BHPB Gas Reservation Submission Final April 21

WA Government Policy on Securing Domestic Gas Supplies BHP Billiton Submission Submission to Department of Industry and Resources 21 April 2006

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Aluminium Carbon Steel Materials Petroleum Stainless Steel Materials

Vice President Government Relations – Western Australia BHP Billiton Pty Ltd Central Park, Level 33 152-158 St George’s Terrace Perth WA 6000 Phone: (08) 6218 2160 Fax: (08) 6218 2161 Email: [email protected] Website: www.bhpbilliton.com

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Contents

Executive summary 1

Chapter 1 4 BHP Billiton in Western Australia 4

1.1 BHP Billiton 4 1.2 A balanced perspective 5

Chapter 2 6 The Government’s position 6

2.1 Introduction 6 2.2 Background 6 2.3 Overview of this Submission 7

Chapter 3 8 Challenging the misconceptions 8

3.1 Introduction 8 3.2 Supply and demand of domestic gas 8 3.3 LNG projects and domestic (Western Australian) gas sales 12 3.4 Reservations and the domestic gas market 14 3.5 Domestic gas prices 15 3.6 Conclusions 16

Chapter 4 18 The proposed domestic gas reservation policy and its implications 18

4.1 Introduction 18 4.2 LNG in Western Australia 18 4.3 A standardised reservation policy 20 4.4 Implications of a standardised reservation policy 20 4.5 Conclusions 22

Chapter 5 23 Conclusions 23

5.1 The scope of the gas supply problem 23 5.2 Shortcomings of a standardised reservation policy 23 5.3 Relative benefits of flexible negotiated outcomes 24 5.4 Alternative roles for government 24

W A G O V E R N M E N T P O L I C Y O N S E C U R I N G D O M E S T I C G A S S U P P L I E S

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Executive summary

A recently released Consultation Paper by the Department of Industry and Resources on Securing Domestic Gas Supplies suggests a number of policy mechanisms to ensure that a sufficient quantity of the gas reserves, located in waters off the coast of Western Australia, are retained for consumption in the State. The policy mechanisms raised are each a variation on the application of some defined and standardised portion of a gas field’s reserves to be set aside for domestic market consumption.

The underlying rationale for the introduction of a reservation policy is to satisfy the State’s forecast levels of gas demand over coming years and to maintain the current levels of domestic gas prices which are, according to the Consultation paper, ‘significantly less than average world prices’.

As both a producer and consumer of gas in Western Australia, BHP Billiton understands the importance of ensuring that there is an adequate supply of competitively-priced energy into the State.

It is BHP Billiton’s strongly held view that market mechanisms will lead to gas being supplied at a competitive price to whom ever wishes to purchase it. Therefore, apart from market failures, there should be no role for Government intervention in the domestic gas market. However, if the Government decides that intervention is necessary then BHP Billiton would accept the continued use of negotiated agreements that are equitable between LNG producers, flexible and do not compromise the development of LNG projects.

BHP Billiton opposes any form of standardised domestic gas reservation policy on the grounds that such a policy is unnecessary, ineffective and likely to be detrimental to the State.

Unnecessary

There is no need for Government intervention in Western Australia’s domestic gas market. Based on projections out to 2020, there is some element of Western Australian gas demand that is yet to be filled by contracted supply. This, however, does not constitute a gas shortage and nor does it constitute a need for broad-based Government intervention in the domestic gas market.

Once consideration is given to the vast amounts of accessible gas reserves off the coast of Western Australia and the identification and development of new gas fields over time, the possibility of a gas shortage in Western Australia is highly remote.

Major gas consumers in Western Australia account for around 90 per cent of market demand and have strong bargaining positions; they are well-resourced and have overriding commercial objectives to secure the gas they need at prices that are conducive to viable commercial operations.

There is no reason to suggest that these domestic gas market consumers will be unable to secure competitively-priced gas in the future.


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Ineffective

A standardised domestic gas reservation policy would not bring about equitable outcomes for LNG producers as is claimed in the Consultation Paper. Instead, producers developing the more commercially marginal gas fields will be burdened to a far greater extent than proponents of the larger more viable fields. This is because a standardised reservation policy has no means of providing the flexibility necessary to cater for the different challenges faced in the development of different gas fields. Such a policy is non-progressive in terms of the impost that it would place on producers.

A standardised reservation policy fails other criteria of good policy formation in that it is retrospective (an impost put in place today would tax economic decisions made in the past — this issue is particularly pertinent to the LNG industry as large-scale investment is needed many years before fields may be developed) and non-transparent (the burden that such a policy would have on the operations of LNG producers is difficult to calculate). These key failings in the design of a standardised reservation policy ultimately mean that such a policy would be highly distortionary and impede the efficient operation of the domestic gas market.

Potentially detrimental

Any requirements to set aside a mandated amount of gas for the domestic market will reduce an LNG project’s rate of return and therefore the imposition of such a policy risks some gas fields being rendered sub-commercial and consequently not being developed.

Even for those very large fields that can more readily support a pre-determined allocation of gas to the domestic market, the implementation of a standardised reservation policy will make it more difficult for projects to achieve their required hurdle rates of return and therefore, a standardised reservation policy may discourage investment into the development of LNG projects in Western Australia. Not only would this have adverse implications for the nation’s LNG industry (and the associated economic benefits that are derived from it) but it would also close avenues for the supply of domestic gas for the State and reduce supply competition, the key factor in maintaining a competitive price environment.

It is important to note that most large offshore gas fields will never be developed to supply the domestic gas market alone, as large economies of scale are needed to underwrite the offshore infrastructure of an LNG project. Once a field has been developed for the export market, incremental domestic contracts can enhance the economies of scale already developed.

A standardised reservation policy is also likely to have adverse implications for the State’s exploration industry. The setting aside of volumes of gas for the domestic market from gas fields being developed as LNG projects will create a supply overhang that not only impacts negatively on LNG project economics, but also will act as a disincentive to the development of smaller gas resources which require a modest increase in gas prices to achieve commercial viability. It will discourage exploration that is targeted solely at the domestic market.


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If some large scale LNG developments are rendered uneconomic and/or there is a reduction in exploration there will ultimately be a reduction in supply-competition. Prices will rise as a result, as a function of what the market is prepared to pay until such time as the supply base increases to the point where supply competition acts to limit further price increases.

A preferred alternative

It is the view of BHP Billiton that there is no need for any Government intervention in the domestic gas market and that any form of intervention will distort the market in a negative way.

