Fortescue Metals Group's plan to move into the gas market has led to a call on the federal government to enforce Retention Lease policies, and phase out the domestic gas reservation policy.
In a letter to the ASX last week, FMG company secretary Mark Thomas said that enforcement of the “Use it, or Lose it” policies would encourage the “rational and market-based development of Western Australia’s abundant gas reserves”.
FMG’s construction of the 270km Fortescue River Gas Pipeline forms a major part of their plans to change the Solomon Power Station from diesel to gas, with an expected saving of approximately $20 million each year.
FMG has funded a Deloitte report entitled ‘Western Australia Gas Sector Analysis’, released on May 16, which claimed that strict implementation of the Retention Lease policy guidelines would lead to a drop in the price of gas of $3.20 off the projected $10 per gigajoule in 2020, and $5.90 off the projection of more than $12 per gigajoule.
The report shows there are currently 35 retention leases in Commonwealth waters, 17 of which have been renewed more than once in a duration greater than five years.
“If additional gas reserves were developed for the domestic market, our analysis suggests that the domestic gas price would fall to around A$7.2/GJ which is the gas price of the most expensive domestic project, Devil’s Creek,” the report found.
“This price would set the upper bound for the domestic gas price in contrast to the more expensive LNG netback price.”
Modelling showed the WA economy would benefit from an increase to Gross State Product of $2.5 billion in 2020 and $$4.8 billion in 2030, and could generate an extra 2100 jobs.
“It is therefore imperative that governments more rigorously apply the principles of the retention lease policy and enhance transparency of the process,” the report concludes.
“Along with phasing out the domestic gas reservation policy, these changes will result in a more competitive and robust domestic gas market.”
FMG chief Nev Power said the focus of the company was to be as cost competitive as possible.
“Fortescue’s vision is to be the safest, lowest cost iron ore producer,” he said.
“By getting the policy settings right, we could make a long term switch from imported diesel to reliable, competitively priced Australian natural gas.”