on effect that multi-nationals are increasingly looking at opportunities to feed an increasingly lucrative east coast domestic market.

All of a sudden, the gap in the premium the gas producers are receiving for LNG-designated gas versus selling it to local consumers is closing.

And don't forget that the US explosion in shale gas production may spawn a new LNG export industry to rival liquefied production here, with the result that the price of LNG exports into Asia comes under pressure and maybe close the gap further.

It's called a free market place, even if it is not the news households want to hear.