June 2, 2014

The evidence against Western Australia’s populist and protectionist domestic gas reservation policy continues to mount.

Last month, the state’s independent Economic Regulation Authority surprised few when it called for the policy to be dumped after finding the cost to the WA economy far outweighed any perceived benefits.

But last week’s intervention by Fortescue Metals Group (FMG) is a different matter. You just know a policy is struggling  when even those it is designed to benefit find it impossible to defend.

FMG is one of WA’s biggest energy users and a member of the Domgas Alliance, a group formed to champion reservation as a means of delivering subsidised gas to its members.

But yesterday, FMG effectively kicked the stool from under the policy  by releasing a report which echoes calls for the policies abolition.

The Deloitte Access Economics report states that: Domestic gas reservation may relieve supply shortages and potentially depress prices in the short term. However, we consider that in hindering the ability of markets to function effectively, domestic gas reservation policies are generally likely to create adverse economic outcomes in the longer term.

The report acknowledges that market forces, not government intervention, should determine when and how Western Australia’s offshore gas should be developed.

It recommends use of the existing retention lease framework to strike the right balance between investment in export and domestic gas markets.

But we need to be wary of any changes to the retention lease system which fail to recognise the significant investment companies make in offshore exploration or impose conditions that may deliver non-commercial outcomes.

We shouldn’t replace one form of intervention with another.