The Western Australian domestic gas reservation policy, enacted in 2006, certainly caused a lot of hand-wringing and whispers of Randian conspiracy in the LNG-export rich state.

The Australian Petroleum Production and Exploration Association has certainly made its feelings clear in a submission to the federal government’s Energy White Paper, due to be released in the middle of the year.

"Policy interventions such as the WA domestic gas reservation policy can adversely affect energy security by, rather than increasing gas supply, having the perverse effect of discouraging new market entrants and supply diversity," it said.

Now the manufacturing sector is pushing for a similar policy intervention in the Eastern States and the oil and gas sector is again hectoring the government to keep clear of a policy intervention.

Dow Chemical head Andrew Liveris caused a splash late last month when he suggested a portion of gas from new east coast gas projects be put aside to help the struggling manufacturing sector.

His reasoning is that manufacturing can help Australia avoid becoming a solely resources-driven economy by using said resources as chemical feedstock for a variety of manufacturing products.

The woes of the manufacturing sector have been played out in the broadsheets with steelmakers and carmakers crying for help from the government, citing a loss of employment if the industry is allowed to die.

Increasing the pressure on the Eastern States manufacturing sector is the rising price of gas caused by LNG exports on the Queensland coast.

Queensland’s Department of Employment, Economic Development and Innovation has projected that current market price expectations could lead to prices rising sharply from 2013 to more than $A8 per gigajoule in most markets.

Incetic Pivot, a large multi-national manufacturer of nitrogen and phosphorus-based fertilisers , has perhaps more reason than any to be concerned.

According to an edited version of its submission to the White Paper supplied to ENP, the manufacturer currently uses 27.5 petajoules of gas, or roughly 4.5% of east coast demand.

Incitec Pivot spokesperson Stewart Murrihy told ENP that the company is currently locked in negotiations for supply to its Phosphate Hill plant in Mount Isa, with the going tough.

“The feedback that we’ve been getting regarding pricing is that the prices we’re looking at are probably more than double our previous contract,” he said.

“The other concerning area is that the length of the contract is not really what we’re after. Typically we’ll sign contracts for ten years but the discussions that we’ve been having have been looking at three to five years.

“That’s definitely a concern for us.”

Of concern to industry peak body APPEA is any talk of government intervention. In fact, it was chief amongst their concerns into the future.

“Too often, calls for policy interventions reflect dissatisfaction with the operation of competitive markets, or have an ‘industry development’ justification, and do not reflect genuine market failure,” its submission read.

One gets the feeling however that the manufacturing sector’s and APPEA’s definition of “market failure” may be slightly different.

Incitec’s argument is that the manufacturing sector and the petroleum sector have such disparate views on the issue that the government should be brought in to “have a look at the whole value chain”

“They have a view from coming from the gasfield right through to the end manufactured product with the government picking up dollars along the way,” Murrihy said.

“From a government perspective, the value for the government in finding a way to secure some of that gas for domestic manufacturing is of a greater value to them than the gas just going offshore.”

The manufacturing sector’s call is that there is a direct multiplier on the gas used in domestic manufacturing compared with straight export.

For example, it says that one tonne of ammonium nitrate emulsion contains roughly $40 in natural gas, assuming a gas price of $3 per gigajoule. Based on sales of roughly $800 for the ammonium nitrate, this represents a 20 times value uplift on the resource value.

While APPEA maintains this sort of formula is “not necessarily the case” and the above example has likely been massaged, Murrihy said Incitec had held informal talks with government and opposition, and found them receptive to the logic.

“What we’re seeking is the government to have a look at the whole gas market both from a well to manufacture scope and look and how we can best benefit from that. I’ve also said that we don’t want to necessarily see restrictions on the gas companies because they’re investing lot of money, employing a lot of people … they have shareholders as we do,” he said.

“That being said there is a national interest in this. That’s why we believe the government needs to be involved.”

But hamstringing one industry to benefit another is surely a zero-sum game?

“We’re not saying it is [in their interest]. We’ve never said it is, and in fact we recognise that forcing the LNG suppliers to sell at a price below what they can get is transferring funds from their shareholders to our shareholders, which is not fair,” Murrihy said.

Blunt, to be sure, but this is at the heart of the reason why it’s pitching to penny pinchers in Canberra rather than the gas industry.

Its reasoning is that Canberra would be able to scoop more tax in a scenario which allows value-added products such as fertiliser or explosives for the mining industry and LNG export, rather than just LNG export.

Suffice to say, APPEA doesn’t agree on that last point.

“Policies which raise the gross value of output of particular industries at a cost to others – for example, forcing gas producers to supply ‘cheap’ gas to industrial users – may lead to a decrease in the overall economy’s value adding,” APPEAs submission read.

“Resources, including gas, should be allowed to flow to their highest value use – this increases economic welfare for all Australians.”

Given that much of the gas is coming from unconventional resources such as CSG and later, shale, one would also think that being forced to sell a portion of its product at cheaper prices would discourage project proponents already facing cost pressures.

This is a point Murrihy acknowledges, but says operators in the past have made a profit from gas deals derived from mainly CSG at lower prices.

“While I hear the point, we this year are opening in a couple of months an ammonium nitrate plant in Queensland in Moranbah which is backed to gas and we’ve tied up a 10-year deal with Arrow. Arrow signed that contract, and I would guess they signed it because they’re making a profit from it,” he said.

So while the manufacturing sector has yet to come up with the solution to the problem of an increasing gas price, it’s hoping the government will come around to its way of thinking and impose direct market intervention.

Whether or not market intervention is a rational idea is quite irrelevant. After all, politics and logic have never really gotten along.

This article first appeared in ILN's sister publication EnergyNewsBulletin.net.