However, if the State Government maintains the contrary view that continued intervention in the market is necessary then BHP Billiton believes that the Government should rely on the use of individually negotiated agreements rather than a standard dedication or quarantine of reserves. Negotiated agreements should apply specifically to the project for which they are negotiated and should represent a balance of interests between the proponents of the project and the State. These agreements can encompass a range of provisions and if appropriate one such provision may be some form of domestic gas reservation.

The objective of such negotiated agreements should be the creation of a framework which allows for outcomes that:

• are equitable between LNG producers as they can take account of project-specific factors;

• are flexible in that they can take into account the needs and objectives of both parties; and

• do not compromise the development of specific LNG projects.


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Chapter 1

BHP Billiton in Western Australia

1.1 BHP Billiton

With over 20 per cent of its global assets located in Western Australia, BHP Billiton has a keen interest in the growth and development of the State.

BHP Billiton is one of the world’s largest diversified resources companies and it is one which has long had a substantial presence in the mineral-rich state of Western Australia. Since the commencement of iron ore mining in the Pilbara in the 1960s, BHP Billiton has worked constructively with successive Governments in Western Australia to secure outcomes that are in the interests of both the company itself and the State.

Today BHP Billiton employs around 10 000 Western Australians across a number of different industry sectors, including:

• iron ore — each year, BHP Billiton’s iron ore operations bring in around $5 billion of export revenue to the State;

• nickel — as part of its recent purchase of WMC and the development of the Ravensthorpe nickel project, BHP Billiton recently moved its global nickel headquarters from London to Perth; and

• aluminium — BHP Billiton is the majority owner of the Worsley alumina refinery in the State’s south west region.

As an operator of the above business units, BHP Billiton has demand of around 150 terajoules of gas per day (equivalent to 16 per cent of the State’s total domestic gas market) making it the State’s second largest domestic gas buyer. Expansion projects, in the operations of each of the above business units, currently in Feasibility will deliver increased economic returns to the State and see the company’s demand for gas rise over time.1

In addition to the above business units — which are all consumers of gas — BHP Billiton has significant business interests in petroleum resources located off the coast of Western Australia. In terms of gas, BHP Billiton has involvement in two currently operational projects:

• North West Shelf — BHP Billiton is a partner of the North West Shelf Joint Venture which currently supplies gas to both domestic and export markets; and

• Griffin — BHP Billiton has a 45 per cent stake in the Griffin oil and gas project which is located in the Carnarvon Basin and sells gas into the domestic market.

1 BHP Billiton’s current commitments to the expansion of Western Australian operations include the Iron Ore

Rapid Growth Projects 2 and 3 in the Pilbara, the ongoing construction of the Ravensthorpe Nickel Project and the expansion of the Worsley refinery in the State’s south west region. See ABARE 2005, Australian Energy; national and state projections to 2029-30, October, attachment pages.


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BHP Billiton is also a significant owner of undeveloped gas resources located predominantly in Commonwealth waters offshore from the Western Australian coast, and is currently involved with two potential LNG projects; Pilbara LNG (Scarborough) and the Browse Project. The company also has ownership in substantial offshore acreage which has been earmarked for exploration with a significant work programme commitment.

1.2 A balanced perspective

The future growth of BHP Billiton in Western Australia is inextricably linked to the prosperity of the State and its amenability as a place to do business. BHP Billiton values the relationship that it has built up with the Western Australian Government over many years of operating as a major resources company in the State and is keen to work with the Government on the issue of ensuring that the State has access to sufficient quantities of competitively-priced gas.

The company has been a participant in the North West Shelf State Agreement (Woodside) Act 1979 as well as other State Agreements such as the Goldfields Gas Pipeline Act 1994 and a range of iron ore-related agreements signed since the 1960s.

BHP Billiton is in the unique position of being a significant consumer of gas in Western Australia, a seller of gas into the domestic market, a seller of gas into the international LNG market and an owner of significant undeveloped gas resources. This Submission has been prepared to reflect the combined interests of the BHP Billiton Group as well as the interests of the State as whole.


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Chapter 2

The Government’s position

2.1 Introduction

In its recently released Consultation Paper on Securing Domestic Gas Supplies, the Department of Industry and Resources puts forward a number of policy mechanisms that it suggests could be used to ensure that a sufficient quantity of the gas reserves located in waters off the coast of Western Australia are reserved for consumption in the State.

The main policy mechanisms proposed by the Department are centred on the application of requirements on LNG producers to set aside a certain portion of the gas fields proposed for development via an LNG project for the domestic market.

According to the Consultation Paper, the policy of domestic gas reservations is considered necessary to:

• satisfy the State’s forecast levels of gas demand over the period 2005 to 2020 (and possibly beyond); and

• maintain current gas pricing outcomes whereby domestic gas prices are ‘significantly less than average world prices’.

2.2 Background

The policy approaches proposed by the Department are not a completely new concept in terms of the State’s energy policy. Agreements between LNG producers and the State Government have been reached in respect of the development of both the North West Shelf and the Gorgon gas fields and in each of these Agreements, the State Government has been able to secure reserves of gas that are to be sold into the domestic market subject to agreement upon commercial terms and conditions.

These agreements are negotiated bilateral outcomes and have been effective in serving the interests of both the producer and the Government. Much of the gas that currently supplies the domestic market is attributable to agreements which have been reached between Woodside (as operator of the North West Shelf Joint Venture in which BHP Billiton is a participant) and the Western Australian Government.

The key difference between arrangements that have been used to date — that is the reaching of negotiated outcomes — and the policy approach put forward by the Department is that the latter offers significantly less flexibility to both parties. A standard reservation policy that applies to all gas fields proposed for development via LNG projects cannot by definition satisfy the different requirements that are encountered by LNG producers in the development of different gas fields. Nor does such a policy give much flexibility to the Government should its objectives change over time.


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2.3 Overview of this Submission

As both a significant gas consumer and gas producer in Western Australia, BHP Billiton sees merit in the notion of ensuring that there is an adequate supply of competitively-priced energy into the State. However, it is the considered view of BHP Billiton that proposals recently put forward in the Department’s Consultation Paper are unnecessary given the current characteristics of the State’s domestic gas market.

Even if some form of policy response was considered necessary, a position that BHPB Billiton does not support, then it is the strong view of BHP Billiton that those measures put forward in the Consultation Paper are far from appropriate. As is explained in this Submission, the policy approaches have the potential to be counter-productive in terms of meeting the objectives for which they have been designed and therefore may actually be detrimental to the State as a whole.

