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SELECT COMMITTEE ON FUEL AND ENERGY
30/06/2009
Issues relating to the Fuel and Energy Industry

CHAIR —I invite you to make a brief opening statement and then the committee will ask you some questions. Do you have any comments to make on the capacity in which you appear?

Mr Hohnen —In addition to my role as Chairman of DomGas Alliance, I think it is relevant that I am also Executive Chairman of DBP, which owns and operates the Dampier to Bunbury Natural Gas Pipeline. Gavin Goh, who is with me, is Executive Officer of the DomGas Alliance, which was formed in 2006 in response to serious concerns about gas supply shortages for the domestic market in Western Australia. We represent gas users, infrastructure investors and prospective gas producers. Members represent about 80 per cent of the state’s gas consumption and transmission capacity, including industries, small businesses and households.

Energy security, particularly domgas security, is an issue of vital importance for Western Australia. Western Australia is by far the most energy and gas dependent economy in Australia, with a reliance on gas for 50 per cent of our primary energy. This compares with something like 19 per cent for Australia as a whole, so we are very heavily dependent on gas for our primary energy requirements. Natural gas fuels about 60 per cent of the state’s electricity generation. Notwithstanding the current economic downturn, domestic gas security is the most critical challenge facing Western Australia today. Our state continues to experience a serious gas shortage, which is impacting industries, small businesses and households. Gas users are unable to secure long-term gas supplies in substantial quantity. Also our gas prices have risen fivefold in recent times, with prices reported for recent gas sales up to five times higher than eastern states prices on a delivered basis.

At recent prices, industry and power generation in the south-west will no longer be viable. This will have profound consequences for jobs and communities in Western Australia. While the state has experienced serious challenges to gas security, oil and gas producers continue to expand exports of LNG. Despite having just over two per cent of the world’s natural gas resources, Australia is aspiring to be the world’s second-largest gas exporter. With the depletion of the state’s gas reserves and the locking up of resources to 20 to 25 years, LNG contracts present serious challenges to energy security. WA’s experience is now being repeated in the eastern states, where the development of the LNG export industry will lead to significant price increases for consumers.

Since 2006, the alliance has been pressing state and federal governments to improve the availability and affordability of gas supply. We have, however, met limited success given the influence of the major upstream oil and gas companies. These companies have immense economic and political clout and are highly effective at influencing government policy. The current downturn has also resulted in the unprecedented influence of companies like Shell, Chevron and ExxonMobil, with the focus of governments on a Gorgon or LNG-led economic recovery. In this environment decisions are being taken today that will impact energy security, jobs and investment for decades. We can provide specific examples.

The original intent behind the federal government’s energy white paper was energy security—that is, meeting the future energy needs of Australian industry and households. Over the past 18 months, however, the process has become captured by major energy exporters. This has seen a fundamental shift in focus from meeting Australia’s energy security needs to maximising Australia’s energy exports to the rest of the world. This is evident in the terms of reference of the white paper. It is also reflected in the membership of the consultative committee overseeing the white paper. Major energy exporters make up 80 per cent of the committee’s industry representatives. Australian industry and households for whom energy security is a matter of vital importance account for just two positions on this committee. Given the dominance of energy exporters, the ability of the white paper process to deliver meaningful outcomes on energy security is now open to question.

I have exceeded the allotted time for the opening statement, but I would like to provide the committee with another example. The committee would be aware that Western Australia is one of the most uncompetitive gas markets in the country. Through cartel selling arrangements, two producer groups control close to 100 per cent of the market. Through arrangements of the North West Shelf Joint Venture, six of the world’s biggest oil and gas companies combine together to set prices and contract terms. As a result, producers exercise immense market power at the expense of local consumers. The current state of the WA gas market is a direct consequence of decisions by the ACCC over many years in granting authorisations to producers to engage in anticompetitive conduct and in failing to enforce the Trade Practices Act when those authorisations expire. Since 2006, consumers have been pressing the ACCC to remove the North West Shelf cartel selling arrangements. No action has been taken by the ACCC to protect consumers. Consumers were moreover dismayed at the ACCC’s decision last week to grant interim authorisation to Shell, Chevron and ExxonMobil to combine as a cartel to market Gorgon gas. In accepting the Gorgon producers’ claims that cartel selling was necessary for a final investment decision on the project, the ACCC ignored the fact that separate selling is commercially and practically feasible. Shell, Chevron and Exxon have been separately selling LNG to overseas customers since 2005, and Shell is separately selling in New Zealand despite making similar claims that it was impossible to do so.

