Australia Domestic Gas Policy Report Prepared For The DomGas Alliance Prepared by Glen Gill, MD November 2012 Australia Domestic Gas Policy Report DomGas Alliance Australia Domestic Gas Policy Report This report has been prepared by Innovative Energy Consulting Pty Ltd (“IEC”) for the DomGas Alliance (the “Alliance”) to assist in their ongoing review of the current state of Australia’s Domestic Gas Policy vis-a-vis the impact of growing LNG exports from Australia and the relatively unchecked behaviour of gas explorers and producers. This report also compares Australia’s domestic gas policy to other large gas exporting regions and nations overseas that have developed economies. Among other things, this report aims to provide information, concerns and an informed view on the unintended consequences resulting from a lack of effective domestic gas policies in Australia. Gas resource-rich developed economies that export gas, either pipeline gas supplies or LNG, tend to have comprehensive gas export policies in order to ensure a long term supply of abundant reasonably priced gas is available to the domestic market of the exporting country or region, as the case may be. Gas resources, in such countries, are primarily owned by the crown; consequently the best long term interest of the general public, the citizens of gas exporting countries, must be sought and that typically means that the domestic gas market receives the primary benefit from those resources and therefore exports to competing countries and economies are permitted only if and when gas resources and production capacity are deemed to be surplus to the long term needs of the domestic gas market. While many countries nationalise their gas industry in order to protect the interests of its citizens, this is an extreme position that can be avoided with sound energy and gas policies. The Alliance wishes to provide additional information to State and Federal Governments and other industry stakeholders to promote a balanced and reasonable domestic gas policy across Australia. Australia has yet to engage in a thorough debate regarding the role of gas in Australia’s future and the value of domestic gas demand growth compared to export opportunities. This paper is designed to initiate such a debate and to provide compelling reasons why such a debate is crucial at this time. © Innovative Energy Consulting Pty Ltd PO Box 1008, Maleny, Qld, 4552 63 Bytheway Lane, Curramore, Qld Phone (07) 5435 8288 [email protected] www.innovativeenergy.com.au Innovative Energy Consulting P/L Page 2 of 214 Australia Domestic Gas Policy Report DomGas Alliance Disclaimer This Australia Domestic Gas Policy Report is provided to the DomGas Alliance for use by its members, namely ERM Power, Burrup Fertilisers Pty Ltd, Gold Fields, Fortescue Metals Group Ltd, Dampier Bunbury Pipeline, NewGen Power, Alinta Energy, ALCOA Australia, Horizon Power, Newmont Australia, Verve Energy, and Synergy. By accepting receipt, it is understood that the Alliance and its members waive all rights to any claims against Innovative Energy Consulting Pty Ltd (“IEC”) or against Glen W. Gill or any private or public companies to which he is associated, arising out of any perceptions, advice or business arrangements based on its contents. All contents are subject to verification and possible copyright from original sources and independent advice or permission should be sought prior to public disclosure. Whilst every effort has been made to ensure that the information contained on this report is current at the time of compilation, IEC makes no representations or warranties, expressed or implied, as to the quality, accuracy or completeness of the information. Any evaluation of opportunities in Australia or elsewhere, or conclusions made from, the information contained on this report shall be at the sole risk of the recipient of the information. IEC accepts no responsibility for any loss, whether direct or consequential, suffered by the recipient based on any reliance on the information contained on this report or any associated presentation material. For the purposes of this disclaimer, any reference to IEC means Innovative Energy Consulting Pty Ltd and any of its related entities and their respective directors, officers, employees, contractors, agents and consultants. Innovative Energy Consulting P/L Page 3 of 214 Australia Domestic Gas Policy Report DomGas Alliance Table of Contents 1 Executive Summary ....................................................................................................................... 7 2 Background ................................................................................................................................... 12 3 Gas Industry ................................................................................................................................. 13 3.1 Introduction to Gas ............................................................................................................. 13 3.2 Differentiating Gas from other Fossil Fuels and Forms of Primary Energy ............... 16 3.3 Energy Resources/Consumption GDP Correlation ....................................................... 19 4 Australia’s Gas Resources ......................................................................................................... 21 4.1 The Role of Gas in Australia to Date ............................................................................... 21 4.2 Australia’s Abundant Gas Resource Base ..................................................................... 25 4.3 Past Government Intervention .......................................................................................... 27 4.4 The Future Role of Gas in Australia ................................................................................ 28 4.5 The Chronic Market Power Conundrum ......................................................................... 35 5 The Natural Resource Curse & ‘Dutch Disease’ Syndrome .................................................. 41 6 World Gas Markets ...................................................................................................................... 46 6.1 Gas Market Structures ....................................................................................................... 46 6.2 World Gas Prices................................................................................................................ 52 6.3 LNG Pricing Mechanism ...................................................................................................... 58 6.4 Exports, Imports & Domestic Gas Pricing Relationship ................................................ 63 6.5 Inter-Relationship of Crude Oil and Gas Prices .................................................................... 69 6.6 Oil Linked Pricing Formulas for Gas ................................................................................ 71 6.7 Gas Pricing under Short Term Vs Long Term Contracts.............................................. 73 6.8 Gas Hub Pricing .................................................................................................................... 77 6.9 Cost Based Pricing ............................................................................................................. 81 6.10 Delivered Prices to Major Gas Users .................................................................................... 84 6.11 Gas Contracting .................................................................................................................. 85 7 Gas Policy Issues & Examples .................................................................................................. 89 7.1 Australia’s Conundrum ...................................................................................................... 89 7.2 Gas Policy ........................................................................................................................... 90 7.3 Domestic Gas Policy .......................................................................................................... 96 7.4 Export Gas Policy ............................................................................................................. 102 7.5 Value Adding Via Manufacturing .................................................................................... 104 8 Case Study – Province of Alberta, Canada ........................................................................... 110 9 Case Study – State of Alaska, U.S. ........................................................................................ 120 10 Case Study – Canada’s Domestic Gas Policy ................................................................. 130 11 Case Study – Netherlands Domestic Gas Policy ............................................................. 151 12 Case Study – Norway’s Domestic Gas Policy .................................................................. 165 13 Case Study – Russia’s Domestic Gas Policy ................................................................... 172 14 Case Study – Texas Domestic Gas Policy ....................................................................... 178 15 Case Study – U.S’s Domestic Gas Policy ......................................................................... 182 Innovative Energy Consulting P/L Page 4 of 214 Australia Domestic Gas Policy Report DomGas Alliance Figures Figure 1 World Energy Consumption By Fuel* .............................................................................