Malcolm Roberts – CEO, APPEA, Australia
The CEO of APPEA, Australia’s peak national body representing the E&P industry, explains how government leaders and regulators alike have responded to changing dynamics in the domestic gas market as a result of increasing LNG exports on the East Coast, while highlighting key development areas in terms of improving the nation’s competitive appeal for upstream petroleum investment. He also illustrates the importance of gas, as a transitional fuel, in climate change discussions and defines the widespread implications of Australia hosting LNG18 in April 2016.
To begin, Malcolm, can you please share the goals you set for yourself when assuming the position of CEO back in June, and also describe how far the organization has progressed now in relation to those goals?
For any industry association, the aim must be ensuring the best operating environment for your members. In particular, APPEA supports reforms to make the regulatory system as simple and low-cost as possible, consistent with meeting public policy objectives. APPEA is very focused on ways to streamline regulation. In the case of environmental approvals, for example, we support greater coordination between the commonwealth and the states. We’ve seen welcome initiatives to essentially create a one-stop shop for approvals to reduce duplication and delays. We’ve seen a transfer of responsibilities to the states for environmental approvals under commonwealth legislation. These are major regulatory reforms.
APPEA is working with the commonwealth and states to ensure that the release of acreage for exploration is as streamlined and simple as possible. Governments need to recognize that exploration, always risky, is even more of a high risk venture in the current market. Regulatory systems should reflect the fact that businesses take great risks to find and develop commercial resources. Attracting these investments in a global market means governments need to offer timely, transparent decision making and appropriate security for developers. These points are generally well understood so I think we’ve made good progress there.
APPEA is concerned that exploration in Australia is suffering from more than a cyclical downturn driven by low prices. We are seeing a worrying decline in onshore and offshore exploration. Reversing this trend will be a major priority for APPEA.
More generally, as in many other countries, the oil and gas industry needs to maintain public confidence. There are emotive public debates about the impact and future of fossil fuels. There are concerns about the environmental impact of our operations. APPEA has an important duty to explain the contribution the industry makes to a more prosperous, sustainable Australia.
How would you evaluate Australia as an investment platform for oil and gas?
Australia is a highly attractive destination for investment in the resources sector. Most Australians intuitively understand that resources underpin our economy—particularly in Western Australia and Queensland. Our economy is built on world class strengths including resources, agriculture, international education, and niche manufacturing. The $200 billion which has been invested in the sector in recent years has created a highly competitive, sophisticated industry supply chain in Australia. We have great strengths in innovation, evident in the rapid growth of our coal seam gas producers and the technical challenges our offshore projects have overcome. We can point to our capacity to support first-in-kind projects such as coal seam gas to LNG or floating LNG or carbon capture and storage.
Australia has the advantages of political stability, deep engineering and commercial expertise, and substantial, proven resources. But we are not complacent. We are conscious of the unrelenting pressure to lift competitiveness and productivity to stay at the forefront of global investment. APPEA is working on ways to enhance our underlying strengths to ensure we can attract the next wave of international investment.
The COAG Energy Council recently held its fourth annual meeting under the leadership of the newly appointed Minister Frydenberg as chair. How do the outcomes of this meeting align with what APPEA had hoped to be addressed or accomplished?
We were pleased with the Ministers’ acceptance that Australia requires policy focused on bringing more gas to market. The key risk is policy failure, not market failure. Australia has ample resources but we could face, in the short term, an unnecessarily tight domestic gas market on the east coast. We reject the misleading arguments which seek to blame the LNG industry for this situation; these arguments are usually made to promote self-defeating policies such as gas reservation. The LNG industry has created the commercial incentive and scale for massive re-investment in developing resources, to the benefit of domestic and international customers.
APPEA is looking to governments to convert good intentions into good policy.
Unfortunately, at the moment, the situation in New South Wales (NSW) and Victoria is not very encouraging. The NSW government supports the development of two major projects. These projects are essential if NSW is to achieve any meaningful local supply – today, 95 per cent of the gas used in NSW comes from other States. NSW is in the uncomfortable position of relying on two commercial decisions to determine the future of gas supply in that State. In Victoria, a moratorium on onshore gas development was put in place by a previous government— a new government has extended the duration and scope of the moratorium. There’s a political decision to be made in Victoria about onshore gas development. Offshore, there is more encouraging news. There’s an AUD 6 billion project to develop the Kipper field—a challenging project in a technical sense but one which is essential to bring new supply to the market, offsetting the decline of traditional fields.
What were the main barriers that recently prompted Canada to overtake Australia as the 2nd most favorable destination for upstream investment?
I could say that we are proud to be ranked consistently as the number 1 or 2 most favourable destination for investment over the last three years. It’s a crowded, intensely competitive field. But, as I said before, we can’t afford complacency.
Australia remains a great location for any investor. We continue to offer a competitive regulatory and stable political environment, coupled with solid technical skills and a well-established industry supply chain. But we need to keep the focus on reducing the costs of doing business here. That fact is more acutely recognized in our industry today than at any time over the last 10 or more years. The Australian industry is agile because it has to be.
I’m pleased that this imperative is now being recognized by governments. In early 2016, the commonwealth will release a national resource development statement. From what I understand, it will focus on reforms to enhance our international competitiveness.
Industrial relations is one area overdue for reform. We have just achieved some modest, overdue changes in the treatment of greenfields projects. APPEA will be working to expand that approach to give project proponents more certainty about labour costs and industrial agreements.
Ideally, we’d have a lifetime project agreement to give certainty about future labor costs and allow for more flexibility on workplace issues such as rosters. At the moment, we have some security but only for the first four years of a greenfields project
We also have a very developed skill base in the country which we will work to retain during the current downturn to ensure we can respond quickly when the market improves.
