Volatile gas: Economics and gas in Western Australia

by Cameron Murray and Rod Campbell

Western Australia’s economy is heavily impacted by the resource sector. 22% of gross state production comes from resources, making it heavily exposed to the booms and busts of global resource markets.

The established gas industry in Western Australia comprises large-scale offshore gas fields focussed on export markets and a number of smaller onshore gas producers supplying domestic users.

Resource royalties and taxes for petroleum (oil and gas) generated $576 million in revenue, or about 2% of total revenues, for the Western Australian government in 2016-17.

The domestic gas reservation policy (DGR policy) ensures that major gas exporters supply 15% of the gas they produce to the domestic market, currently around 4 TJ per day, with new reserve gas coming to the domestic market this year.

The DGR policy has insulated local gas users from global prices. Prices have fallen in recent years, with Western Australia’s domestic gas now 31% cheaper than Australia’s East Coast where no such policy exists. However, Australia’s Energy Market Operator forecasts increasing prices and new supply. If new supply is high-cost unconventional gas it may set prices and see substantial price increases.

Major domestic gas users in Western Australia are grid-connected electricity generation (25%), mining (24%), mineral processing (28%—predominantly alumina), and industrial use (18%). Other businesses use just 4% and households just 2%.

The petroleum (oil and gas) industry is one of the smallest employers in Western Australia’s resources sector with all gas related industries employing just over 11,400 people in 2016, just 1 percent of the state’s employment.

Compared to the established offshore gas industry, onshore unconventional gas (in coal seams or shale formations) will be high cost. This means that royalties which apply to value-added prices will bring less revenue than existing low-cost offshore gas.

Most resource rich regions are diversifying their economies rather than investing in new high cost projects in established energy sectors. Including more gas in the economic mix simply ties Western Australia’s economic fortunes more closely to global commodity cycles.

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