It is absurd that joint selling to domestic customers should be deemed necessary when 90 per cent of Gorgon gas production is being sold separately to overseas customers in China, Japan and India. Given that Shell and Chevron are already participants in the North West Shelf selling cartel, the ACCC’s decision further entrenches the market power already exercised by the North West Shelf joint venture. It potentially sets back competition in the WA gas market for decades, with industry, small businesses and households being the ultimate losers through higher gas and electricity prices. The DomGas Alliance has provided the committee with a report on WA’s domestic gas security, which was released this year. The report highlights serious challenges to the long-term availability and security of gas supplies in Western Australia. Importantly, it sets out a clear way forward for meeting the state’s future energy needs, including stringent review and transparency of retention leases to ensure producers do not withhold supply from the domestic market, removing anticompetitive cartel selling arrangements, tax and royalty incentives to encourage domestic gas exploration and development and domestic gas reservation policies to ensure the needs of the local economy are met.

The report makes clear that there is no magic bullet to ensuring energy security. A range of initiatives should instead be employed. Domestic gas security is an issue of critical importance for industry, small businesses and households in the state. The committee has a vital role to play in ensuring the right decisions are being made by governments.

CHAIR —Thank you very much. I am broadly aware, but for the interest of the other members of the committee, can you outline for us the membership of the DomGas Alliance?

Mr Goh —We currently have 11 members representing domestic gas, gas consumption, infrastructure investors and domestic gas supply. Members include ERM Power/NewGen Power, Murphy Oil—which is an emerging domestic gas producer—Fortescue Metals Group, Dampier Bunbury Pipeline, Alcoa of Australia, Alinta, Burrup Fertilisers, Horizon Power, Newmont Gold Company, Verve Energy and Synergy. The alliance accounts for around 80 per cent of gas consumption in Western Australia and, through the major aggregators, it also supplies small businesses and households.

Mr Hohnen —And my company, DBP, which is the major transporter of gas in Western Australia has committed $1.8 billion to the expansion of that transmission system since 2005.

CHAIR —You have raised a lot of issues related very specifically to our terms of reference around energy security. In an ideal world scenario, what would you would be looking for in terms of state and federal regulatory frameworks?

Mr Hohnen —Our first objective, of course, is a truly competitive market. We do not believe that that is the case at the present time. We see the North West Shelf joint venture, despite not having specific authorisation, continuing to sell on a joint basis. We see that the decision to support joint selling on the part of the Gorgon group is cementing in the economic power of that upstream supply. It is virtually a cartel in terms of the extent of control of reserves and production capability upstream. We have seen pricing in Western Australia as a result which is some four to five times the pricing in the eastern states and makes gas consuming activities in the south-west of the state totally uneconomic. So in terms of the future of my business, DBP, and the future of gas-fired power generation and alumina processing in Western Australia at the sorts of gas prices that have been promulgated at the moment, that will come to an end.

CHAIR —Can you talk us through the gas pricing? You made the point in your opening remarks how Australia is a relatively small proportion of the world’s gas market. Isn’t the pricing for gas set at an international level? Are we not in tune with what world prices are? How can our pricing be that different from the eastern states? Can you just talk us through that?

Mr Hohnen —We are aware of gas prices in the eastern states in the low $3 per gigajoule—and they are very recent numbers—whereas prices that have been sought by the upstream industries in Western Australia have been four to five times that level. That would make the baseload users, alumina refining and power generation in the south-west and other forms of mineral processing completely nonviable.

