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Focus: Energy – December 2006

Securing domestic gas supplies to WA

In brief: On 12 October 2006 the Western Australian Government released its domestic gas supply policy statement. To meet the state's long-term energy security and economic development, the WA Government will negotiate with proponents of export LNG projects to obtain a domestic gas supply commitment up to the equivalent of 15 per cent of LNG production from each new LNG project. Partner Gerard Woods(view CV) and Law Graduate Clare McNeill report.

How does it affect you?

  • The WA Government will require up to the equivalent of 15 per cent of LNG production from new projects to be reserved for domestic consumption. This commitment will be made a condition of access to WA land for the location of processing facilities.
  • The WA Government has indicated that it will negotiate on a case-by-case basis with LNG project proponents and will consider alternative market mechanisms that allow LNG project proponents to meet this commitment.
  • The Federal and WA Governments are not in agreement over the new WA domestic gas supply policy. Many of the gas reserves located off the WA coast are within Commonwealth jurisdiction. If projects are developed entirely offshore in Commonwealth waters and do not require access to WA land or waters for processing or other purposes, the WA domestic gas supply policy will not apply.

Existing WA domestic gas market

Western Australia has large proven gas reserves of approximately 120 trillion cubic feet. However, in order to take advantage of increased global demand, much of the reserves will be committed for sale into the export LNG market rather than made available to the domestic market. The WA Government has expressed a concern that, if the majority of the state's gas resources are committed to long-term LNG export contracts, there will not be sufficient gas supplies to meet the future needs of the domestic market.

In the past, the WA Government has been able to secure domestic gas supplies by entering into State Agreements with LNG project proponents which include a compulsory reservation of gas for the domestic market. The State Agreement which facilitated the establishment of the North West Shelf project contains a domestic gas supply commitment, as does the State Agreement which will govern the proposed Gorgon project.

The WA Government considers that the volume of reservation under existing State Agreements will not be sufficient to meet the state's future domestic gas needs. Accordingly, the WA Government has entered into negotiations with proponents of potential new LNG projects to attempt to increase the quantity of gas reserved for domestic consumption.

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Outline of new domestic gas supply policy

The objective of the WA Government's domestic gas supply policy is to secure supply commitments from LNG proponents of up to 15 percent of LNG production from each new LNG project. This objective reflects current estimates of the state's future needs, taking into account estimated gas reserves and forecast LNG production. The 15 per cent target is to be subject to periodic review by the WA Government.

The WA Government has stated it will negotiate with LNG project proponents to secure a domestic gas supply commitment as a condition of access to land in the state for the location of processing facilities. Such negotiations will be conducted on a case-by-case basis, taking into account the different characteristics of each project, such as size, accessibility of resource, potential markets and the appropriate timeframe for delivery.

The WA Government has stated it will remain open to alternative market mechanisms which provide LNG project proponents flexibility in meeting their domestic gas supply commitments. Such mechanisms may include the proponents fulfilling domestic gas commitments from reservoirs other than those used to produce LNG, or by commercial trade arrangements with owners of gas fields particularly suited to domestic gas development. The WA Government has indicated that it plans to apply its policy flexibly in order to avoid damaging the commercial viability of LNG projects. In addition, WA Premier Alan Carpenter is reported to have said that if supplying the local market is commercially unviable, domestic supply obligations could be deferred until such time as supplying the local market becomes viable.

If a State Agreement facilitates the establishment of an LNG project, that agreement will likely contain the 15 per cent domestic gas supply commitment. Other mechanisms will be used to implement domestic gas supply commitments in situations where LNG projects are not established under a State Agreement. For example, a domestic gas supply obligation could be imposed as a condition of a production licence.

Despite the WA Government's willingness to intervene to secure domestic gas supplies, it has indicated that it will not interfere with the pricing of such gas supplies. The price of gas sold into the domestic market will continue to be determined through commercial negotiations between gas producers and consumers.

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Future directions

The Federal Government has indicated that it is not in agreement with the WA Government's domestic gas supply policy. Many of the gas reserves located off the WA coast are within Commonwealth jurisdiction. If such projects are developed entirely offshore in Commonwealth waters and do not require access to WA land or waters for processing or other purposes, the WA domestic gas supply policy will not apply. It remains to be seen whether a cooperative approach between the Federal and WA governments can be reached to avoid inconsistency in domestic gas reservation requirements applying to projects on separate sides of the commonwealth/state boundary.

The Ministerial Council on Energy comprising all state and federal energy ministers released a communiqué on 27 October 2006 outlining its agreement to participate in a joint working group with the Council on Minerals and Petroleum Resources to examine how domestic gas demand can be met in light of rising global demand for LNG and the accelerated development of LNG projects.

The joint working group will specifically address the issue of balancing the development of resources for export with the supply of domestic gas for Australia's long-term needs. The WA Government has indicated its support for this national initiative and the objective of achieving a consistent national approach to Australia's long-term security of domestic gas supply.

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