WA is continuing to try to tempt companies to “go west” for its low, low gas prices, but the reality is that budding gas producers in the east are likely to keep their hold over customers trapped by their own investments.

This week WA Premier Mark McGowan again pitched east coast gas users to move west and take advantage of $3 gigajoule (GJ) gas prices.

Spot market gas prices on the east coast yesterday averaged around $10 GJ.

“My pitch to east coast industry is simple. If you want a cheaper and more reliable supply of gas – go west,” McGowan said in a statement ahead of a pitch to the APPEA Conference in Brisbane.

He is claiming “an abundant supply of cheap gas” created by their domestic gas reservation policy.

Frontier Economics energy economist Andrew Harpham says commercial gas contract prices have hovered around $8-12 GJ, while in WA they’re likely around $5-6 GJ.

WA? Unlikely

Stockhead understands several east coast gas users would move — if they could. But sunk costs and better deals overseas mean that’s highly unlikely.

ACCC boss Rod Sims warned in March that sunk capital costs — such as completed factories and installed heavy equipment — trap companies where they are.

Energy Users Association of Australia chief Andrew Richards told Stockhead he’s seeing more companies moving to the US which also offers cheap gas and business incentives, such as Incitec Pivot (ASX:IPL) building a $1.08bn ammonia plant in Louisiana, citing the state’s low taxes and low regulation.

“It’s not very sensible because they’ve [industrial gas users] already got all of their facilities in the east,” Energy Users Association of Australia chief Andrew Richards told Stockhead.

“The only reason you’d set up a new facility in WA would be if it’s closer to your export markets, such as South Africa.”

Harpham says companies are looking to move — they’ve worked with a few that are investigating the Northern Territory but doesn’t know of any considering WA — but it depends on whether they can get long term contracts.

Queensland, the Northern Territory and WA all export gas, so companies need to be sure they can get low gas prices for 15-20 years.

Just five years ago WA’s gas prices were around the $10 GJ mark, Harpham says.

The problem in the Northern Territory is they’d need to develop new fields to have “certain” gas for 20 years, and it’s likely a producer would develop that for the more lucrative export market.

Harpham says “it’s not impossible” to get a good long term contract in WA as the Perth Basin is close to Perth and are unlikely to be exported.

Gas reserves in that basin are being proved by a range of companies including Beach Energy (ASX:BPT).

Small gas producers could be in the driver’s seat

The major gas sellers on the east coast are the big LNG exporters QGC (a joint venture of Shell, China National Offshore Oil Corporation and Tokyo Gas), Australia Pacific LNG (a joint venture of ConocoPhillips, Origin and Sinopec), and Santos GLNG (a joint venture of Santos, Petronas, Total, and Kogas).

The ACCC’s fifth interim report into the gas sector found that 80 per cent of ‘2P’ gas reserves were controlled by the big three Queensland LNG producers, either through ownership or through purchases from other suppliers.

So industrial gas users began striking deals with the few independent gas producers left.

According to data crunched by Stockhead, the only Queensland gas producers listed and unlisted that are not already owned by a billion-dollar behemoth are Armour (ASX:AJQ) and Senex (ASX:SXY). Central Petroleum (ASX:CTP) in the Northern Territory can also sell to the east after hooking into the Northern Gas Pipeline.

Richards says large gas users can’t secure contracts for more than 12 months and they’re looking at paying $1-$1.50 over the LNG netback price, the LNG export parity price.

Central Petroleum hooked Incitec Pivot in June last year for a 13-month contract.

Senex signed CSR (ASX:CSR) and packaging company Orora (ASX:ORA) this year, but for longer terms of three years and two years respectively.

Armour is contracted to sell 10 terajoules (TJ) a day to APLNG and can put the rest into the spot markets. At the end of March they were at 9.9 TJ a day.

“We need more Central Petroleums. We need more mid-sized players to challenge the bigger players,” Richards said.

“It’s hard to for large gas users because… the volumes they are looking for are just too big.”

Queenslanders Bounty Oil and Gas (ASX:BUY), Energy World Corporation (ASX:EWC), Galilee Energy (ASX:GLL) and Comet Ridge (ASX:COI) are expecting to have producing fields running this year.

Beef up the little players

A report released yesterday by S&P Global into whether Australian businesses are ready for an economic slowdown pointed to the country’s “curious” gas market as an area that will be ripe for intervention over the coming years.

“The country’s various electricity and gas market rules need to be reviewed and shaped in the face of evolving changes in the generation or gas market,” said the report, titled ‘Are Australian Corporates Battle-Ready?’.

“We believe these reviews will also address the need for timely and appropriate investments and availability of gas to domestic users at efficient costs. It is curious that Australia, an energy-rich continent, pays more for domestic gas than its offshore customers.”

The Energy Users Association of Australia’s Richards said competition was a major part of the cure.

He endorsed a multi-billion dollar Snowy Hydro-like investment into a commonwealth gas wholesaler or creating a Clean Energy Finance Council for gas which could invest in gas pipelines, such as what Labor was proposing to use the $5 billion Northern Australia Infrastructure Facility (NAIF) for with regards pipelines into the Galilee Basin, just north of the Surat Basin.