This Submission seeks to identify some of the basic misconceptions which have led to the Government’s current policy proposal. The paper then goes on to suggest some of the adverse implications that may arise were any of the suggested policy mechanisms implemented. It is the view of BHP Billiton that these implications have to date not yet been fully considered by Government (or at least they were not discussed in the Consultation Paper). The final chapter of this Submission suggests alternative ways in which the State Government may achieve its policy objectives should it still believe, contrary to BHP Billiton’s view, that some form of policy intervention is necessary.


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Chapter 3

Challenging the misconceptions

3.1 Introduction

Access to a supply of competitively-priced energy is essential to the basic functioning and international competitiveness of industries in economies the world over. In the energy-intensive Western Australian economy, this rule holds to an even greater degree than normal.

However, much of the premise regarding the urgency of the need to secure domestic gas, as put forward in the Consultation Paper, appears to be based on some basic misconceptions of the workings of the gas industry. As a player in the domestic and international gas market, BHP Billiton can offer some insights into the workings of the different markets and the current supply and demand situation facing Western Australia.

This chapter challenges some of the basic misconceptions put forward in the recently released Consultation Paper. The challenging of these misconceptions is not designed to disregard the Government’s position — as stated earlier, BHP Billiton is sympathetic to the aims of Government on this issue — but instead the aim of this chapter is to present a series of facts that may shed light on the actual size of the perceived gas supply issue and the urgency with which Government policy action may (or may not) be needed.

Effective Government policy action can only be taken once the issue is properly defined and understood. Failure to understand the true nature of the issue risks the implementation of a heavy-handed policy response that would ultimately be detrimental to the Western Australian economy.

3.2 Supply and demand of domestic gas

The notion of the need for domestic gas reservations is premised on an assessment made in the Consultation Paper that over the period 2005 to 2020, Western Australia faces a supply shortfall of domestic gas that is in the order of 2 trillion cubic feet. The estimated shortage is based on a number of questionable assumptions (in both an application and methodological sense) and these questionable assumptions tend to over-inflate the size of the estimated shortfall.

Misconception 1 — Western Australia is facing a potential gas supply shortage

In terms of the calculations that are used to underpin the analysis in the Consultation Paper, the following issues are raised as areas of concern:


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• The calculations underpinning the estimation of Western Australia’s gas shortage are based on expectations that the demand for gas will grow by 4 per cent per annum over the period 2005 to 2020; above the average for the last 10 years of 3.4%2. No explanation is provided as to how this growth rate is derived. The 4 per cent growth rate is considerably higher than that put forward by ABARE in its recent publication, Australian Energy; national and state projections to 2029-30. Using detailed modelling and analysis, ABARE derives an annual average growth rate for Western Australian gas consumption of 2.9 per cent.3

• By applying ABARE projections to current levels of Western Australian gas demand, an aggregate level of demand for the period 2005 to 2020 of 5.8 trillion cubic feet is derived. This estimate is 0.4 trillion cubic feet lower than demand estimate of 6.2 trillion cubic feet that derived in the Consultation Paper.

• The Consultation Paper identifies that the majority of this demand to 2020 will be met from existing sources namely, 2.6 trillion cubic feet from the NWS; 1.1 trillion cubic feet from other domestic contracts already in place and 0.5 trillion cubic feet from currently uncontracted domestic gas reserves, leaving between 1.6 to 2.0 trillion cubic feet of gas to be sourced elsewhere. However, as the Consultation Paper points out even in the event that all the LNG projects currently under consideration go ahead, and that all gas reserves associated with those LNG projects are dedicated to LNG (an unlikely outcome as discussed in Chapter 3.3), there is still 15 trillion cubic feet of identified gas reserves available to supply the projected domestic gas requirements.

• There is not, as the Consultation Paper indicates, a shortage of gas to supply the domestic market, rather there is a gap between demand and firmly contracted supply, a gap that will erode as the market adjusts and new supply contracts are entered into, and a new equilibrium point is established between supply and demand.

While the existing reserves base is more than sufficient to satisfy the forecast domestic demand to 2020, the volume of existing reserves considerably understates the volume of gas which has the potential to be available to the domestic market:

North West Shelf gas

The analysis used in the Consultation Paper assumes that the North West Shelf will not supply any domestic gas that is in addition to its current reservation. The reality is that the North West Shelf is already contracted to supply domestic gas volumes that significantly exceed its reservation and in all likelihood will continue to do so, as supplying increased volumes of gas to the domestic market provides accelerated revenues relative to selling the gas as LNG at the end of existing contracts, as well as increased production of high value condensate liquids. In fact the North West Shelf is currently expanding its domestic gas plant such that by the end of 2006 it will be capable of providing an additional capacity of around 100 terajoules per day to the domestic market.

2 ABARE Energy Data, http://www.abareconomics.com/data_services/energy.html, Accessed 20 April 2006.

3 ABARE 2005, Australian Energy; national and state projections to 2029-30, October, pp. 32 and 64 and

ABARE Energy Data, http://www.abareconomics.com/data_services/energy.html, Accessed 23 March 2006.


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Known and unknown gas reserves

Another key weakness of the analysis put forward in the Consultation Paper is the assumption made that between now and 2020 (and even beyond) there will be no new domestic gas fields either developed or discovered for supply into the domestic market. Such an assumption is not consistent with the recent history of gas discoveries off the coast of Western Australia.

As part of ongoing assessments of conditions in the exploration industry, BHP Billiton has prepared the following information:

• Total gas reserves discovered off Western Australia currently stand at around 133 trillion cubic feet of which only half was discovered in the initial exploration phase prior to 1980 when exploration was targeting primarily oil and not gas.

• Between 1994 and 2003, approximately 50 trillion cubic feet of gas was discovered off the coast of Western Australia — this equates to an effective annual rate of discovery of around 6 trillion cubic feet per annum.

• In the last three years, discovery rates have averaged around 4 trillion cubic feet per annum; the new fields discovered during this period include Wheatstone, Pluto and Caldita.

• Gas focussed exploration, underpinned by confidence that gas prices will be set by the interacting forces of supply and demand and that they will be sustainable over the investment timeframe, has been increasing and is virtually certain to lead to the discovery of significant new gas resources in coming years. The threat of a physical supply overhang arising from reservation or quarantining of large volumes of gas from prospective LNG projects, however, will act as a disincentive to exploration and may lead to a reduction in the discovery rate.

