March 10th, 2011 from...

March 10th, 2011 from http://au.news.yahoo.com/thewest/opinion/post/-/blog/benharvey/post/8/comment/1.

Peter Collier has a gas problem. As one of the more astute members of a Cabinet which is living proof of WA's skills shortage, Mr Collier knows he has a problem.

The gas causing Mr Collier so much consternation is not the socially embarrassing kind. It is the politically awkward variety. The issue of how much we pay for the gas we buy to power our hot water systems, heaters and ovens is about to become a political nightmare for Mr Collier.

Many readers who would ordinarily not read political analysis are probably feeling duped after realising Inside State has fraudulently suggested a senior member of the front bench has an intestinal problem in order to suck them into reading a column about the energy markets.

If you are one of those people, please resist turning to the Today section because, after decades of playing second fiddle to electricity in the public debate about utility prices, gas is about to burst onto the political stage.

Voters are going to start asking why their gas bills are going up when they are constantly told that WA is set to rival the Middle East as the world's richest gas province.

Chances are your local MP will be unable to answer your question. If they can, you will probably fall asleep before they get to the end of the answer.

So here is the one-line, reader's digest version of why your gas bill is on the way up: there is huge competition for WA's gas and there is no competition in the way gas makes its way to the stove in your kitchen.

The longer version takes a bit of telling. Let's look first at the overall demand for gas. When producers such as Woodside find a gas reserve, they have two options - sell it as LNG to Japan, China and South Korea or pipe it to the WA mainland for the domestic market.

To ensure they don't ignore the local market chasing fat LNG profits, the WA Government has forced them to sell at least 15 per cent of their product locally.

A recent Government report claimed this mechanism had failed, which would suggest that someone in Perth boiling a pan of water is competing with the industrial powerhouses of Asia for the gas they are burning.
The reality is less cut and dried. The gas producers can make fast and relatively easy money selling domestically and will continue to do so.

Yes, the price of domestic gas mirrors LNG. But the link is obtuse. The price cycle is like this (take a deep breath): LNG prices go up because of growing demand from Asian industry, which demands more raw materials, which sparks increased production at mine sites in WA, which requires more gas-powered generation of electricity, which increases demand for local gas, which drives up the domestic price.

Energy2031, a State Government strategy document which maps out WA's energy needs over the next two decades, warns of years of sudden gas price spikes as resource projects are established far quicker than the new gas fields required to power them.

We are currently using about 1000 terajoules a day (one terajoule could keep an average house going for 50 years) and this is forecast to jump to about 1900 TJ/day by 2030. On the supply side, by 2016 we will be producing 1500 TJ/day. How much is produced after that is anyone's guess.

It's also anyone's guess how sharply the price will go up but the past few years have seen a more than three-fold increase in wholesale prices, from a low of $2.50/gigajoule (that's one thousandth of a terajoule).

The price pressure caused by surging demand for gas is exacerbated by the lack of competition in the delivery of gas to your home. From the moment gas is discovered off the WA coast to the second you light your stove, monopoly after monopoly gets in on the action.

The biggest monopoly is the conglomerate of gas producers known as the North West Shelf partners. Led by Woodside Petroleum, the group comprises BHP Billiton, BP, Chevron, Shell and a partnership of Mitsubishi and Mitsui.

They provide two-thirds of the domestic market and sell their gas as a legal cartel.

The next monopoly to get its snout in the trough is DBP Transmission, which owns the Dampier-to-Bunbury Gas pipeline. To stop DBP Transmission, whose chief shareholders are DUET Group and Prime Infrastructure, abusing its stranglehold on the 1600km pipe, the prices the company can charge are regulated by the Government.

Monopoly number three is WA Gas Networks, the company which owns the 12,000km of pipes that criss-cross the State.

Look at the corporate structure and you will see Prime Infrastructure and the DUET Group listed as major shareholders. Cosy huh?

WA Gas Networks charges retailers for the right to pipe gas through their network to our homes. Again, Government intervention is needed to curb the free market.

The final monopoly in the supply chain is Alinta.

When the debt-laden monster goes to the Government asking for the right to raise prices, it is armed with evidence that it is being gouged three ways: by WA Gas Networks, by DBP Transmission and by the producers in the North-West.

Mr Collier will soon tell West Australians, the owners of some of the world's largest gas reserves, that household prices will go by about six per cent each year for the next three years.

The decision will make him as popular as an Energy Minister in a lift.