Securing domestic gas supplies

1
Securing domestic gas supplies
Australian Oil and Gas Conference 2007

• Presented by
• Stuart Hohnen
• Executive Chairman
• Dampier Bunbury Pipeline
• Thursday 22 February 2007

2
Securing Domestic Gas Supplies

• Operational structure

• DBNGP history

• DBNGP expansion

• The domestic gas supply issue

• Has the market failed?

• Gas the environment

• The DomGas Alliance

• The way forward

• Summary

3
Operational Structure

• DBNGP
• Australias largest and most significant gas
  transmission system
• vital component of WAs energy economy

• Dampier Bunbury Pipeline (DBP)
• trading name of the group of companies which owns
  and operates

• DBP is responsible for the performance of the
  business and manages all
• contractual arrangements with shippers
• new business development activities
• economic and technical regulatory arrangements
• stakeholder relationships including Government

• Alinta Asset Management (AAM)
• responsible under contract to DBP - for the
  day-to-day management of the pipeline

4
DBNGP History

• 1984
• DBNGP commissioned to Perth

• 1985
• Bunbury extension

• 1995
• Transferred from SECWA to AlintaGas

• 1998
• Privatised purchased by Epic Energy

• 2004
• 27 October 2004 purchased by DBP consortium

5
DBNGP Expansion

• DBNGP - progressively expanded over its life

• DBP - proactive in meeting its expansion
  obligations

• Stage 4 approved by new owners in May 2005

• 430 million capital cost

• 100 TJ/day of new capacity

• Eight new compressors

• 217km of looping

• Ten separate loops 5km to 50km

• Completed in December on time and on budget

• Official celebration held yesterday

6
DBNGP Expansion

• Nov 2005 - Stage 5 FEED expenditure approved
• Conceived as one project (310 TJ/d)
• May 2006 - DBP decided to proceed in three stages
• Contributing factors
• uncertainty about gas price/availability
• high construction costs
• August 2006 - Stage 5A investment decision - 700
  million
• approx 100TJ/d of new capacity capacity to
  offset gas quality reduction
• 570km of looping some compressor
  reconfiguration
• Construction has commenced, commissioning due
  March 2008
• Stage 4 5A total commitment of 1.1 billion
  in two years.

7
The domestic gas issue

• Since 1984 - an abundance of reasonably
  inexpensive gas in WA
• WA market comprised monopoly seller (NWSG) and
  monopoly buyer (SECWA)
• Apache JVs emerged as a new significant
  supplier (90s)
• Disaggregation of SECWA contract in 1995
  eliminated monopoly buyer
• Gas sold into WA energy market in competition
  with other fuels.
• Purchases are made by long-term take-or-pay
  contract
• Major consumers alumina refining, power
  generation and processing
• These industries rely on the continuing
  availability and competitiveness of gas

8
The domestic gas issue

• Uncertainty about availability and price of gas
  for new projects
• New project developers unable to engage with
  producers regarding additional sources of new gas
• Existing gas users advised no new gas is
  available from existing sources for incremental
  supply
• Industry estimates potential demand for 400-500
  TJ/d in the next 4-5 years
• No clear evidence of new field development
  notwithstanding significant new LNG project
  activity
• ERA prescribed lower quality gas spec for DBNGP
  in 2005
• to stimulate development of new fields
• to increase competition in domestic gas market

9
The domestic gas issue

• WA has the vast majority of Australias gas
  reserves
• Yet WAs gas requirements are being ignored in
  favour of LNG
• New LNG projects under development or active
  investigation include
• - NWSG train 5
• - Woodsides Pluto
• - Chevrons Gorgon
• - BHPBs Scarborough
• - Inpex Ichthys
• Recent delivered prices for gas are significantly
  higher than in the Eastern States - despite WAs
  massive reserves

10
The domestic gas issue

• DBP has committed 1.1 billion to expansion in
  two years
• Returns from pipeline investment are heavily
  regulated
• economic regulator - DBNGP lifespan of 60 years
• Upstream market not subject to economic
  regulation in fact the NWS JVs are permitted
  to sell jointly
• Confidence in long term availability and
  competitiveness of gas is fundamental to DBPs
  owners and customers
• State Government to be congratulated for
  identifying the gas supply problem and moving to
  address it
• However, reservations alone will not ensure
  timely and competitive supply - other initiatives
  are required to address the market shortfall

11
Has the market failed?

• No serious interest in the domestic gas market by
  existing and prospective producers
• Competition amongst producers in the domestic
  market appears non-existent
• New domestic supply could be totally reliant on
  future LNG developments
• Billions of dollars in new domestic project
  investment could be dependent on future
  (uncertain) LNG developments
• There is a need for a spread of projects and
  reserves that are not dependent on export scale
  and timing
• Opportunities to develop a domestic market
  framework are being ignored
• While joint selling by the NWS JVs may have been
  appropriate when SECWA was a monopoly - it is now
  an anachronism

12
Gas and the environment

• Domestic gas - an important component of WAs
  response to the greenhouse challenge
• Any threat to the position of gas in the WA fuel
  mix is a threat to the environment
• Natural gas the cleanest of all fossil fuels - an
  important transitionary fuel
• WA has the highest gas consumption and the
  highest of gas-fired power generation in
  Australia
• 50 of all generation (90 of private sector
  generation) is gas-fired
• If natural gas becomes unavailable or
  uncompetitive, new baseload generation will be
  coal-fired
• Increased greenhouse gas emissions are inevitable
  under this scenario

13
DomGas Alliance

• Domestic gas supply debate has been seen as a
  matter between producers and State Government
• Gas users are faced with one dominant producer
  group
• DomGas Alliance formed to provide some balance in
  the debate
• The Alliance will represent parties with a stake
  in ensuring
• certainty of supply in the domestic fuel market
• continued competitiveness of gas
• Economic analysis commissioned to examine
• the significance of gas using industries in WA
• structure and shortcomings of the domestic gas
  market
• Lack of competitive gas supply for domestic
  purposes could have a huge economic and
  environmental impact

14
The way forward?

• Principal objective of the Alliance
• to achieve certainty of supply and a competitive
  gas market through multiple supply sources
• Additional goal
• is to achieve consistency and alignment in
  upstream and downstream regulatory regimes
• Strong preference of Alliance is to create a
  workable and competitive market
• More active government intervention may be
  required if this does not emerge
• Alliance seeking to positively engage State and
  Federal Governments
• There is a need for industry and government to
  join together to
• examine the whole gas supply chain
• explore all ways of reducing delivered gas costs
• evaluate all possible avenues to encourage supply

15
The way forward?

• Upstream mechanisms might include
• reservations
• review of retention licence arrangements
• review of joint selling dispensation
• differential royalties /or taxes
• active promotion of smaller field exploration and
  development
• alternative approaches to offshore gas gathering
  systems
• Reservations may be part of the equation - but
  cant be seen to be the only solution

16
Summary

• DBP has moved quickly from a standing start
• Stage 4 completed on time and budget
• DBP has been proactive with respect to Stage 5
• Gas underpins a significant proportion of the WA
  economy
• Gas availability and competitiveness is a matter
  of real concern
• Industry Government need to join together to
  focus attention on how best to stimulate domestic
  gas supply

17
Questions