The DomGas Alliance says that the state continues to experience a serious gas shortage, and that current and prospective gas users are unable to secure long term gas supplies in substantial quantity.

The Alliance was formed in response to concerns about the continued availability and competitiveness of gas supply to the WA domestic market. Alliance members, including key WA retailers such as Alinta and Alcoa, represent over 80 per cent of the WA’s domestic gas consumption and gas transmission capacity, including smaller industrial and household users of gas.

WA gas prices have almost tripled over the past 12 months, and prices reported for recent sales are now more than double delivered prices in the eastern states, according to DomGas.

The Alliance has said that it understands a major gas producer is now demanding prices equating to a 600 per cent increase in historical prices, and it expects that demand for natural gas will only continue to grow.

The Energy Retailers Association of Australia has said that while it is not part of DomGas and nor does it endorse its position, the Association would certainly concur that the availability of gas to retailers needs to be ensured if there is to be a healthy domestic market across the country.

An analysis commissioned by the DomGas Alliance found WA will require around 900 TJ/day of gas in the next 6 years to meet new and replacement demand. This is equivalent to the size of the existing domestic market.

The analysis, by Economics Consulting Services, identified $23 billion in development projects in WA seeking natural gas for expansion or new developments. These comprise eight iron ore and nine other developments including alumina, nickel, molybdenum, vanadium, gold and ammonia projects.

Furthermore, the continued focus of producers on LNG exports raises significant greenhouse risks for the state, says the Alliance, and the inability to secure gas is forcing industry and electricity generation to switch to coal for energy requirements, introducing long term implications for the state’s greenhouse footprint.

DomGas Chairman Stuart Hohnen has urged the Federal and State governments to take action, and recommended that producers reserve a proportion of gas for the domestic market and/or limit the proportion of gas that could be sold to the domestic gas market under joint marketing arrangements.

The Alliance’s recommendation reflects the WA domestic gas reservation policy, introduced by Premier Alan Carpenter last October, under which offshore developers are required to set aside 15 per cent of available gas for domestic use.

However, Federal Resources Minister Ian Macfarlane believes the reservation policy serves only to discourage the development of new fields by making it harder for multinational resource companies, who may decide to take their development projects elsewhere.

Instead, Mr Macfarlane says the Federal government will continue to apply a “use it or lose it” approach to gas retention leases. Every five years companies holding a retention lease must either apply to renew the lease, convert it into a production lease, or surrender the lease completely. In order to be able to renew the retention lease, companies must be able to prove that petroleum production from the lease is not currently commercially viable.

WA’s Economic Regulation Authority also found through their discussion paper Gas Issues in Western Australia that WA was likely to encounter problems in the supply of gas at various periods over the next five to seven years.

ERA Chairman Lyndon Rowe believes that one of the main causes of the probable shortfall is the suppression of price signals, leading to a lack of targeted exploration for potential gas fields that would supply the domestic market.

Another contributing factor that Mr Rowe highlighted was the 20 year “take or pay” contract which played a major part in the development of the North West Shelf project, which WA domestic gas supplies are currently almost completely reliant upon.

When it originated in the mid-1980s, the contract had a domestic gas price comparable to the expected LNG netback price, but by 2005 the LNG netback price was three times the domestic price.

“The incentive provided by such a price differential leads to a focus on large offshore fields suitable for LNG export,” Mr Rowe said.

“Similarly the domestic gas price, at least until recently, has not provided the incentive for exploration for potential domestic gas fields or for coal seam methane.”

The competition between domestic and export gas supplies was highlighted recently when Santos was awarded two new contracts to supply West Australian mining projects with gas at more than double the price of domestic gas.

Mr Rowe believes the best way to approach the threatened shortfall in gas supplies is by allowing the price signals to work of their own accord without imposing limits on domestic gas prices, in order to encourage companies to pursue the exploration of new fields and the development of existing fields.

Meanwhile, FEED studies have commenced for Santos and Apache Energy’s Reindeer gas field in the Carnarvon Basin, offshore WA, which is expected to increase the security of gas supply into the domestic market.

The new onshore processing facility will add incremental processing capacity, away from the existing plants at Varanus Island and the North West Shelf.

Santos Managing Director John Ellice-Flint highlighted the positive impacts of bringing a significant new source of gas supply into the rapidly growing WA market.

“The booming minerals industry in WA has given us the confidence to move forward with FEED studies for this project. It is also evident that recent higher gas prices will help to facilitate significant investments in long term gas supply for WA such as that proposed for the Reindeer project,” he said.

In early October, Santos and Apache began to invite bids from major domestic gas customers for gas supply from the Reindeer development.

The proposed production capacity is approximately 110 TJ/d of sales gas with first gas targeted for mid-2010.