with Belinda Robinson, Chief Executive, APPEA
Australia has typically operated as a middle power in the foreign policy sense. But the energy sector is quickly lifting the country to the ranks of a superpower. Are we in the beginning phases of a golden age of Australian energy?
I certainly like to think so. Our economy is very much based on resources with oil and gas energy playing an increasingly significant role. We have enormous supplies of coal and uranium and the massive reserves of natural gas that we possess are becoming ever more obvious. With the inclusion of coal seam gas (CSG) resources, we are facing a reserve-to-production ratio in excess of 250 years. That alone puts us in the realm of an energy superpower. Taking into account the other energy sources we have, it is an indisputable statement to say that we are an energy superpower.
With gas grabbing all of the headlines as the future of Australian energy, is oil getting lost in the discussion? What is the outlook for oil in Australia?
In Australia the outlook for oil is not too good. The oil reserves-to-consumption ratio is less than ten years. However, some incremental discoveries are still being made. But there is no doubt that on the basis of current activity, oil production in this country is declining. Whether that becomes the reality we don’t quite know yet because Australia is still a relatively unexplored country. Only 20% of our sedimentary basins have been explored. The upside of the oil story is that we are under-explored and there is still the prospect of a major new oil discovery. But barring a major new discovery, the outlook for oil in Australia is very grim. Our ambition as an association for the ten years beginning in 2006 was that we would not go below the 2006 level of production-to-consumption. We have dropped a few percentage points since then and the outlook is for that decline to continue. But the extent to which it happens absolutely depends on the number of discoveries made.
Is the business and investment climate in Australia one that encourages exploration to mitigate these trends?
The issue is probably less about the business climate and more about perceived prospects. The low-hanging fruit is being taken from an exploration point of view. If we are to make a major new discovery it will probably be in a frontier area; those areas that are further away in much deeper waters that involve much greater costs and preparedness for a risk that we have not taken before. When it comes to the business climate the challenge is to address that appetite for risk. How do you make high risk, high-cost exploration more attractive?
We are on the eve of the release of a new government report about our taxation system called the Henry tax review. A big part of the discussion has focused on the potential of changing the taxation regime for the resources sector. Whether it changes anything in terms of encouraging oil and gas exploration remains to be seen. One thing we have long advocated for is a system called “flow-through shares.” This system enables the deductions associated with exploration to be passed on to the investors. In essence deductions “flow through to the investor.” If that comes through it would enable the small- to-medium sized companies access to greater levels of capital and have a positive material impact on the role that they can play in oil exploration in the country. In terms of the big companies who have access to the large amounts of capital necessary for exploration, so far we have not seen much of an appetite by government to create public policies that attract companies to explore in these high-risk areas.
You recently described the oil and gas sector to be one of the most heavily taxed industries in Australia. In addition to the flow-through shares system what else would be an optimal outcome for the industry to emerge from the Henry tax review?
We have also long advocated that the tax system should apply a more competitive capital depreciation regime. Our association has believed for a long time that if anything could be done to accelerate the development of gas projects on the drawing board, it would be to reduce the rate of capital depreciation to bring it closer in line with our competitors at around three to five years.
Turning our attention to gas, Australia seems to have many factors in its favor driving it to be a top-two, perhaps the world leader in liquefied natural gas (LNG) production: it is neighbor to energy-hungry Asia, has a safe sovereign risk profile, and abundant reserves. What are the possible inhibitors to Australia reaching its peak?
One key issue is what will happen to gas internationally. Some analysts talk about an oversupply of gas. What happens in terms of gas, the energy policies of our customer nations, and in particular what happens with Qatar and their energy policy will certainly affect our positioning. Those are the international factors.
Domestically, the concern is on sufficient access to skilled labor. I do not anticipate that all of these projects will be built simultaneously so we will not need 55,000 new workers all at once. But the labor needed will be spread out over time to support the projects we have on the drawing board. Access to labor will be a central issue.
Once we have that access, an issue to address is uniting everyone under common safety standards. One of the challenges with our Queensland projects is bringing together so many workers from different backgrounds and safety cultures that are perhaps not the same as the safety culture of the industry in this country. The safety culture is evolving right across this new industry and the people in it. We need to bring everyone together under the same culture and the standards that we expect.
Third, finding customers is always top of our mind since long-term contracts underpin these projects going forward.
Australia today is certainly riding the wave of Asian growth. What do you see being Australia’s continued sphere of influence in the future international gas market?
Without a doubt the future activity of LNG will be centered in Asia and at the heart of that region is Australia as a supplier. Our view is that we are poised geographically and equipped with abundant resources to play a major role in the growth of the Asia-Pacific demand for energy. We have a confluence of factors that position us very well to capture the benefits. Associated with that is the increasing demand for cleaner energy in the Asia-Pacific market. When you consider that China is 80% dependent on coal for electricity generation, that leaves a lot of room for gas to penetrate the Chinese market. You only need to penetrate a small part in order to make a big difference in terms of gas production. Much of the same goes for India. With everything that has been going on I think there is no doubt that all the action is in the Asia-Pacific region and we will continue to be right at the center of that.