Looking forward, it is highly probable that known gas reserves, which will be available to the domestic market, will increase over time for a number of reasons:

• Expansions of currently operational domestic fields — according to the Consultation Paper there are at least six dedicated domestic gas production complexes currently in operation off the coast of Western Australia — Harriet, East Spar, Dongara, Woodada, Beharra Springs and John Brookes. It is common within the gas industry for estimations of the reserves of known fields to increase over time due to a number of factors:

– improvements in extraction technology over the life of a project may allow for a greater volume of gas to be extracted than initially expected;

– improvements in technology in general may allow previously uneconomic gas to be extracted in an economic manner; and

– near-field exploration around the site may identify previously unknown reserves — a case in point here is the fact that the owners of the Dongara field have in place a continuous drilling program and in 2005, six drills were made in the gas field of which five were successful in finding additional resources.4

4 Department of Industry and Resources 2005, Western Australian Oil and Gas Review 2005, p. 37.


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• The development of known fields that are not yet operational — there are several known gas fields off the coast of Western Australia which are well-suited to the supply of gas to the domestic market. For example, since the discovery of the Macedon field (which contains around 0.76 trillion cubic feet of gas reserves), BHP Billiton has made continued efforts to market the gas to domestic gas consumers, but to date, prevailing market conditions (prices and the forward contracted position) have not been conducive to its development. BHP Billiton is of the view that the necessary price environment in which to commercialise Macedon is approaching particularly given that domestic gas buyers are becoming increasingly aware of the fact that new gas fields will soon be needed to augment existing supply sources.5

• The commencement of new LNG projects — there is a current suite of LNG projects off the coast of Western Australia that are likely to be developed in the short to medium term. Potential gas fields which are considered likely to be developed as LNG in coming years include Greater Gorgon, Scarborough, Pluto, Brecknock/Scott Reef and Icthys. There are likely to be commercial opportunities for supply to domestic customers associated with the development of these gas resources, as the LNG producers seek to accelerate revenues and achieve a balance of market diversification.

• The discovery of new gas fields — the Australian Bureau of Statistics estimates that in recent years, the petroleum industry has spent close to $600 million per year on exploration in Western Australia. Based on national aggregates, it is expected that around 80 per cent of the total exploration expenditure is greenfields exploration; that is, around $480 million has been spent each year looking for new oil and gas reserves off the coast of Western Australia.6 Given the level of exploration expenditure being undertaken in the region, it is almost certain that new gas fields will be found and developed over the period 2005 to 2020. Based on work undertaken by the US Geological Survey on quantifying the rate of gas discoveries (including reserves growth) that are yet to be made ABARE estimates that ultimate or eventual reserves off the coast of Western Australia are likely to be closer to 166 trillion cubic feet.7

In summary

There is not a shortage of gas to supply the domestic market, rather there is a gap between demand and firmly contracted supply, a gap that will be eroded as the market adjusts and new supply contracts are entered into. The existing reserves base and the significant potential for the discovery and development of new reserves will be more than sufficient to meet forecast gas demand.

5 There are a number of other fields which are similarly suited to selling into the domestic market. Another

example is the Whicher Range field located south of Busselton. The field is 65 kilometres from the DBNGP and is close to the growing mineral processing industry in the south-west of the State. The gas quality is well-suited to domestic consumption (see Department of Industry and Resources 2005, Oil and Gas Review 2005, pp. 74-75).

6 Australian Bureau of Statistics 2006, Mineral and Petroleum Exploration, December quarter, cat. no. 8412.0,

p. 13. 7 ABARE 2005, Australian Energy; national and state projections to 2029-30, October, pp. 39-40.


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3.3 LNG projects and domestic (Western Australian) gas sales

There are numerous instances where the Consultation Paper asserts the notion that in the absence of reservations, LNG producers will not sell gas into the domestic

s equivalent (or higher) LNG netback prices can be achieved. Such a statement is incorrect and appears to be based on a simplified assessment of the mechanics of the LNG industry, failing to take into account the fact that the basis for investment decisions will change over time as a function of whether the initial investment in the LNG project has been made, and the degree to which there is capacity available to service the domestic market.

market unles

Misconception 2 — in the absence of a gas reservation, LNG projects will not sell gas into the WA market

In reality, there are several reasons as to why LNG producers would (and currently do) sell gas into the domestic market despite there being a differential between international and domestic prices.8

Accelerated returns

LNG projects require substantial upfront capital expenditure and margins are generally tight as the industry is highly competitive on a global scale. For these reasons, the payback period for LNG projects is long, such that in most cases projects only deliver positive returns after a significant period of operation.

It is likely that the scale economies associated with LNG projects would be enhanced, and so returns accelerated, by augmenting these projects with domestic sales of gas. Moreover, as discussed later, domestic gas projects infrastructure requirements are not as onerous as those for LNG projects and so LNG parity prices would not be required for domestic sales.

In assessing the merits of the North West Shelf project selling into the domestic market, a recent report — released by the Department of Industry and Resources — notes that:

The extent to which [North West Shelf] gas is available for new minerals developments in the south west coast region may however be dependent upon the value of gas in the domestic markets relative to its value in export markets (although near-term domestic sales are likely to be attractive in comparison with longer-term LNG sales [emphasis added]).

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Well-established LNG producers also have strong incentives to increase gas production via selling gas into the domestic market as it allows them to increase the production of the high value associated condensate liquids without the high costs and risks of expanding liquefaction infrastructure.

8 While many of the factors outlined below apply to the Western Australian market, they may, for a variety of

reasons, not apply to other interstate markets. 9 Department of Industry and Resources 2004, Energy for Minerals Development in the South West Coast

Region of Western Australia, December, p. 21.


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Risk-adjusted returns

The premise that LNG producers will not sell into the domestic market unless equivalent (or higher) LNG netback prices can be achieved does not take into account risk-adjusted returns. By engaging in near-term sales in the domestic market, producers can avoid the risks and uncertainty associated with leaving any uncontracted gas in the ground in the hope that it can be sold as LNG into an increasingly competitive LNG market at some point in the long-term future. The other option for the producer would be to market and sell the uncontracted gas as LNG but this would, in most cases, involve the undertaking of large-scale capital expenditure for plant expansions which is itself a risky venture. Domestic gas sales are far less capital-intensive, and therefore can be quite an attractive undertaking.

Additionally the domestic market offers a stable and low risk market into which LNG producers can sell and thus it can be very attractive when considered in the context of certain LNG markets which are characterised by much higher political and economic risks.

Once consideration is given to the notion of risk-adjusted returns, then a better understanding of incentive for LNG producers to sell into the domestic market can be gained. Equivalent LNG netback prices are not the only factor driving decisions by LNG producers to sell into the domestic market.

Diversified portfolio

The risk profile of an LNG producer can be optimised when a diversified portfolio of domestic and international assets is managed. In this sense, LNG producers have a strong incentive to sell into the domestic market. By being responsible for sales into international and domestic markets, producers can avoid having all their exposure tied to one market sector.

