Current projects

Domestic energy reservation policies: An international comparison

There has been some resistance to and criticism of WA's domestic gas supply policy announced in October 2006. There may be applicable international policy lessons which would assist in the furtherance of the debate.

This report, updated and expanded on an annual basis, presents a review of international energy policies related to the reservation of, primarily, natural gas, but in some cases also oil and coal, for domestic energy use. It focuses on a number of self-contained country case studies. For each country of interest, a case study is provided in laymen’s terms, including:

•  brief details of the level of gas or energy reserves, consumption and exports

•  a description of the reservation policy (past or present), or relevant domestic market promotion policy or production sharing agreement/contract conditions, be it for oil, gas or coal

• conclusions at the completion of each case study in Sections I through III discussing some of the benefits and criticisms of the policies.

The report can be purchased by contacting Mrs Muriel Bijoux at  M.Bijoux@curtin.edu.au.

Price impacts of the domestic reservation policy for natural gas in Western Australia

Modelling the effects of a large-scale resource project is complicated by the fact that the multiple effects may be substantial enough to cause disruption of input and output markets. In such circumstances, the application of current market prices in evaluating costs and benefits associated with the project is problematic, even when there are no external costs or market imperfections that give rise to differences between private and social values. The complications are compounded when there are substantial externalities. This is the case with the use of fossil fuels in energy production, and when there is substantial market imperfection in the downstream stages of use of the resource, a feature that also generally applies to the use of fossil fuels for the production and distribution of energy.

Production of natural gas has contributed substantially to West Australia’s booming economy and has the potential to continue to grow substantially over coming years. Domestic use of natural gas has risen by over 5% each year in the 20 years up to 2005-6, while the growth of export sales has been even more rapid since the commencement of liquefied natural gas (LNG) shipments in 1989-90. Recently, concerns have been raised about whether domestic users of natural gas will continue to be reliably supplied in view of competition from the booming export market. This has led to the introduction of a domestic gas reservation policy by the WA government applying to all future field developments where economically viable.

The research will utilise the experience of the OGM researchers to forecast future prices for WA gas in both the export and domestic market. These forecasts will include two alternative scenarios: one with a domestic gas reservation policy in place, and one without the policy. A distinctive feature of the forecast is that they will integrate the analysis of external economic developments (eg the world business cycle) and external policy developments (eg carbon trading) with the particular characteristics of the production and consumption of natural gas in WA (especially the small number of both producers and major consumers in the domestic market). The results from the research will further assist with the determination of economic viability for application of the domestic gas reservation policy to future field developments.

It is planned that this scoping exercise will lead to an application for an Australian Research Council Linkage grant in 2008.

Comparison of international gas regulatory regimes

A key project is currently being conducted on behalf of the Australian Centre for Natural Gas Management (ACNGM) entitled “A Comparative Static Comparison of International Gas Regulatory Regimes”. The main purpose of the research is to review best practices in gas regulation and to provide source material that can be used as part of the executive education programs undertaken under the auspices of the ACNGM. A comprehensive pro forma structure has been designed to allow ease of comparison for differing styles of regulation across the 7-8 countries under consideration. As it progresses, this project will involve a range of collaborators, particularly from Chinese universities.

Volatility dynamics of energy complex and its implications for optimal risk management strategies

The University Post Doctoral Fellow in Energy Economics, Hiroaki Suenaga, is continuing work on the project that formed the basis of his application for the fellowship. In this project, he analyses the price and volatility dynamics of energy commodity prices and examines their implications for optimal risk management strategies. Econometric models of volatility dynamics have been applied to NYMEX natural gas, crude oil, and other petroleum commodity prices and results have been compared with conventional models of energy price dynamics. The model is to be extended to the analysis of cross-commodity and -market linkages. Implications of these results for risk management practice and optimal investment and contract decisions are to be examined in the course of this project.

The incorporation of country and political risk variables into export pricing for natural gas from Australia

In efficient market it would be expected that there is an equal probability of the near future price of the asset rising, falling or staying the same. Natural gas markets, like many other commodity markets, are not efficient. This means that the news associated with economic, financial and political risk factors that comprise country risk does not arrive in a random fashion. The model in this study compares time varying gas price risk premia to country specific economic and political risks in a natural gas market that is not integrated and where conditions of excess demand prevail. The motivation for the research is that countries such as Australia need to determine the contribution of country specific economic and political risks not only to infrastructure investment returns but also to gas price risk premia for appropriate export pricing for particular markets. This research is being conducted by Dr John Simpson.

