I must have missed most of the interesting discussions going on here previously. Just thought I'd spend some time going through the submissions that are of relevance to STX from some of our key customers (WES, S32, AGL, STO) and protagonists (Hancock, BPT, MIN and the multi-nationals)...
WES: (firming in our corner fighting for consistency, transparency and timely approvals)
• Accelerating regulatory reviews and approvals for new gas developments by ensuring that regulatory bodies prioritise these reviews and are appropriately resourced to make prompt decisions on approval applications, but without compromising the quality of the review. Making a decision on approvals for Strike’s West Erregulla gas project would facilitate this gas being brought to market promptly and help improve the supply position.
• Responding to producers, such as Strike Energy, that are advocating for an open right to export onshore gas as LNG by the State Government making an express statement that further export approvals will not be granted. This should be followed by an amendment to the policy to remove the current ability for exemptions to be granted on a case-by-case basis. These steps will aid liquidity and certainty in the domestic gas market.
S32: (Interesting points raised about how exporting gas may impact on gas spec consistency and end users)
2. AEMO should critically assess supply and supply risks, verifying the claims made by gas producers and explain these risks to the audience;
....
Walyering, operated by Strike, in the Perth Basin, operated by Strike, was expected to start producing gas in April 2023 according to Strike's ASX announcement of 14 March 2023. AEMO still has not set up Walyering on the Gas Bulletin Board to include the nameplate capacity or medium-term outlook for the new production facility, even though first gas continues to be delayed.
Furthermore, AEMO has given no explanation to the gas market about how physical gas flows will changes as a result of the export of Waitsia's gas via the North West Shelf project. Indeed, from the GSOO it is barely discussed that 125T J/d of gas will be exported from Wait sia via the DBNGP and the North west Shelf Project. That represents about 10% of the gas market. DBP has been altering the design of the pipeline to allow for this export but little information has been made public about how the flows will change. This is important to gas users as they will now see different quality gas from what they received in the past which their equipment can now be tuned for. It may also mean the usefulness of the line pack (gas stored) in the DBNGP will change resulting in less ability for the DBNGP to manage gas supply disruptions or short-term peaks in gas demand.
MIN: (Firming in same position as STX unsurprisingly)
Prohibiting the export of gas via the onshore gas pipeline network has disincentivised investment in onshore exploration and production and has limited the scale of investment in gas processing plants. Replacing the prohibition on export of onshore production with a 15% reservation for domestic market will deliver greater investment in the exploration and production of gas enabling more gas to be delivered earlier.
Prohibiting exports of onshore gas also limits the scope of gas projects to only those projects that are economically viable in the domestic gas market. Development of gas fields in the Perth Basin requires significant capital investment. Access to international export markets improves the economic viability of marginal onshore projects creating greater prospects of those projects proceeding and delivering more gas to the domestic market.
Access to domestic and international gas markets also creates the opportunity for larger gas processing plants, providing more gas to the WA domestic market.
Importantly any changes to the Policy should reward not disadvantage early investors that bring more gas to the market sooner and assist with closing the forecast supply demand gap. Changes to Policy should be applied equitably and allow all onshore producers to export as well as supply the domestic market.
Not all onshore gas proponents will seek to export gas. Smaller fields would naturally only supply gas to the domestic market. It is only the proponents of larger onshore resources that will seek to export gas. Another natural barrier to exports is that changes and upgrades are required at the Dampier Bunbury Pipeline (DBNGP) and the Karratha Gas Plant (KGP) to facilitate export.
Domestic Gas Alliance or DGA: (Pushing for offshore producers to meet their obligations and rightly so)
Some LNG producers that are not currently meeting the clear intent of the policy to deliver 15% of their gas reserves to the market, need to be required to meet the policy, including making up for historical shortfalls.
BPT: (The case put forward is actually for a good explanation of how dom gas producers in general can find it hard to justify economic returns on upfront capital spend without external capital return incentives.)
Beach’s view is that the committee should recognise that policy settings can have the unintended effect of suppressing investment in domestic-only gas projects. Beach’s observation is that the market was oversupplied for several years after the Gorgon and Wheatstone domestic gas plants came online. As a result, domestic market prices were depressed for many years to the extent that domestic-only producers have found it difficult to justify new developments. Most domestic-only producers also have very little, if any, “co-product” generation such as natural gas liquids, making the economic justification even more difficult when domestic gas prices are unnecessarily and artificially depressed. As a result, domestic-only producers
and LNG exporters are both competing in the same domestic market but are not playing on a level playing field in terms of return on capital. Therefore, Domestic-only producers require other means to generate sufficient returns to justify the high capital costs associated with new project developments.
The Waitsia Joint Venture developed the concept of a project that would export and supply the domestic market to develop an investible case. Approval was sought from the State to export a portion of reserves from the Waitsia Stage 2 Gas Project as LNG over a five-year window with the domestic market to continue to be served by the Joint Venture before, during and after the LNG export window. Based on market conditions at the time, customer soundings and the then GSOO outlook for supply and demand, the Waitsia Joint Venture was unable to get sufficient comfort that a pure domestic gas project would support the economic viability of a 250TJ/day Waitsia Stage 2 development. At the time, the Western Australian potential domestic gas supply was forecast to exceed forecast gas demand by more than 100 TJ/d as a result of the success of domestic gas policy settings and was forecast to remain so through the decade . Prices at the time were reflective of abundant low-risk supply from large-scale, long-life projects. This meant that it was difficult for any new domestic-only gas project proponent to attract foundation domestic gas customers to underpin
development. Therefore, the approval to export a portion of Waitsia gas as LNG for a five-year window was the economic enabler for the development.
We note there have been a very limited number of final investment decisions for domestic-only onshore gas projects in recent years, which is likely due to similar dynamics to that experienced by the Waitsia Joint Venture. Beach also notes that since the ban on selling gas outside the state from onshore developments was announced, some producers have been considering exporting gas through alternative mediums such as
ammonia to generate economic returns.
To resolve this unintended consequence of current policy settings, Beach suggests that the Committee consider mechanisms that, during periods of oversupply, either allow LNG Projects to be relieved from their obligation to supply the domestic market and/or allow flexibility for gas produced from onshore fields to be exported.
STO: (Definitely same side as STX)
Overall, I could pick up some general themes:
* Current offshore producers are not fulfilling their obligations by pushing their 15% dom gas supply obligations down the track towards the tail end of the project;
* Lack of a consistent market in terms of gas pricing, specifications, etc;
* Lack of a consistent over-arching set of gas policies;
* The majority of onshore producers do not have sufficient confidence of ROI on upfront capital spends due to lack of a gas market exchange. Perhaps the set up of an exchange similar to Henry Hub here in Australia will help facilitate a futures exchange to provide transparent market prices for short and long dated gas.
On that last point, even though the current and foreseeable spot price will render most onshore gas projects very profitable, it is the regulatory uncertainties coupled with lack of long-term market price visibility that makes long life project economics hard to justify. This was the key reason why Wework failed because its business model was to sign long term lease liabilities while offering/receiving short term leases/revenue that is subject to market fluctuations and uncertainties.
I think the likes of STX/MIN/BPT will be profitable regardless of what the spot price is/will be given the unit cost of production for the likes of Waitsia/South and West Erregulla and Lockyer are so low. It is only a question of how much future cashflow they can guarantee to be able to justify the upfront costs associated with building more processing capacity to frontload more supply to the market.
Either way, it will be an interesting watch to see how the WA govt decides its next move.
618
(20min delay)