CHAIR —These are obviously issues that you or others have raised, and you mentioned a process before the ACCC. What does the ACCC say when these items are put forward? At various times the ACCC has reviewed the marketing arrangements of gas, haven’t it?

Mr Goh —In 1998 when the ACCC provided authorisation—

CHAIR —Which then lasted for a 10-year period—

Mr Goh —Five years.

Mr Hohnen —Seven years till 2005.

CHAIR —Okay. So what happened then?

Mr Hohnen —They approved the continuation of joint selling.

CHAIR —In 2005?

Mr Hohnen —That is correct.

CHAIR —On what basis?

Mr Hohnen —On the basis that they were only prepared to approve a seven-year time frame.

CHAIR —Sure, but in 1998 it was approved for five or seven years, it was reviewed and the ACCC came to the conclusion that it should continue. What was the ACCC’s response to the arguments you have put?

Mr Hohnen —The ACCC’s view was that there was not sufficiently depth or sophistication in the market in 1998 to warrant separate selling.

CHAIR —What about 2005?

Mr Hohnen —They only agreed to a seven-year term for this arrangement. It is a bit more complicated. We had the original North-West Shelf domestic joint venture which had approval from the late 1970s when they were selling to the state owned energy commission in WA. They had an approval in 1977 which had no time limit on it. The 1998 authorisation was to extend the joint-selling arrangements to the export joint venture, which had somewhat different membership. The 1998 authorisation only applied to the export joint venture, because the domestic gas joint venture had unlimited authorisation—it was not time limited at all.

Since 2005 North-West Shelf has been in a somewhat ambiguous situation where it had approval for joint selling for the domgas joint venture but the joint-selling approval for the export joint venture, which was taking up part of the domgas market, had expired. Eventually, North-West Shelf decided that this created contradictions for them. They were not prepared to apply for new authorisation for the export joint venture. They have since let the authorisation lapse in respect of the domgas joint venture. They do not have any specific authorisation from the ACCC that allows them to join sell at the present time. They are proceeding on their view that they do not require ACCC authorisation for joint selling. We have some real issues with that. The ACCC is currently reviewing the whole joint-selling situation and has been since 2007.

Mr Goh —The consumers first raised the issues with the ACCC in 2006, so it has been almost three years with no outcome for consumers.

CHAIR —When you say consumers it sounds like mum and dad on the street corner but these are sizeable businesses that—

Mr Hohnen —These are major users.

CHAIR —These are major users. These are big organisations.

Mr Hohnen —This is the industrial base Western Australian power generation and industry.

Mr Goh —It is very important to recognise that mums and dads buy through Synergy and Alinta.

CHAIR —Sure, understood.

Mr Goh —So the ability of these big consumers to negotiate on a level playing field does directly impact consumers in the street.

CHAIR —Understood, but I guess I am trying to understand. How the price in Western Australia gets set? It is linked to world prices or are you saying it is even worse than that because there is some sort of unreasonable market dominance?

Mr Hohnen —Prices are set by a long-term contract so a lot of the pricing is historic pricing, and the—

CHAIR —Is it in line with world prices or is it set—

Mr Hohnen —There are no world prices for domestic gas. There are a whole series of different price levels that apply. You can talk about the traded price of LNG but most major industrial companies do not rely on LNG. The United States has some price settings called Henry Hub, for instance.

CHAIR —It comes from the same source. It is broadly the same resource though, isn’t it? Whether Alcoa sell within Australia or overseas, presumably they will go where they can get the best price.

Mr Hohnen —They are already here, and they are already here with a massive investment—

CHAIR —Sure, and it is a great organisation, but that is not the argument. If Alcoa has a certain amount of product to sell and they can get price A in Australia, which is lower than price B overseas, what would Alcoa—

Mr Goh —We can see pricing being determined on the basis of market power. In Western Australia we effectively have two suppliers controlling 100 per cent of the market. If I was a business in China or India and I needed to purchase LNG, I can purchase from any of the suppliers in Western Australia, as well as from the Middle East, Russia or any number of sources. If I am a WA energy consumer I only have two options.