Small to medium enterprise (SME) integration in the oil and gas supply chain

This project aims to assess the cooperation and collaboration by SME’s in the Western Australian oil and gas supply chains. The project is part of an international research program of the “Trans-Regional Supply Chain Research Network”, with project coordinators Prof. Gudrun Jaegersberg, University of Applied Sciences, Zwickau, Germany, and Assoc. Prof. Jenny Ure, Edinburgh University, Edinburgh, UK.

The international research program aims to support the development of regions as centres for innovation, research and best practices in Supply Chain Management. The support can be provided through the exchange of knowledge between stakeholders within and between regions, and in developing value-adding partnerships. Opportunities for synergies and stakeholder alliances are developed within tri-partite partnerships consisting of government, university and industry partners.

The WA component of the research program is led by Assoc. Prof. Martin West (Co-Director) and supported by the City of Perth as part of the World Energy City Alliance, Chevron and the WA Energy Research Alliance.

In WA, the research project focuses on identifying factors that impede SME collaboration in the oil and gas supply chain. In particular the research focuses on how the competitiveness of the oil and gas industry could be enhanced by an effective interface between research and development and small to medium technology companies in the local oil and gas supply chain.

The valuation of imputation tax credits in regulatory asset pricing: A re-assessment

Companies in regulated industries in Australia, such as public utility companies are required by legislation to obtain a reference tariff from the relevant regulatory authority for the products and services they offer to the general public. In determining the reference tariff, rate regulators are expected to allow a fair rate of return for the capital employed by the utility company. The common practice in rate regulation is to estimate the rate of return or equivalently, the cost of equity capital by applying the Capital Asset Pricing Model (CAPM). The cost of equity is the rate of return that the firm needs to earn on its assets in order to meet the expected or required return of its equity holders. When the utility company is financed by both equity and debt, a Weighted Average Cost of Capital (WACC) is computed to reflect the rate of return to meet the expected return of its equity and debt holders.

This research will re-examine the value of franking credits using company data since the change of the corporate tax rate to 30%. This will enable a cleaner estimate of the value of the franking credits. In estimating the value of franking credits, a number of factors will be controlled for that may have a bearing on the value of franking credits paid out by different firms. The research will test the hypotheses:
1. Do high capitalisation stocks have a greater propensity to pay high yielding dividends?
2. Do high capitalisation stocks have a higher propensity to pay franked dividends?
3. If the last two hypothesis’ are correct, do high capitalisation stocks exhibit higher drop off ratios?
4. What is the value of a dollar of franking credits?
5. Does the franking credit component of the drop off ratio differ for different market sectors/industries?
6. Does the franking credit component of the drop off ratio differ for high capitalisation and small capitalisation companies?

The application of the results of this project will be specifically targeted at the cost of capital computations of gas pipelines. One outcome of the project is expected to a case study of regulatory pricing methodology as applied to gas pipelines. This research is being conducted by Assoc. Prof. Lakshman Alles.

Research on emerging management issues in the oil and gas sector

This suite of research is being conducted by the School of Management, led by Ms Christina Howe.

1. Recruitment and Retention in the Oil and Gas Sector: ‘Best Fit’ Strategies

While a number of obvious ‘best practice’ techniques can be recommended for handling recruitment and retention in very tight labour markets, the analysis of ‘best fit’ may be more appropriate in the complex oil and gas sectors. In this respect, the astute management of human resources may generate sustainable competitive advantages when closely integrated with business strategy. This project would analyse Strategic Business Units and seek to identify areas for immediate improvement and long-term development in terms of:

• External fit: the extent to which HR Recruitment and Retention strategy supports the business strategy;
• Internal fit; the extent to which the bundle of HR practices is integrated (joined up) and self-reinforcing;
• Market fit: the extent to which the Recruitment and Retention Strategy is sustainable and responsive to external labour market pressures/constraints; and resilient to the impact of rivals.

The methodology of this project consists of single case studies (consultancy style). Data are to be collected via interviews with key staff (those responsible for building strategy, and for HR policy) and examination of documentation and web-based materials.

The outcomes from this project include a seminar for company staff accompanying a business report. Later, these to be converted into a series of teaching case studies.

2. Expatriate Management and Technology Transfer

While knowledge transfer is often explicitly stated as a reason for the employment of expatriate staff, there is limited empirical research evidence on the effectiveness of this approach. Quite a lot is known about the high cost of expatriate employment, and the level of expatriate failure, to the extent that the value of expatriate employment must now be questionable. There is a need to identify successful methods and models of expatriate activity with regard to:

• mechanisms and behaviours that facilitate knowledge transfer in complex industrial and multicultural settings;
• the identification and reduction of barriers to successful knowledge transfer

The methodology of this project consists of multiple case studies of expats in situ. Data are to be collected via interviews with expats, host-country nationals working with them, and HR Directorate staff.

The outcomes from this project include inter-company seminars, and a handbook outlining models/methods.