Currently, worldwide trends are creating a relatively challenging pricing environment for E&P. Given these factors, do you believe the country is still poised to overtake Qatar as the world’s largest export of LNG by 2020?
Yes, I’m very confident. The projects are very well advanced—we’re only talking about the timing of when each project achieves first gas. All three Queensland projects are now exporting. Gorgon is imminent. Wheatstone, Prelude and Icthys will follow. Browse is an exciting prospect. One of the aspects that makes Australia interesting is the fact that we’re using a mix of technologies to tap different resources. Whether that’s coal-seam gas or FLNG, we’re seeing different technical solutions being trialed in Australia, which is a tremendous vote of confidence by the international industry.
What’s next? There are many opportunities for brownfield developments, as the major projects we have can be readily expanded. There is tremendous potential onshore in Western Australia and Northern Territory (NT). The NT government has announced the construction of a pipeline to link the NT system with Queensland—this initiative will strengthen both our domestic and export capacity. We are also optimistic about offshore exploration, including in frontier areas.
At the EUAA national conference this past October, you had mentioned that as the LNG export industry develops, the east coast gas market will continue undergoing a “painful transformation—for all parts of the gas supply chain.” Do you believe contention surrounding domestic supply security is actually warranted? Or is it more of a “resistant-to-change” matter?
Unfortunately, many of our customers will experience pain when their long-term contracts expire and they face 2016 prices for the first time. But this has very little to do with the emergence of the LNG industry. And the reservation policies sometimes peddled to address supply-side risks would make matters far worse for downstream customers.
The domestic market was built on long-term bi-lateral contracts usually offering very competitively priced gas. At the time, it was in the interests of all parties to have long-term contracts and it was possible to supply gas at prices we would see today as astonishingly cheap. Long-term contracts gave everyone – producers, infrastructure developers and customers – the security they needed. Prices were low because of the accessible, high quality reserves supplying the market.
That set of circumstances has been changing for many years. The fundamental reason is that the industry is moving up the production cost curve. We are depleting the low-cost, high quality resources and must now develop more costly fields. In many cases, that means replacing conventional gas with more expensive, unconventional gas. The trend away from bi-lateral contracts is paralleled by similar developments in the international market. If we look at the international market, roughly 5 percent of transactions have traditionally been in the spot market—that’s now hovering around 30 percent, which reflects the changed nature of supply and demand in the market.
How do you see the landscape improving based on your discussions with the ministers and other stakeholders?
At the end of the day, the only solution is to bring more gas to market, which will stimulate competition and put downward pressure on prices.
Governments may be tempted by short-term populist policies but they also know that industries and households need reliable, affordable gas. As we become more dependent on unconventional gas reserves to meet those needs, it will become obvious that unjustified restrictions on developing these resources have a high social and economic cost.
The LNG industry has largely created its own supply by pioneering the development of coal-seam gas resources. If we look at the east coast market now, coal seam gas accounts for 40 percent of production and 90 percent of reserves. We are seeing a fundamental shift away from well-established conventional gas fields into unconventional gas. While some groups are using this shift to attack the environmental credentials of the industry, it is becoming more and more difficult to ignore the fact that unconventional gas reserves will have to be developed on a large scale to sustain our local market.
Energy users, and their representative industry bodies, agree with us: restricting gas developments doesn’t make economic sense. Users, like everyone in the gas industry, support an effective regulatory regime that protects the environment. But they also recognize that gas is an essential feedstock for manufacturers as well as energy for businesses and homes.
Next year, LNG 18, the world’s largest conference and exhibition on LNG will be held in Perth—featuring some of the most prominent voices in the industry. In your opinion, why is Australia best suited to host a conference of this caliber and truly embody the prestige of this event?
At the risk of sounding too patriotic, where else would you go? Australia has an industry at the forefront of international development, integrated into arguably the most important regional market for LNG in the world. We have an innovative industry, leading in groundbreaking technical solutions. Australia has the leading companies in the world working on some of the most ambitious projects in the world.
The successes we are enjoying today reflect longstanding relationships with our friends in the region. Our partners are integral to our success and, in many cases, are committed investors in our major projects. Australia is very much part of the Asia Pacific century. Holding LNG-18 in Australia recognizes the significance of the region to the global industry.
Moving forward, in which areas of the market do you see the most opportunities to improve the nature of collaboration between industry and government?
There is a renewed effort between the industry and governments to maximize the opportunities for our industry and our country. Much of this effort is focused on lifting productivity and using innovation to reduce costs. The new Oil, Gas and Energy Resources Growth Centre is just the latest initiative to focus on linking business, governments and leading researchers. APPEA members are heavily involved in these initiatives and industry-based collaboration.
We’re in a political climate where there are natural concerns around environmental issues, too often exploited by activist campaigns with little regard for the facts. Industry cannot address these issues alone. Governments must be part of the solution, supporting high quality independent science and creating credible regulators and other public institutions which address community concerns.
What are the fundamental objectives that you would like to have achieved in the next three to five years?
Two objectives stand out.
An industry which makes an even greater contribution to Australia’s prosperity, creating opportunities for all Australians.
An industry which is more widely acknowledged for its economic contribution and respected for its stewardship of the Australian environment.
The first objective means lifting our competitiveness across the board – tax, regulation, industrial relations, innovation.
The second objective may be more elusive but it is not less important. It involves telling a complicated but positive story to people who are being bombarded with misinformation. In particular, I trust that we will see a more mature debate develop about climate change which recognizes the important contribution gas is making in the transition to a low emissions future.