CHAIR —And those two options are?

Mr Goh —From the North-West Shelf Joint Venture participants who control 70 per cent of the market and Apache joint venturers which control the remaining 30 per cent.

CHAIR —That is in relation to gas. This brings us to the issue of energy security more broadly. Isn’t it more an issue where we need to diversify our energy sources, rather than focussing on the supply within a particular source? The reliance on gas in Western Australia is much higher than what it is on the eastern seaboard.

Mr Hohnen —That is correct, because our alternative source of energy is Collie coal. So we have the one coal field, basically, with quite low quality coal from that field. So they are our two options. Western Australia, in the early seventies, was entirely dependent on Collie coal for power generation and energy generally. It moved to diversify its fuel sources and chose imported oil to do that, and then got caught up in the oil shocks of the early seventies. So reliance on the Collie coal fields is not a place we want to be.

CHAIR —So what other energy options are there? Your members are essentially energy consumers—more so than, necessarily, gas consumers, aren’t they?

Mr Hohnen —They are primarily gas consumers because the alternatives are Collie coal, with very tight ownership, or gas. So what we want to see is greater diversity in the gas supply market, greater competition in that market, and the removal of the artificial market controls that government is placing on the upstream market.

We have a very artificial situation where the producers are able to band together to sell jointly whereas the buyers are not in that situation. There are 30 different parties on our pipeline, all of whom have to buy their gas separately, but they are dealing with an elephant controlling 70 per cent of the market. That is the imbalance that we see in that situation. The outcome of that has been a difference between wholesale gas pricing in the eastern states in the low $3 a gigajoule and recent price requests in Western Australia of four to five times that amount. That all results from market power.

CHAIR —Specifically, what is your policy wish list in terms of addressing the issues that you have identified?

Mr Hohnen —Our policy wish list is to get separate selling on the part of the upstream party. That includes the North West Shelf joint venture. I am not sure if you are aware of the recent ACCC decision to extend joint selling authorisation to the Gorgon joint venture. Seventy-five per cent of its ownership is common with the North West Shelf joint venture. Frankly, we find that just incredible.

CHAIR —The ACCC is the expert body that assesses these things. They made that decision. What do you think leads them to that decision? And we have to get back to your policy wish list.

Mr Hohnen —I think what leads them to make the decision is all the emphasis that has been placed on the size of the Gorgon investment decision. I think the ACCC, frankly, is playing a political game and not wanting to do anything that might make more difficult the Gorgon investment decision. You are talking about an investment of tens of billions of dollars. I think it is a very political game, and it is Western Australia industry and power consumers that have been played off against a Gorgon-led economic recovery.

CHAIR —I guess if there was not an investment in Gorgon and other such projects the gas trade would not be increasing much at all, would it? It would not solve the problem not to have Gorgon go ahead.

Mr Hohnen —It may. What else are these parties going to do with this gas? We do not believe that that is the issue. We are talking about a very small component of domestic gas relative to the size of the export opportunity. We seriously do not believe that Gorgon is likely to be prejudiced at all by a competitive domgas market. I think the country is being naive. We had a situation in New Zealand just in recent years where the parties, of which Shell was one, argued that it would not be prepared to proceed with a particular investment unless it got authorisation for joint selling. The authorities in New Zealand provided that authorisation, after quite a bit of debate, and then it happened that the joint venture parties could not reach agreement amongst themselves on joint selling arrangements and the development went ahead in any event with separate selling. So you have to take some of these things from the big upstream boys with a grain of salt. Joint selling is not permitted in other major jurisdictions around the world; you are required to separately sell.

CHAIR —If there were separate selling, people would still go for where they can get the best price wouldn’t they?

Mr Hohnen —Absolutely, but you would then have some real competition. At the moment we have 70 per cent of the market tied up by a cartel of six companies and that is now being extended to the Gorgon joint venture for additional supply. Other fields are controlled by particular members of the North West Shelf consortium.