North West Shelf case study

An understanding of the development of the North West Shelf project illustrates the point that there are numerous reasons as to why LNG producers would, and do sell into the domestic market when not required to despite their being a differential in net prices between the LNG market and the domestic market. The North West Shelf case study also shows that Government imposed domestic gas reservations have not been the sole contributing factor to the successful development of the State’s domestic gas market as implied in the Consultation Paper (see Box 3.1).


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Box 3.1 THE DEVELOPMENT OF THE NORTH WEST SHELF PROJECT

Initial developments In 1977, the North West Shelf Joint Venture signed a Memorandum of Understanding with the State Energy Commission of Western Australia (SECWA) to supply, for onshore use, up to 10.5 million cubic metres of natural gas per day for twenty years. The agreement was the first (international or domestic) gas sale agreement that was signed by the Joint Venture. It was the signing of this agreement that, in many ways, underpinned the development of the North West Shelf and also the development of the domestic gas market. The agreement between the Joint Venture and SECWA did not arise out of any formal Government reservation policy nor was it the result of any legislated requirements for the Joint Venture to sell into the domestic market. From the perspective of the Joint Venture, the signing of the Memorandum of Understanding with SECWA was done on commercial grounds. The agreement provided the Joint Venture with upfront revenues, particularly in respect of condensate production, that improved the economics of the LNG project at a time when the development of the project itself was marginal.* Another key factor in the development of the domestic gas market was the investment by the State Government into the construction of the Dampier to Bunbury Natural Gas Pipeline. The construction of the pipeline infrastructure allowed for the transport of gas from Dampier (the onshore receiving point of North West Shelf Gas) to the domestic market which is primarily located in the south west region of Western Australia. The construction of the pipeline at a time when the domestic gas market was in its infancy was pivotal in the development of the market and in particular the selling of North West Shelf gas into the market. In return for its investment into gas infrastructure, the State Government was successful in negotiating with the Federal Government for a share of the royalties flowing from North West Shelf production. More recent developments In contrast to earlier versions of agreements between the Joint Venture and the State Government, Schedule 3 of the North West Gas Development (Woodside) Agreement Act 1979 (signed in 1994) does contain provisions for the reservation of gas for the Western Australian market. However, it is important to note that since the signing of Schedule 3, the Joint Venture has attempted, with varying degrees of success, to sell gas over and above its reservation requirement, into the domestic market. In numerous instances, the Joint Venture has secured fully termed contracts to sell gas into the domestic market; potential buyers have included BHP Billiton’s Methanol Plant, Syntroleum, Mineralogy and Methanex. In each of these cases, however, the actual sale of gas has not eventuated due to the failure of the purchasing parties to get their projects off the ground. Despite these developments, the North West Shelf Joint Venture is currently contracted with domestic purchasers to deliver a significant volume of gas in excess of its domestic market reservation. The Venture continues to undertake domestic marketing programs in an effort to secure more sales into the domestic market.

* Evidence of the project being a marginal one in its early years can be seen in Schedule 1 of the North West Gas Development (Woodside) Agreement Act 1979. Clause 5(1) states ‘The Joint Venturers shall continue their studies to enable them to determine whether the overall project is technically and economically viable and shall endeavor to complete such studies by 30th November 1979.’

In summary

It is a fallacy to suggest that in the absence of domestic reservations, LNG producers will not sell into the Western Australian market unless equivalent (or higher) LNG netback prices can be achieved. In reality, there are several reasons as to why LNG producers would sell into the Western Australian market despite their being a differential in prices and this is demonstrated in the case of the North West Shelf project.

3.4 Reservations and the domestic gas market

The proposal to set aside volumes of gas for domestic use appears to rest on an assumption that consumers in the domestic gas market are (or will in the future be) unable to source adequate volumes of gas at prices that are conducive to viable commercial operations. At no point in the Consultation Paper is there any discussion of the current composition of the domestic gas market.

Misconception 3 — domestic gas buyers need reservations to be able to secure adequate levels of gas


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The Western Australian domestic gas market is mainly comprised of a small number of large gas buyers. The five largest domestic gas purchasers in Western Australia — Alcoa, BHP Billiton, Alinta, Western Power (now trading as Verve Energy) and Burrup Fertilisers — account for close to 90 per cent of total gas sales within the State.

Access to adequate volumes of gas is critical to the operations of these five large gas purchasers. Further, each of the five key players are large and well-established entities — they are each sufficiently resourced to identify and secure for themselves the volumes of gas that are (or will in the future be) required for their business operations. Whilst smaller gas consumers may have a lesser negotiating leverage than the major consumers they can generally be assured that a gas supply will be available courtesy of the infrastructure that is in place to service the major consumers.

BHP Billiton, as one of the major gas purchasers, has a keen understanding of its gas requirements for its Western Australian operations over the period 2006 to 2015 with its gas requirements expected to grow to in excess of 200 terajoules of gas per day. At this point in time, the company’s contracted supply of gas is not sufficient to cover its growing demand into the future. In light of this, BHP Billiton is currently in negotiations with gas suppliers — both within the company, for example, the operators of the Macedon gas field, and external to the company — to arrange for its growing levels of gas demand to be met. Given the importance of sufficient quantities of gas being supplied to BHP Billiton’s gas consuming sectors, there is no reason to expect that the company will fail to secure an appropriate volume of gas at prices that are conducive to the commercial success of its business operations.

It is generally the case that other key market players in the Western Australian gas market have significant quantities of their current demand contracted for extended periods of time.

In summary

The State’s large gas consumers have the capabilities to source their own gas needs on commercial terms without the need for Government intervention either at the supply or market end.

3.5 Domestic gas prices

An underlying objective of the reservation policies that are put forward in the Consultation Paper is to maintain the current level of low gas prices in Western Australia as it is considered that the availability of low cost gas has been ‘a major driver of the State’s strong economic growth over the past two decades’. It is useful — from the perspective of assessing the implications of increased domestic gas prices — to think of the consequences of a complete absence of Government intervention in the domestic gas market.

Misconception 4 — higher domestic gas prices would have significant adverse implications for the WA economy

There are strong reasons to expect that, under a completely free market, the prices paid by Western Australian purchasers would actually find ground at some level below global gas prices:


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• Western Australia’s proximity to vast gas reserves means that the costs involved in getting gas to Western Australian consumers is far less than those involved in supplying international customers. Domestic gas operations do not require the large-scale capital investments in liquefaction, storage and harbour facilities that are required for LNG operations. For this reason, LNG producers operating in a completely free market should be willing to sell gas to the domestic market at prices that are lower than current world prices.

