Australia must maximise its natural gas advantage

May 29, 2014

Fortescue Metals Group Ltd (ASX: FMG) has called for the enforcement of Retention Lease “Use it, or Lose it” policies to encourage the rational and market-based development of Western Australia’s abundant gas reserves.

In launching a report by Deloitte Access Economics for Fortescue, Western Australia Gas Sector Analysis, Fortescue Chief Executive Officer Nev Power said WA’s significant natural gas advantage should translate into both a world leading LNG export industry and competitive and secure domestic gas supplies to drive jobs and economic growth.

“Australia faces strong, global competition and this report is part of our focus as a company on being as cost competitive as possible,” Mr Power said.

“Fortescue’s vision is to be the safest, lowest cost iron ore producer. By getting the policy settings right, we could make a long term switch from imported diesel to reliable, competitively priced Australian natural gas.”

Fortescue is the world’s fourth largest producer of iron ore and a significant energy user. At its current production capacity of 155 million tonnes a year, Fortescue has forecast energy costs of more than US$800 million in FY15.

Fortescue’s strategy of switching from diesel to gas across its Pilbara operations is under way with the construction of the Fortescue River Gas Pipeline, the longest to be built in WA in a decade. The pipeline will deliver gas to the Solomon Hub from early 2015 for use in the existing power station.

This single initiative will save Fortescue approximately $20 million a year as well as reducing carbon emissions.

The Deloitte study makes the following key findings:
- There is tightness in the domestic market currently and uncertainty about future security of supply
- There are plentiful reserves of gas in Western Australia to meet both projected domestic and LNG export demand for the foreseeable future
- The imposition of the domestic gas reservation policy has the unintended consequence of linking the LNG export and domestic gas industries together.
- Deloitte Access Economics modelling suggests some gas reserves held under Retention Leases are commercially viable now to develop for standalone domestic gas projects
- Deloitte Access Economics found the strict implementation of the retention lease policy guidelines should lead to a drop in the long term domestic gas price of A$3.20/Gigajoule by 2020 and A$5.74 by 2025.
- WA could transition away from the domestic gas reservation policy if a transparent and rigorous “use it, or lose it” approach was applied to Retention Leases

“In a competitive market, where users had long term security of supply, we would expect domestic gas prices to reflect the cost of development, rather than LNG netback prices,” Mr Power said.   

Deloitte Access Economics Partner Chris Richardson said delinking the LNG and domestic gas markets would have net benefit for the WA economy.

“The impact on the WA economy would be significant with competitive and secure long term gas available generating 2100 extra jobs and an annual estimated increase in GSP of around A$2.5 billion in 2020, increasing to 2600 jobs and A$4.8 billion additional GSP by 2030,” Mr Richardson said.