Senator HUTCHINS —Does the alliance have a view about gas being preserved specifically for domestic use?

Mr Hohnen —No. We see export as an important component of our gas industry. We are not saying we should not have export. We believe that there is a balance to be maintained. We have a lot of world-competitive industries that are reliant on a competitive energy input and it is important for us that they are maintained.

Senator HUTCHINS —You said the size of the investment decision at Gorgon was essentially part of a political game. Is that political game one of: ‘If you want me to commit all this money, it doesn’t matter who’s in power, then you are going to have to guarantee me these prices in return or guarantee me these opportunities to get these prices in return.’

Mr Hohnen —Yes, you are going to have to give me the opportunity to jointly sell which is essentially an extension of the North West Shelf joint cartel arrangement.

Mr Goh —The thing to bear in mind there is that the domestic gas supply is going to account for around 10 per cent of the entire production of Gorgon. So 90 per cent of Gorgon production is Leave not granted., which has been sold separately by the Gorgon participants since as early as 2005. Quite frankly, it is absurd that investment decisions on Gorgon are dependent on the ability to sell as the cartel to consumers for 10 per cent of production. It quite simply does not make sense. I think the problem that we are seeing in these issues, in particular with Gorgon, is the marked reluctance by government and an independent regulator to challenge these claims and assertions by producers. Similar claims and assertions were made in New Zealand, they were proved to be false and yet they are making the same claims and assertions in Australia.

CHAIR —On that point if most of the market is overseas so that the domestic part of it is a smaller component, why would there be such an emphasis? That is not where most of the profits are going to come from. Are you saying that they want to get a higher price domestically in Western Australia than overseas?

Mr Hohnen —That is what is happening now.

CHAIR —So you are saying that the price in Western Australia is higher than internationally.

Mr Hohnen —Yes. They are seeking prices in the $10 to $15 a gigajoule in Western Australia where their net back return from LNG would not by anywhere near that.

CHAIR —So the viability of this project is dependent on the sort of price they can get in Western Australia?

—No, I do not believe so. I think that is just cream. They have an opportunity to extend market control and improve returns and they are taking it. As I said, gas prices for industrial purposes on a delivered basis in Victoria are low—$3 a gigajoule. In Western Australia, where we have an abundance of gas, we are talking $10 to $15 a gigajoule into the pipeline. It is a huge difference, and it is all about market control.

Senator HUTCHINS —This concern has been expressed, no doubt, to the state government here.

Mr Hohnen —It has been expressed to the state government here and it has been expressed to the ACCC. As I said, we have been going through a two-year process with the staff at the ACCC, without any comfort or satisfaction, in terms of the market structure and gas pricing in Western Australia.

Mr Goh —To give you an example, we have been raising these issues for well over two years with no outcome. When the Gorgon applicants put in their request for interim authorisation, consumers were given 10 working days to respond. So you can see how very different processes apply between the upstream producers and the downstream side of the market in terms of the application of the Trade Practices Act.

Mr Hohnen —For two years they have been reviewing these joint selling arrangements on the domestic market, but when the decision is wanted on the export side it happens instantaneously. There is a double standard here. We are the most gas dependent economy in the whole of the state and utilise gas for a great number of value adding opportunities.

Senator HUTCHINS —Has the state government made any commentary on the situation?

Mr Hohnen —Our Premier has written to the ACCC, supporting their view for Gorgon with respect to the joint selling, which is a major source of frustration to us.

Senator HUTCHINS —Earlier you said that we have two per cent of the world’s gas here.

Mr Hohnen —That is correct.

Senator HUTCHINS —Yet we are the second largest supplier of gas in the world.

Mr Hohnen —We are aspiring to be the second largest supplier of LNG in the world, with something like two per cent of world gas.

Senator HUTCHINS —Do you see that down the track, particularly in a state like Western Australia, that is going to have a significant impact on our security here?