• As has been discussed, the sale of gas into the domestic market provides LNG producers with a number of benefits such as accelerated returns, low risk revenue streams and a diversified portfolio of assets. For these reasons, LNG producers operating in a completely free market should be willing to sell into the domestic market at prices that are below world LNG prices.

• Moreover, if the State adopts policies that rely on market forces to meet its supply needs, new sources of supply will be brought forward which, in turn, will serve to limit price increases through gas-on-gas competition.

The domestic gas market on Australia’s eastern states is a noteworthy example of the way the market will react without any form of Government intervention in the marketplace. Gas prices have been allowed to rise in a free market with the consequence that there has been increased supply-competition which in turn has acted to put a ceiling on prices at a level well below international price levels (approximately A$3.00/GJ). A marketplace which has minimal supply competition will necessarily see prices rise to a higher level.

The continuation of domestic gas prices lower than world prices, as would be the outcome of encouraging supply competition, would ensure that Western Australia’s gas consumers are at no disadvantage relative their international competitors.

In summary

Were there to be no government intervention in the domestic gas market, domestic gas consumers in Western Australia would still be paying prices that are below global gas prices; an outcome which would maintain the State’s current competitive position.

3.6 Conclusions

This chapter has challenged some of the basic misconceptions which are presented in the Consultation Paper, specifically it has shown that:

• The gas supply shortage as presented in the Consultation Paper does not exist — there is simply a gap between demand and firmly contracted supply. Existing reserves are more than sufficient to satisfy the identified gap, with the significant potential for the discovery and development of further gas resources, off the coast of Western Australia, meaning that the possibility of a gas shortage in Western Australia in the future is remote.

• LNG producers have a number of incentives to sell gas into the domestic market — the domestic market offers producers a low risk means to obtain accelerated revenues and manage a diversified portfolio of assets. The North West Shelf project has in the past, and continues to this day, to sell gas to the domestic market out of its own commercial interests.


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• Domestic gas purchasers are sufficiently well-resourced to access their required volumes of gas without Government intervention in the market — the five largest gas consumers in Western Australia account for close to 90 per cent of the market. These consumers have very strong commercial interests in securing adequate levels of gas and are sufficiently well-resourced to be able to do so independently of government.

• Higher domestic gas prices in Western Australia would not result in the State being at a net competitive disadvantage — a complete absence of government intervention in the domestic gas market may see domestic gas prices rise as a function of the interacting forces of supply and demand. However, prices would not rise above world prices and there are many reasons to suggest that they would be constrained to a level that is below world prices.

This chapter has found that the Government’s view on the emergence of a gas supply problem and its potential implications is based on some basic misconceptions which each tend to over-inflate the need for government policy intervention.


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Chapter 4

The proposed domestic gas reservation policy and its implications

4.1 Introduction

The domestic gas reservation policy approaches that are put forward in the Consultation Paper are each variations on a ‘one size fits all’ approach to reservations. Effectively they all involve the setting aside of a standard volume or proportion of gas irrespective of the nature and characteristics of different gas fields. The ‘one size fits all’ policy approach is indicative of policy formulation that is somewhat simplistic and ignores commercial realities. A standardised reservation policy actually has the potential to be counter-productive in terms of achieving the objectives for which it has been designed and it may therefore be detrimental to the Western Australian economy.

4.2 LNG in Western Australia

The LNG industry is a significant contributor to both the State and national economies. In 2004-05, the Western Australian LNG industry generated around $3.2 billion in export revenue10 and some commentators have forecast that by 2015 LNG will be Australia’s second most valuable commodity export, behind coal, worth around $15 billion per year.11

In Western Australia, the LNG industry directly employs around 2000 people and this is expected to grow to close to 10 000 by 2015.12 Speaking in 2004 on the oil and gas industry in Western Australia, the then Premier, Dr Geoff Gallop stated:

The continued development of Western Australia’s oil and gas sector is a key driver of strong economic growth in this State. It has injected millions of dollars in the form of royalties back into Western Australia and has strongly contributed to the creation of new business opportunities and new jobs.

13

In addition to direct economic contributions to the State, the industry has successfully built strong business partnerships with foreign investors. In a relatively short space of time the Western Australian LNG industry has become known as a world-class supplier of gas and consequently this has reflected well on general perceptions of Western Australia as a place to do business.

10

ABARE 2006, Australian Commodities, 06.1 March quarter, p. 93. 11

N. Wilson 2006, ‘LNG to be second-biggest earner’, The Australian, 20 January, p. 17. 12

Minerals Institute of Western Australia 2005, The Western Australian Resources Sector: People and Skill Requirements in 2015, September, p. 9.

13 Hon. Dr Geoff Gallop 2004, ‘Opening of the Gas Australasia Pacific 2004 Conference’, Presentation to

Australasia Pacific 2004 Conference, Perth.


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Industry characteristics

The LNG industry is truly global. While Western Australia’s LNG industry is significant in its own right, it must be considered that the State’s LNG production accounts for only 7 per cent of total world LNG production14 and Australia as a whole only has around 1.6 per cent of global natural gas reserves.15 Within this globally competitive context, Australian projects face additional challenges due to the long associated shipping distances and the high cost of labour. Figure 4.1 depicts global LNG and natural gas trade movements and highlights the fact that Australia is one player in a highly competitive global market.

Figure 4.1 MAJOR LNG AND NATURAL GAS TRADE MOVEMENTS - 2004

Source: BP, Natural Gas Trade Movements, http://www.bp.com/sectiongenericarticle.do?categoryId=9003070&contentId=7005911

LNG projects involve the investment of significant amounts of capital infrastructure. Capital expenditure requirements for proposed LNG projects in Australia range from US$4 billion to in excess of US$10 billion. The combination of high initial upfront capital costs with tight margins and long-term project horizons (whereby uncertainty is high) means that project returns are often marginal and net pay back periods can span 10 to 20 years.

A recent research report by Cambridge Energy Research Associates (CERA) has highlighted the future growth potential of the LNG industry. However, the report notes that, even in an environment characterised by high demand growth, returns will vary greatly between projects and that there remains significant uncertainty in market fundamentals and business drivers such that not all projects will make commercial returns.16

14

Chamber of Minerals and Energy Western Australia 2004, Bedrock 2004. 15

Energy Information Administration 2003, The Global Liquefied Natural Gas Market: Status & Outlook, December, p. 5.

16 Cambridge Energy Research Associates 2005, LNG Development Question Becomes “How” Rather than

“Whether”, November, http://www.cera.com/news/details/1,,7735,00.html, Accessed 24 March 2006.


