A report commissioned by the DomGas Alliance on the gas situation found the state to be in a gas supply crisis, with current gas users and project developers being unable to secure new supplies of gas.

DomGas Chairman Stuart Hohnen 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 report, which was prepared by Synergies Economic Consulting, found that WA has the highest energy dependence on natural gas that any other Australian state with natural gas accounting for 51 per cent of WA’s primary energy needs.

The DomGas Alliance was formed in response to concerns about the continued availability and competitiveness of gas supply to the WA domestic market. Alliance members, which include 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.

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.