Mr Hohnen —I think it is an important issue for the nation, not just for Western Australia. To put it into context, only about eight per cent of world gas is available to the major oil companies. The rest of it is held by national oil companies and is not available on the open market. So the likes of Shell and Chevron are looking at their opportunities in eight per cent of world gas. We have a quarter of that, so it is a major strategic point.

Mr Goh —I think that is important to emphasise, because it really does challenge a lot of the claims and arguments being presented by upstream industry around sovereign risk and commerciality. The upstream industry is very effective in arguing issues around sovereign risk. When you look at it in terms of Australia representing a quarter of the total global opportunity on an unrestricted basis, these arguments just do not stand up. The difficulty we have is that governments are not challenging these sorts of claims. It has only been quite recently that we have seen that happening in relation to retention lease arrangements. We believe retention lease arrangements are being used by producers to warehouse resources which could otherwise supply the domestic market. The outcome of that is that if we have a less stringent approach to lease arrangements in Australia compared to the rest of the world then we are creating safe havens for companies to simply sit on reserves. That is being increasingly recognised by government.

Senator HUTCHINS —Have governments of either persuasion made any comment on that, which you could refer us to?

Mr Goh —There have been recent media statements by Minister Ferguson around that issue. I guess the frustration that we have is that the same issues were raised by us in 2007 to a Commonwealth-state joint working group. That working group took evidence, engaged consultants and prepared a report containing recommendations. Nothing has happened by way of implementing those recommendations for over two years.

Senator HUTCHINS —In the submission you seek an opportunity to development common use infrastructure. Are you prevented at the moment from going down that path—to have common use infrastructure for your consumers?

Mr Hohnen —Not specifically prevented except by the actions of the upstream producers.

Senator HUTCHINS —So the ACCC is not trying to prevent you from it?

Mr Hohnen —No, there are not any limits from that point of view, but each of the major producers, as part of the whole market control issue, seeks to control its own infrastructure.

CHAIR —Clearly, you are looking at it from a gas point of view, but isn’t part of the solution to diversify the energy mix in Western Australia per se? We are a bit of an energy island, which is part of the reason our reliance on gas, compared to that of the eastern states, is that much higher as a proportion of our overall energy mix. Isn’t there a need for Western Australia to perhaps add another major—

Mr Hohnen —I have a business that has invested $1.8 billion in the expansion of infrastructure over the last four years—

CHAIR —Around gas.

Mr Hohnen —around gas, around an existing market, and diversification of energy supply is not of great comfort to me. We have a whole series of downstream industries, power generators and so forth that have invested on the basis of abundant gas, and it is really an issue of market structure—and market structure that is within the influence of government—that is preventing gas reaching its full potential within that marketplace.

CHAIR —Talking of your policy wish list, we never got past the separate selling item. Are there other things on your policy wish list?

Mr Hohnen —Separate selling is critical to all of that. Gavin might like to add something.

Mr Goh —We have briefly touched on retention lease arrangements whereby you have a more stringent approach to retention leases if you have third party participation, you have greater transparency and you can then start challenging some of the claims being presented by producers as to why leases should continue to be held and not brought into production.

CHAIR —You would have reviewed the discussion paper released by the minister in relation to retention releases?

Mr Hohnen —Yes. That in itself has been something that has taken an inordinate length of time to appear. We were making representations to the Commonwealth department in 2006 about these matters. It has been under review and under consideration and finally we have a discussion paper, after three years of deliberations, which is seeking further submissions.

CHAIR —What is your view on the draft conclusions that are in the discussion paper?

Mr Hohnen —We see it is moving in the right direction. It should have happened three years ago. We should be very much tightening up on the whole retention lease arrangements and providing transparency, providing opportunity to challenge and providing opportunity for the downstream industry to get involved. It has really provided a huge amount of protection to the upstream industry to sit on resource and not to develop it. That is a very important policy issue in this whole business.

CHAIR —Are you taking active involvement in the review process presumably?

Mr Hohnen —The Domgas Alliance?

