The Gorgon deal that could up the stakes on WA’s looming gas shortage

Gas producers and consumers are furiously lobbying the WA government on whether it should allow onshore gas to be exported to handle a shortage predicted over the next ten years, but no one is talking about a real risk that the state’s biggest supplier could leave the market a few years later.

Because of a deal struck in 2003, Chevron’s Gorgon gas export project – which now supplies about 25 per cent of WA’s needs – could turn the tap off around 2037.

That sounds like a long time away, but the risk that affordable gas supply may not be available is a drag on current investment decisions, which take a long-term view. At stake are both new gas-consuming projects, and more critically, life extensions to old plants that employ thousands.

Successive WA governments have boasted to their east-coast counterparts about their wisdom in requiring gas exporters to reserve 15 units of gas for local use for every 100 units exported, but the reality is less effective.

Gorgon went ahead based on the 2003 deal with a then-Labor government that did not impose a 15 per cent domestic gas obligation, but a fixed amount to be reserved for local use: 2000 petajoules.

In the ensuing six years Chevron discovered more gas and decided to building a bigger processing plant. The result, estimated by the Domgas Alliance of big gas consumers, was that less than 7 per cent of the $80 billion project’s gas is reserved for WA.

The company pie had grown, but WA’s slice had not.

Richard Harris, spokesman for the Domgas Alliance that includes Alcoa, Wesfarmers and Pilbara fertiliser manufacturer Yara, said Chevron deserved credit for delivering the gas required under its agreement, but it could fulfil its obligation as early as 2037.

“It is up to the government how it addresses the issue, but we have consistently said the agreements should reflect the intent of the policy to deliver 15 per cent of liquefied natural gas exports to the domestic market,” he said.

The US major plans to operate Gorgon into the 2060s, giving it a quarter of a century of exports without a requirement to supply WA.

A Chevron spokeswoman said Gorgon was meeting its obligations and delivered more gas to WA than any other facility over the past 12 months.

“We currently expect to continue marketing our share of Gorgon domestic gas for decades to come in line with our own expectations about the ongoing role for gas in WA,” she said.

Chevron, and its partners ExxonMobil and Shell who all sell their shares of Gorgon’s gas separately, could keep offering gas to WA after 2037, but logically, why would they sign a deal if exports yielded a greater return?

The only way a buyer could be confident of getting gas from Gorgon is to offer a price that gives the seller the same return as the international market.

Any such deal would mark the complete failure of the domestic gas reservation policy that aims to shield local value-adding industries from the high prices and volatility of the global gas market.

Gorgon’s true reservation obligation of about half the much talked-about 15 per cent has been missed in the state’s gas debate – perhaps because the annual gas supply outlook by the Australian Energy Market Operator only looks forward ten years.

AEMO expects demand will exceed supply by about 150 terajoules in 2033. If Gorgon, supplying about 300 terajoules a day now, pulls out four years later, 45 per cent of state gas demand will not be met.

The issue has hardly been mentioned at the parliamentary inquiry into WA’s domestic gas policy that has a remit to focus on the short to medium term.

However, one interested group will take note – investors searching the world for places to park billions of dollars in gas-dependent investments that operate for decades. The prospect of scarce and expensive gas will not be attractive.

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