Sydney (Platts)--8Nov2012/434 am EST/934 GMT

The Australian upstream petroleum industry has welcomed the release of the Australian government's new energy policy, which it said recognized the critical importance of a market-based approach at a time when some interest groups were seeking a return to protectionism and industry development subsidies in order to unsustainably reduce input costs.

The long-awaited policy, known as a White Paper, was unveiled Thursday by Minister for Resources and Energy Martin Ferguson. The development of Australia's gas resources was one of four priority areas identified in the paper, alongside delivering better energy market outcomes for consumers, accelerating clean energy outcomes, and strengthening the resilience of Australia's energy policy framework.

The new policy "faces up to major challenges such as rising energy prices, pressures in Australia's gas markets, remaining competitive in the development of our energy resources, maintaining our liquid fuel security and bringing new clean energy technologies to market," Ferguson said. "To meet these challenges, the Australian government is committed to open and transparent markets that allow competitive pricing, efficient resource allocation and innovation."

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That stance was welcomed by gas producers, who have faced a clamor from from consumer groups seeking domestic gas reservation policies over recent years. "Intervention in domestic gas markets would be counter-productive for both supply and prices, as they would discourage innovation and investment especially in dedicated domestic gas projects," Shell Australia Country Chair Ann Pickard said in response to the White Paper.

Shell also welcomed the paper's recognition of growing international competition for liquid fuel production, with new "mega refineries" in Asia providing competitive pressure to local refineries. Shell recently converted one of its two Australian refineries into an import terminal and Caltex Australia has similar plans for one of its two facilities.

"The company is confident the existing robust supply chain will ensure security of supply at internationally competitive prices," Pickard said, echoing recent comments made by Ferguson. The latest two closures will reduce Australia's refining sector to five plants, each with capacity of about 100,000 b/d.

"Only a market-based energy policy framework can enhance Australia's attractiveness as a place to do business and encourage the tens of billions of dollars worth of gas industry investment still to be approved," said Australian Petroleum Production and Exploration Association Chief Executive David Byers. "It is important that gas is seen no differently to other major export commodities such as iron ore, coal and wheat in that the benefits associated with development are maximized through links to international markets."

NEED TO ADDRESS LOOMING GAS PRICE 'BUBBLE'

The Australian Pipeline Industry Association said there was still a need to address a looming gas price "bubble" in eastern Australia due to LNG exports and a slowdown in coalseam gas development. Domestic gas prices in eastern Australia are widely forecast to as much as triple from the current level of $3-4/gigajoule over the next five years.

"There remains the fundamental challenge facing Australia's energy industries, and that is, the cost to the domestic economy of linking national gas prices to LNG export prices," APIA Chief Executive Cheryl Cartwright said.

"The solution is to address gas supply -- and ensure that businesses threatened by a short-to-medium term price hike can survive until the price levels out," Cartwright added. "With the vast resources of natural gas in Australia, improved access will address supply issues -- which will in turn assist in bringing prices down. In the meantime, government should seriously consider whether it wants a short-term gas supply crisis to permanently damage some sectors of the economy."

Prices are also the main concern of Western Australia-based gas user lobby group DomGas Alliance, which said the new policy "effectively surrenders Australia's competitive advantage in energy." DomGas Alliance said Australia now has some of the highest domestic gas prices in the world, at around $8-12/Gj, compared with $3.50/Gj in the US and $3.20/Gj in Canada.

"The US has taken a strategic approach on energy security and requires LNG exporters to prioritize the local economy," DomGas Alliance Chairman Tony Petersen said. "Canada also applies a national interest test on exports to ensure the domestic market is not disadvantaged in any way. It makes no economic sense for Australia to link our domestic gas prices to the world's highest prices in Japan."

The user group added that Australia was the only country in the world where international oil companies could openly access and export gas without prioritizing the local economy. "It is also the only major gas producing country facing serious shortages and sharply rising prices," DomGas Alliance added.

Australia is currently enjoying a $180 billion LNG investment boom, with seven major projects under construction around the nation. The new plants are expected to raise Australia's LNG capacity from around 24 million mt/year to more than 80 million mt/year by 2017, potentially making it the world's biggest producer, ahead of current leader Qatar.

A next wave of LNG projects could lift Australia's total LNG capacity to as much as 130 million mt/year by 2035, according to government estimates. APPEA welcomed the White Paper's advocacy for reducing red and green tape that continues to limit the development of Australia's gas resources. "Establishing more effective regulation, including less duplicative planning processes and more timely approvals processes, is a very important step in securing future supplies of gas," the association said.

Australia has 819 Tcf of natural gas, APPEA said. In 2009-2010, the entire Australian economy consumed only 0.9 Tcf, with a further 0.9 Tcf exported. One Tcf is enough gas to power a city of 1 million people for 20 years.

--Christine Forster, christine_forster@platts.com --Edited by Haripriya Banerjee, haripriya_banerjee@platts.com

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