gas price

High gas prices are here to stay
Opinion: 16-April-08 by Mark Pownall


Are the energy market issues of Western Australia about to be solved by the market?

There is strong talk of domestic gas deals set be struck linked to the oil price.

This is something that hasn’t occurred before, with the local gas market enjoying cheap gas from fields originally developed through underwriting by the state decades ago.

During the past 18 months, that relatively cheap supply has dried up and gas prices have more than trebled as the market tightened up.

Domestic users are relatively small and can’t do the massive deals that underwrite an LNG project. And once a company has taken the decision to go ahead with LNG, it’s hard for them to make allocations of gas to the local market which don’t use the facilities they have built to value add.

But the developments in the north-west are changing this.

The most important element in this is that project developers are relatively unfazed about the higher prices other users have found daunting.

As CITIC Pacific clearly states in its annual results, it is not worried about a 40 per cent blow-out in costs for its Cape Preston-based Sino Iron Ore Project because commodity prices are going its way.

Since it decided to go ahead with the project, the value of the fines it will produce have risen 115 per cent – far outstripping the cost of development.

So when it comes to gas, it doesn’t really care, so long as it has security of supply.

In other economies, this issue has been bad. The old Dutch disease can occur when one part of the market is oblivious to cost and sucks up all the available labour, skills and capital.

That is already happening in resources, anyway.

But if CITIC and others agree to pay higher domestic prices for gas and get deals under their belts, they may well pave the way for new supply deals that overcome the current impasse. That will solve a big issue for industry, government and the state.

It doesn’t, of course, remove the issue of the gas price.

Already we are paying around three times that of users on the east coast. There is hope that some isolated fields may deliver cheaper domestic gas, but the reality is we are probably the first market in Australia to pay something near global energy prices for gas.

That may hurt for a while, but it may also prepare us for what is likely to come anyway.

The whole cost of energy is rising at a fast pace and the doomsayers reckon it is unlikely to ever get cheaper.