CHAIR —Yes.

Mr Hohnen —Yes.

CHAIR —And the energy white paper review process, are you involved in that as well?

Mr Hohnen —We get involved in all these processes to the extent that anybody is prepared to listen, as do our individual members.

Senator McEWEN —I just had one question. We had the Western Australian Chamber of Commerce and Industry here before you came and unfortunately they have gone now. Have you engaged with them about the issue of domestic pricing for LNG?

Mr Hohnen —I cannot remember what their specific position is. You need to remember that the chamber of commerce has upstream oil industry members as well as downstream users, so they have some difficulty in reaching a considered view on these sorts of matters.

Senator McEWEN —They did not mention it at all in their evidence to the committee, but we did not ask that either. I am just curious whether you had engaged with that organisation about this?

Mr Hohnen —Western Australia is dependent, for more than 50 per cent of its primary energy requirements, on gas. That is where we are at. That is the reality of the energy supply situation in Western Australia. It has significant ramifications for us down the track and the extent of this reliance does not appear to be recognised within bodies like the ACCC.

Senator HUTCHINS —Equally, Mr Hohnen, you are saying that irrespective of whether they are an upstream or downstream industry, they are paying four to five times as much for their unit of energy than what is paid in similar places in Victoria. Why wouldn’t people who are not up or downstream be shaking the gates of Parliament House and asking why aren’t we doing something?

Mr Hohnen —We have been.

Senator HUTCHINS —I am talking about the people outside your consumerables and producers. I cannot recall that we have had any sort of commentary there at this stage. I might be wrong. I do not know if you want to share an observation with me or not; I am just sharing mine with you.

Mr Hohnen —I guess part of the reason is that we are dealing at the moment with the growth component of the market and the prices within the existing market are locked in by long-term contractual arrangements. We have a significant dispute underway between the North West Shelf Gas joint venturers at the present time and Alinta Gas in respect to a major proportion of their contract. That is something that is very actively disputed at the present time. And you probably noticed a decision just in the last few days by the WA government to increase pricing to domestic consumers quite dramatically. So we will start to see quite a bit of push back on a number of those sorts of issues. And to me, as the representative of a $3½ billion piece of infrastructure, the competitive balance in that energy market is absolutely critical to our long-term viability. We have spent $1.8 billion in the last three years on expanding this piece of infrastructure and to see that that situation is not supported by bodies like the ACCC in terms of leaving us with a truly competitive market structure is very disappointing.

Mr Goh —A lot of the issues that have been experienced in Western Australia are starting to be experienced in the eastern states as well. We have seen reports about gas producers in Queensland taking a decision not to supply to the local market, which then feeds down into the other eastern states, so that they can reserve resources for export. We have indications from a lot of the major gas producers in the eastern states where they are talking about the fundamental repricing of gas into the eastern states market because of LNG export development. The argument has been raised that once you start linking Australian gas prices to some notional international LNG price that becomes a justification for fundamental repricing of eastern states’ gas prices.

CHAIR —With the issue that you raised there, isn’t it fundamental that companies that operate in a global market will seek to sell their product where they can get the best price for it. You told me earlier that the price for gas is higher in Western Australia than overseas and I would have thought that there is a clear incentive here for people to sell as much of their product in Western Australia as possible for as long as the price is higher. If they can get a better price for their product overseas they will maximise their product for export. Some of your member companies would, I am sure, take a similar attitude to this, wouldn’t they?

Mr Hohen —We have two separate markets for energy in Western Australia. There is the market that can afford to pay up to or close to international competitive oil prices because they need energy and their operations are not highly sensitive to energy input prices. Then we have got the bulk of the market, which is highly sensitive to energy input prices.

CHAIR —So you are saying that you really want government to regulate so that prices are—

Mr Hohen —No, you misunderstand me completely. It is government approvals for joint selling cartels that are distorting the market at the present time. It is the ACCC action and government action—

CHAIR —It ultimately comes to affordability of the energy resource, doesn’t it? What we talked about—

Mr Hohen —It comes to the issue of market control.