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The CERA finding is indicative of the fact that the challenges faced in the development of LNG fields are different for different fields. LNG projects face many variables that influence the returns that can be derived from them.

4.3 A standardised reservation policy

By requiring LNG producers to reserve a standardised volume or proportion of gas for the domestic market, a standardised reservation policy effectively imposes an impost on LNG producers.

Such an impost may be assessed according to the criteria of good taxation policy because in effect the impost is a form of taxation on producers (though in this case no revenue is accrued by the Government). Such an impost fails key criteria of good taxation policy in that it is retrospective, non-progressive and non-transparent:

• Retrospective — many potential LNG producers have already invested heavily into the exploration and appraisal of yet to be developed gas fields. All investments made to date have been on the premise that gas producers are free to market the gas purely on commercial considerations without government intervention or restriction. A standardised reservation policy has the potential to reduce the value of gas fields. Past investment decisions may be rendered uneconomic in light of a revised (lower) asset value.

• Non-progressive — a ‘one size fits all’ reservation policy bears no relationship to the ability of producers to absorb the impost. Good taxation policy is progressive in that entities with a greater ability to pay taxes share a greater proportion of the tax burden than those entities with less of an ability to pay — in this way some form of vertical equity is maintained. A ‘one size fits all’ reservation policy is not linked to an ability to pay and therefore has the potential to be highly inequitable between different LNG producers.

• Non-transparent — the Petroleum Resource Rent Tax (PRRT) is a good example of a transparent tax in that it is defined as a fixed percentage of profits. Under such an arrangement, petroleum producers are able to assess the impact that the PRRT will have on their operations and are therefore able to make fully-informed investment decisions. Such an outcome does not hold for a standardised reservation policy as producers cannot easily determine when they will get returns and what returns they will get from sales into the domestic market (there is no single domestic market gas price) thus investment decisions will be made in the absence of fully-informed participants.

4.4 Implications of a standardised reservation policy

A standardised domestic gas reservation policy has the potential to be damaging to the commercial viability of LNG projects and as result may bring about serious adverse implications for the State. If the viability of LNG projects is compromised then the policy may actually be counter-productive in terms of securing gas supply for the State.

Implications of a standardised reservation policy on the State’s LNG industry

The imposition of a standardised domestic gas reservation policy would not bring about equitable outcomes for LNG producers. Instead, those developing the more commercially marginal fields will be burdened to a far greater extent than proponents of the larger more viable fields.


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The relative impact of quarantining gas reserves on an LNG project with a finite resource base in a relatively small market is predominantly a function of the size of the gas field. This is because the opportunity cost of the reservation is typically experienced at the end of the field life. As such, any requirements to set aside a mandated amount of gas for the domestic market will, by necessity, reduce an LNG project’s rate of return.

However, no two LNG projects are the same and the actual reserves that are needed for commercial viability are a function of a number of factors including reservoir complexity and depth, gas quality, condensate content, distance from shore, remoteness of onshore plant site, access to existing infrastructure, LNG prices and contract volumes.

The key failings of the policy proposals put forward in the Consultation Paper are that they each are variations on a ‘one size fits all’ theme and therefore lack the necessary flexibility to be able to be designed to take into account the different requirements for the commercial development of different gas fields.

The imposition of a standardised domestic reservation will run the risk of some fields being rendered sub-commercial. While some fields may be able to support a non-negotiable allocation of gas to the domestic market, some of the more marginal or commercially challenging fields can not. Examples of projects that would be particularly exposed to a standardised reservation policy include those based on relatively small volumes of gas (5-10 Tcf), or those whereby the field is situated a long way from shore or in a remote location.

And on the exploration industry

A standardised reservation policy is also likely to have adverse implications for the State’s exploration industry. By setting aside volumes of gas for the domestic market a standardised reservation policy will discourage exploration that is focussed solely on the domestic market. Additionally it will continue to render as sub-commercial those smaller fields which require a modest price increase to be commercial. Exploration activity will focus on the larger prospects which, in the event of success have the potential to be developed via an LNG project; however, by their nature such prospects are not common and are high risk.

A reduction in exploration activity coupled with an additional burden on LNG projects will have negative implications in terms of security of supply and supply competition, and potentially compromises the ability of the State to access its required volumes of gas.

Implications of a standardised reservation policy on the wider economy

If the reservation policy were to hinder the development of gas resources that require an LNG export scale development to be viable, then not only would this have adverse implications for the nation’s LNG industry and the associated economic benefits that are derived from the industry but it would also close off avenues for the incremental supply of domestic gas.

In the event that LNG projects are marginalised and/or gas exploration is reduced, there will be reduced supply-based competition. Prices will rise as a result, as a function of what the market is prepared to pay until such time as the supply base increases when new more costly supply sources find their way into the market.


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Such a scenario is not unique to LNG and has many parallels with policy developments in crude oil (the prime feedstock in petrol) pricing in Australia, see Box 4.1.

Box 4.1 CRUDE OIL PRICING POLICY IN AUSTRALIA

Prior to 1977, the price of crude oil in Australia was set largely independently of the world market. The policy — which was designed to protect Australia from world oil market prices — was underpinned by the rationale that the domestic price of crude oil should be cheap as it could be produced in plentiful supply from the then newly developed Gippsland Basin in Bass Strait. The policy was replaced after it was successfully argued that attempts to artificially hold down the price of Australian crude oil would have a number of adverse impacts. One of the key reasons behind the removal of the policy was that holding down Australian crude oil prices would discourage investment into oil exploration and development thus generating serious long-term consequences about the ability of the nation to supply its own needs. Since 1977, Australia’s crude oil pricing policy has evolved such that today, Australia participates in the world market both as a buyer and a seller of crude oil at world prices.

Source: M. Roarty 2004, ‘Petrol Pricing in Australia: issues and trends’, Current Issues Brief No. 10, 2003-04.

4.5 Conclusions

A standardised domestic gas reservation policy will make it more difficult for LNG projects to reach the hurdle rates that are required for commercialisation. In doing this, the policy risks acting as a disincentive to investment into the development of Australia’s gas resources and this may ultimately compromise the supply of gas to underpin the State’s economic growth.


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Chapter 5

Conclusions

As both a large producer and large consumer of gas in Western Australia, BHP Billiton understands the issues faced by the Western Australian Government in terms of ensuring that the State has access to sufficient quantities of competitively-priced gas. However, in light of its assessment of the scale and scope of the current supply issue facing the State and the potential adverse impacts of a standardised reservation policy, BHP Billiton does not support the main policy approaches put forward in the Government’s recently released Consultation Paper.

