PERTH (miningweekly.com) – The Australian Petroleum Production and Exploration Association (Appea) on Monday welcomed the Economic Regulation Authority’s (ERA’s) recommendation that Western Australia’s domestic gas reservation policy be removed.

At the end of last week, ERA released a series of microeconomic reform draft recommendations consisting of 31 suggestions aimed at reducing overall costs in the state’s economy, cutting the cost of goods and services and removing competition barriers.

The draft recommendations, which were open for public comment until May 9, covered three key areas, namely government infrastructure, addressing disincentives and removing barriers to competition.

It was under this last key area that ERA suggested that the state government should end the domestic gas reservation policy, which currently reserved up to 15% of gas production for domestic use.

ERA said that the policy imposed costs on the state economy which far outweighed any perceived benefits, and pointed out that the gas reservation policy increased reliance on subsidised gas prices, discouraged efficiency and technological innovation, and perpetuated the existence of industries that may not have a comparative advantage in Western Australia at the expense of investment in other industries.

The policy also discourages investment in gas projects, reducing the availability of gas for future domestic or international use.

Appea COO for the western region Stedman Ellis said that the ERA report had again confirmed the organisation’s view that Western Australia’s gas reservation policy could not be justified on the grounds of market failure.

“It is protectionism pure and simple.

“The impact of a domestic gas reservation policy is to – in effect – place a simultaneous tax on domestic gas production and a subsidy on domestic gas consumption. The result is that the economy forgoes export income in order to inefficiently subsidise domestic consumption by big industrial users.”

Ellis added that like all taxes and subsidies, the gas reservation policy distorted economic decisions and generated an unequivocal economic loss – one which was compounded over time as future investment decisions were affected.

“Appea believes long-term energy security is best delivered through efficiently operating markets and by encouraging new entrants and competition, a view that is shared by other Australian governments that have considered and rejected the need for reservation policies.

“The ERA analysis has found that the removal of the gas reservation policy will result in sustainable gas prices, more competition and greater security of supply.”

Ellis noted that Australia’s ability to develop new gas projects was already threatened by rising costs at home and growing competition abroad, adding that policies that dictated where and how gas could be sold represented a further barrier to investment.

He pointed out that Western Australia was experiencing a growing level of competition in the domestic gas supply market as new capacity came on-stream, as demonstrated by the recent addition of the Devil Creek, Macedon and Red Gully domestic gas facilities.

“These projects proceeded because buyers were willing to commit to commercial terms that underpin the enormous investment required to develop and construct a gas processing facility,” he said.

“They have been driven by market forces, not by government intervention in the form of a reservation policy.

“The Western Australian government should heed the ERA’s advice and abolish its reservation policy and focus its efforts on attracting investment for new gas developments.”