CHAIR —But what you are saying is that the effect of market control is inflated prices.

Mr Hohen —That is happening at the moment. That is happening in Western Australia—highly inflated prices.

CHAIR —But if you can get higher prices in Western Australia, wouldn’t there be a more significant supply?

Mr Hohen —The market is not there at those higher prices. The Western Australian market has always had the two components. Right from the days of the original North West Shelf development we have had two components in the original contract. We had two components of gas: oil competitive gas and coal competitive gas. Oil competitive gas comprised 20 or 30 per cent of the total market. What we are seeing is the upstream suppliers trying to skim the component of the market that can pay the higher prices and the rest of the market will go begging. By virtue of government decisions on joint selling, we are contributing substantially to that outcome.

CHAIR —To a price that is higher than it otherwise would be?

Mr Hohnen —Absolutely. If we had all the elements of the North-West Shelf gas joint venture selling separately we would have a different pricing outcome. If Gorgon had to sell separately to North-West Shelf and if we had the new BHP development selling separately from all of them we would have some real competition, Senator. But at the present time we do not. We have 30 buyers and we have essentially one seller.

CHAIR —But what would prevent all of those sellers from selling on the international market if that is where they could get the best price? Unless we have a gas reservation policy, with a view of having a different pricing arrangement at a domestic—

Mr Hohnen —I really challenge that conclusion that they would—

CHAIR —It is a question. What would prevent them from—

Mr Hohnen —get the best price on the international market. The outcome from LNG sales is likely to give them a lower price, but it deals in very large volumes over long periods of time.

CHAIR —A final question from me: it has been put to us in the past that a broadening of the gas specification on the Dampier to Bunbury gas pipeline up to an Australian standard would also allow more gas into the market and allay the primary concern of a shortage. Would you care to comment on that?

Mr Hohnen —Yes, I am happy to comment on that. That is something that is actively going on between DBP, the Office of Energy and the joint venturers in the Macedon gas field, which is a low quality gas field. The economics of the pipeline are based on a gas of a certain quality. We get paid for transporting energy, not volume. So, if the energy content of the gas is lower then we get paid less, but we have to have a size of infrastructure that is able to do that. We are more than happy to deal with lower quality gas but we need to be compensated in terms of the capacity impact on the pipeline. We are working cooperatively at the present time with the Macedon joint venturers—BHP, primarily—and the Office of Energy to agree on a framework for admitting lower quality gas into the pipeline. That will involve some sort of compensation arrangement from the gas producers to the pipeline to keep us whole. We see that as entirely sensible and everybody has a common view about where we go with all of this. Remember that some of our customers are quite sensitive to gas quality and that there are implications for some of our downstream users in the lowering of gas quality.

CHAIR —Thank you very much.

Senator HUTCHINS —I just have one quick question. You said there were two separate markets for energy prices. You said there was one that will pay the international prices and one that was highly sensitive. Could you just give an example of either of those, please?

Mr Hohnen —Yes. This goes back to the original North-West Shelf contract in 1980. It has been the same situation since then. There are gas sales into the mining market—in the Pilbara for instance, where their operations are not highly energy intensive and they use the gas for power generation or whatever. If gas is not available they use oil or whatever. While it represents an additional cost it is not going to make their operations non-viable. I am talking about the iron ore producers and other miners down the goldfields gas pipeline.

The markets that are highly sensitive are the markets in the south-west of Western Australia which is power generation. Something like 40 to 50 per cent of the energy for the south-west interconnected grid comes from gas at the present time; the rest comes from coal. You have the alumina refining industry which is totally reliant on gas and the economics are very sensitive to energy pricing and you have a bunch of other mineral processing type activities in the south-west Kwinana strip and wherever that rely on competitive energy for their viability. That is production of ammonium nitrate, sodium cyanide and a whole bunch of those sorts of things—a lot of the Kwinana industries.

CHAIR —Thank you very much for your contribution to the committee.

[11.29 am]