As Australia develops into its own mold as an energy superpower what other models or countries can it look to and learn from to improve the way its industry is run?
If we look specifically at LNG, we are trailblazers in many regards. LNG is relatively new for us even though Australia began production in 1989 and has since sent well over 2,000 cargoes into the Asia-Pacific region. But now, with the number of projects planned in response to the massive resources we are finding we are well endowed with, we are seeing the full potential of what we have. Unlike other LNG producing countries, the interest in developing these resources is from international companies, not by government owned entities. It makes the environment slightly different.
Regarding learning from others, Qatar has done a wonderful job in laying the groundwork and preparing this industry. Nothing is overlooked by them in LNG production. They have wonderful strategic planning processes. They have what is called a “plug and play” approach that clearly identifies areas for development and subsequently provides the necessary infrastructure. All of their transport is meticulously thought through. They are extremely well planned and we can continue to learn a lot from them.
But given all that, there are so many “world’s firsts” going on in Australia. We will be the world’s first LNG producers from coal seam gas. Chevron’s Gorgon Gas LNG Project it will be the world’s largest carbon sequestration project. We will have the world’s first floating LNG project. We are trailblazing in many areas and hopefully you will be asking that question of others and Australia will be the country mentioned as a model to look to. All of those “world’s firsts” makes it such an exciting time to get involved in LNG in Australia.
To what extent do you think the government’s decision to delay the passage of a carbon emission trading scheme was rooted in a desire to ease the burden on carbon emitting industries and, ultimately, their final-good consumers?
I see the reason why it is being delayed as two-fold. First is a political reason; the legislation got stalled in the upper house. Second, there is the recognition that Australia does not want to be too far ahead of the rest of the world, particularly our region and trading partners, in moving towards a carbon trading scheme. The government’s view was that Copenhagen did not make anywhere close to the amount of progress that everyone had hoped for. That fundamentally affected the momentum for countries to move forward on some kind of a carbon pricing structure. Australia is a very small market but an open and exposed economy to the markets we trade with. It did not make much sense to advance too far beyond our trading partners. But the emissions trading scheme has only been delayed by two years so it is a matter of when, not if, we need to confront this again. I feel pretty confident that we will still go ahead at some point particularly depending on what the US might do and where the rest of the world ends up.
What is tops on this year’s APPEA conference agenda and how will this one be different given all of the industry’s recent prosperity?
It is going to be a very exciting conference. It is our 50th annual conference and the 50th anniversary of APPEA. We will be holding it in Queensland where the industry first began and where oil was first discovered in Australia. With the emergence and momentum of CSG we also see it as the location of the “re-birth” of the industry. Of course being in Queensland, CSG and the LNG projects will receive a lot of attention. There are projects that are in very advanced planning stages but have still not gone to final investment decision that will generate a lot of interest and discussion; not just about the projects themselves but on the impact that they will have on the economy and employment of Queensland and Australia as a whole.
It is not just about Queensland, of course. It is a national conference that will involve international issues. With foreign dignitaries in attendance we will be talking about what is happening in the world of oil and gas and the impacts of US unconventional reserves on global gas. Only a couple of years ago Australia was talking about exporting LNG to the west coast of the US. Who would have thought then that two years later the US would be a potential gas exporter?
We will look at the challenges of oil: the implications for declining oil, strategies to mitigate declining production and what do we need to get companies to explore in new frontiers. When this association started, up until five years ago, it was all about oil. We have seen a major shift and are now talking about the challenges, rather than prosperity of oil.
Regarding gas it is about exploiting this magnificent potential that we have.
Finally, a big issue for us going forward is reputation. We had an unfortunate spill in Montara in the northwest. We are very interested in what the inquiry over that incident finds, but particularly what it recommends for any changes to the regulatory regime in Australia. We have a very good track record with safety. Over the past few years we have launched some terrific initiatives: Stand Together for Safety Week and Common Safety Training. We want to continue to build on those because safety is incredibly important to us.
What got you interested in this industry?
Being on the job. I have a background in association management. I ran the timber producers and pulp and paper manufacturing industry association before APPEA. Prior to that I was in government overseeing natural resources. Since I came into this job it has been a fantastic experience from day one. My parting comments from last year’s conference were, when you look around at the industrial landscape of the world, where else would you rather be than LNG in Australia? I stick by that. This is such an exciting and dynamic time. This is the industry that has helped Australia evade some of the more negative consequences that have affected the rest of the world. It is this industry that provides so much optimism for the long-term economic sustainability of Australia. And in doing so, supplying clean energy and helping the rest of the world move towards a less greenhouse intensive and more secure energy future. It has so much going for it that it is hard to not be excited for it.