GOT GAS: Which ASX energy juniors stand to win from WA's new domestic gas rules?

Western Australia is allowing onshore gas projects to export 20% of their total production until the end of 2030
Move is expected to stimulate development of new gas resources while the market is balanced
State will also strengthen its “use it or lose it” provisions for onshore gas licences

Welcome to Got Gas, where Stockhead senior energy journalist Bevis Yeo gives you the lowdown on the news and insights you need to know in the ASX energy sector. This time, he looks at how changes to WA’s domestic gas policy will impact ASX stocks.

The Domestic Gas Policy has been a staple of Western Australia’s energy canvas in various forms since 1979, when the State Government helped underwrite the North West Shelf liquefied natural gas project.

It was first formalised in 2006 – and clarified several times since then – and essentially seeks to secure the state’s long-term energy needs by ensuring that 15% of the export-oriented gas bounty found off its coast is retained for domestic use to complement supply from onshore sources.

This was bolstered in 2020 by a ban on exports for onshore gas producers – though Mitsui E&P and Kerry Stokes backed Beach Energy’s (ASX:BPT) major Waitsia project was allowed to export half its gas, which led to much grumbling from other companies.

The Domestic Gas Policy ensured that for many years, gas prices in WA remained low compared to those on the country’s east coast.

However, change is inevitable.

Challenges involved with finding, approving and developing new offshore gas fields – think Scarborough and Browse – combined with declining production from ageing fields has led to the Australian Energy Market Operator forecasting WA’s domestic market would be in deficit between 2024 and 2029.

The AEMO also projected that additional gas supplies would be required from 2030 onwards to meet increasing demand.

Rather predictably, this has led to an uptick in spot gas prices.

Opening up onshore gas fields

However, the WA State Government is not standing still while this shift into deficit is occurring.

The Cook Labor Government has now relented on the ban on onshore gas exports, allowing at least part of its production to be exported.

Under the changes, onshore gas producers can now export up to 20% of their total production, at least until the end of 2030, after which all onshore production returns to being reserved for domestic use.

This is aimed at simulating development while WA’s gas market is balanced, and ensure more gas is brought to market in decades to come.

The 15% offshore reservation policy remains unchanged.

WA also flagged that it will determine how best to strengthen its “use it or lose it” provisions for onshore gas licences.

What it all means

At first glance, the changes seem counter-intuitive.

After all, won’t allowing 20% of total production from onshore gas fields actually REDUCE the amount of gas available for domestic use?

Well no. Allowing the operators of onshore gas fields to sell part of their gas production into the export market allows them to access significantly higher prices.

This means developing onshore gas fields actually becomes more attractive, which in turn increases the likelihood they will enter production.

This is particularly since the wording of the change indicates that the 20% of total production could come out at the very beginning of the project’s life, which could do wonders for payback periods and allow them to breakeven well before they are required to switch over to providing only domestic gas.

In other words, Got Gas actually expects that the decision will deliver more rather than less gas into the domestic market.

It could also lead to more companies deciding to give onshore gas exploration a shot, especially in the currently heaving Perth Basin, though the 2030 cut-off does limit their ability to capitalise on the changes.

ASX company reactions

Thus far only Strike Energy (ASX:STX) has (officially) chimed in on the change, welcoming it as supporting the investment climate for gas projects in the State.

In its ASX announcement on September 19, the company said export markets provide premium pricing and a deeper market.

STX added that it stood to benefit through its substantial uncontracted gas reserves and resources across its suite of pre-final investment decision projects, and signalled that it might increase exploration.

That’s exactly the kind of response that the WA Government wants to see, particularly coming from a company with a track record of both opening up the deep gas potential of the Perth Basin and making new finds, most recently Erregulla Deep.

Another potential beneficiary is Triangle Energy (ASX:TEG), which experienced a setback in August after its Booth-1 exploration well at its L7 permit (50%) in the North Perth Basin was plugged and abandoned after failing to encounter moveable hydrocarbons.

However, the company noted more recently that L7 still has significant potential in the Kingia and Lockyer structures and it is considering drilling a well updip of the historical MH-2 well that returned strong oil shows.

WA’s decision to tweak its Domestic Gas Policy makes it more likely that TEG will drill this further well in L7, which could also test a new basement gas play.

The same is also true for Echelon Resources (ASX:ECH), which has a 25% interest in L7.

Separate from the WA government decision but still related to onshore gas development is Buru Energy’s (ASX:BRU) recent decision to focus on developing its Rafael conventional gas and condensate discovery in the Canning Basin.

While still an onshore find, the Canning Basin has an exception in place that allows the ‘first-mover’ to be treated like an offshore development as the region is not connected to the existing gas network.

Rather than being allowed to export 20% of its total production, the first project out of the gate will instead be able to export all but 15% of its gas, which will likely play a key role in offsetting the high cost of getting the pipeline infrastructure into place.

BRU, a long-time believer in the Canning Basin – especially under the auspices of former chairman Eric Streitberg, is keen to be this first-mover and has worked out a plan involving the use of a mini-LNG plant to monetise its 1C (low case) contingent resource of 85Bcf of gas.

Doing so will allow the company to truck LNG to Broome and regional demand centres, allowing it to sidestep the need for pipelines.

At the larger end of the market, it adds a layer of intrigue to Mineral Resources’ (ASX:MIN) plans at its Lockyer discovery, where the iron ore and lithium miner had indicated a partial sale could be on the cards before WA’s policy changes were announced.