5.1 The scope of the gas supply problem

BHP Billiton acknowledges that there is a growing demand for gas within Western Australia and that, at present, there is some future demand that has yet to be filled through supply contracts. However, BHP Billiton does not believe that the current situation is cause for a rapid and broad-based Government intervention in the domestic gas market. There are a number of reasons for this:

• it is highly likely that new gas fields, capable of serving the domestic market will come on stream in coming years thus filling any potential supply shortfall;

• there is much scope for major resource holders to sell to the domestic market through commercial interest;

• major domestic gas consumers are sufficiently well resourced and have strong commercial motives to ensure that they act to secure the gas they will need in the future; and

• the domestic market can ensure that it secures appropriate levels of gas if it is willing to pay commercial prices.

5.2 Shortcomings of a standardised reservation policy

Each of the policy approaches put forward in the Consultation Paper is a variation of a standardised reservation policy which would result in across the board domestic gas reservations placed on all gas resources developed as LNG projects. BHP Billiton does not support these policy approaches as they have the potential to be detrimental to the LNG industry and the State of Western Australia more generally. Any form of standardised reservation policy suffers shortcomings in that it:

• is indicative of poor policy formulation in that they are retrospective, non-progressive and non-transparent;

• cannot be designed to meet the varying needs of LNG producers or the Government;

• has the potential to render some LNG projects as non-commercially viable thus adversely affecting the LNG industry and being detrimental to the economy of Western Australia;


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• has the potential to discourage investment into the development of Western Australian gas reserves and thus may ultimately compromise the ability of the State to meet its own energy needs; and

• may discourage exploration to the detriment of the domestically focussed petroleum industry.

5.3 Relative benefits of flexible negotiated outcomes

As noted at the outset of this Chapter, Government intervention in the domestic gas market is unnecessary. However, if contrary to BHP Billiton’s position, the State Government maintains a view that continued intervention in the market is necessary then BHP Billiton would prefer to see the continued use of flexible negotiated agreements, which represent a balance of interests rather than the implementation of a standardised reservation policy.

The use of flexible negotiated agreements allows for outcomes that:

• are equitable between LNG producers as they can take account of project-specific factors;

• can take into account the needs and objectives of both parties; and

• can avoid regressive outcomes that would compromise the development of LNG projects and discourage investment into the development in exploration from new resources.

5.4 Alternative roles for government

It is the view of BHP Billiton that that there is no role for government intervention in the domestic gas market (except in instances of market failure) and that an open and free market will have a much greater probability of achieving lower gas prices for the State.

Demand aggregation

The Consultation Paper indicates that government intervention in the Western Australian gas market as a “demand aggregator” may be an alterative or complementary intervention to the use of gas reservations for the purposes of facilitating investment in infrastructure necessary to support the supply of gas to the domestic market.

It is suggested that if this option for government intervention is to be further considered, then a number of matters should be taken into account.

Firstly, the Western Australian gas market is characterised by a degree of concentration on the buying side — close to 90 per cent of total gas sales go to five customers. The large size of these customers means that each customer in its own right would be in a position to take action to ensure the future reliability of its gas supply including, where necessary, contracting in such a manner to support any necessary investment in infrastructure.


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Secondly, demand aggregation already occurs in the Western Australian gas market through the activity of retail gas companies — particularly Alinta, but also other more recent entrants to the market such as AGL and Origin Energy. Demand aggregation is the raison d’être of retail businesses. A decision on whether the Government should intervene in the gas market as, in effect, an additional retail business would need to take into account whether there is any market failure in the activities of the existing retail businesses.

Thirdly, there are potential improvements that can be made to gas markets in Western Australia that should receive attention before attention is turned to direct government intervention. In particular, effective wholesale markets for gas and for pipeline capacity are currently absent in Western Australia. Such markets not only facilitate the efficient use of gas supply infrastructure but also provide important signals to potential investors in infrastructure as to the value and returns to investment. The development of wholesale markets is a matter currently receiving attention by the Ministerial Council on Energy.17

Facilitation/Provision of infrastructure

The supply of gas to customers in Western Australia is currently constrained by the capacity of the Dampier to Bunbury Natural Gas Pipeline and by the rate at which the pipeline can be expanded.18

It is notable that the Western Australian Government has intervened in the gas market for the purposes of facilitating investment in the pipeline by providing a stamp-duty exemption to the change in ownership of the pipeline in 2004, conditional upon investment occurring in pipeline expansion.

BHP Billiton does not have any objections to the State Government playing a role in further facilitating the provision of domestic gas infrastructure should it consider such a role as being effective in meeting its domestic gas market objectives.

The Government could also consider the importance of the gas specification requirements of the Dampier to Bunbury Natural Gas Pipeline in terms of the objective of ensuring an adequate supply of gas into the State. Recent changes to specification requirements are not sufficient to allow gas from either the Macedon or Scarborough gas fields to enter the pipeline without first being ‘spiked’ with LPG to marginally increase the heating value of the gas from 36.68MJ/m3 and 36.36MJ/m3 respectively to the minimum requirement of 37.0MJ/m3. Such requirements can create a strong disincentive to supply the domestic market, and may be an unnecessary constraint on expanding the supply base.

17

For example, see Ministerial Council on Energy 2005, Options for the Development of the Australian Wholesale Gas Market, June.

18 A recent review of energy requirements for minerals development in south west Western Australia put forward

a number of recommendations aimed at ensuring adequate volumes of gas supply at competitive prices. The first recommendation was that of a need to address capacity constraints in the Dampier to Bunbury Natural Gas Pipeline. Two other key recommendations were made in respect of energy derived from gas yet the report does not identify any need to implement a standardised domestic gas reservation policy. To the contrary, the State Agreement approach used in the case of Gorgon was described as ‘a useful precedent for future developments’. See Department of Industry and Resources 2004, Energy for Minerals Development in the South West Coast Region of Western Australia, December, pp. 222-223


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State Energy Policy

BHP Billiton supports the views put forward in the Consultation Paper that policy decisions in relation to gas should preferably be taken in the context of a broader State Energy Policy which includes all components of energy. In short, an Energy Policy would allow the development of a coherent and consistent policy framework that would deliver superior outcomes for the State than any ad hoc approaches.

BHP Billiton strongly disagrees with the view put forward in the Consultation Paper that there is an immediate or pressing need for policy action which necessitates the implementation of a quick fix gas reservation policy rather than the development of a State Energy Policy. It has been well established in this Submission that there is no requirement for Government intervention in the domestic gas market in the near term and thus there is adequate time for the development of a comprehensive State Energy policy.

BHPB Gas Reservation Submission Final April 21

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