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Interview

with Colin Barnett, Premier of Western Australia, Government of Western Australia

30.06.2010 / Energyboardroom

Eastern Australia has been grabbing many oil and gas headlines and there is much excitement about the immense potential of its coal seam gas (CSG) resources. The emergence of CSG has even been referenced as giving a “re-birth” to the oil and gas industry. But despite new assets out east, why is the right place and right time for oil and gas in this country still Western Australia (WA)?

Seventy percent of Australia’s oil and gas is off the West Australian coast. The industry is dominated by WA. Of the three major reservoirs off the coast of WA – the Carnarvon, Browse, and Bonaparte Basins – only the Carnarvon has been relatively explored. In Houston several weeks ago the comment was made to me that the offshore oil, and particularly gas, reserves in WA are at about the stage of development that the Gulf of Mexico was 30 years ago.

What is happening here is of world significance. The success rate in drilling in WA is probably seven out of ten and in some areas ten out of ten. The sizes of the gas fields that have been and will continue to be discovered are large by international standards and certainly large by Gulf of Mexico standards. The total reserves off of WA does not compare to the Gulf of Mexico or the Middle East. However, the significance of the gas reserves here is their proximate location to the expanding markets of Asia. Liquefied natural gas (LNG) is historically an Asian industry in both production and consumption. Japan has always been a big customer while South Korea and Taiwan have played their part. China is, of course, a growing customer. It is significant that China’s first purchase of LNG was from WA and they are now contracting for more. India too has recently committed to buying LNG from WA.

For all those reasons, we expect that we will go from being the fifth major producer of LNG to second behind Qatar by 2020. Our gas is not of Qatar proportions; but it is close and in a politically and legally stable part of the world. Oil and gas is a private sector industry in this state and in this country. Exploration and production companies are at a huge advantage not having to be concerned with production sharing agreements with national oil and gas companies.

What are the coordinated efforts between state government and industry to push WA and Australia as a whole into the realm of an energy supplying superpower?

The development of the industry has always had heavy government involvement. The original and still major LNG producer is the North West Shelf Project which started supplying domestic gas to Perth in 1984 and delivered its first LNG export to Japan in 1989. Prior to the project there was nothing in that region. It was a vast desert and Karratha did not even exist. With gas being off the northwest coast, the only domestic market was 1500 km to the south and export markets were embryonic at the time. The state government in the 1970s and 1980s underpinned the project. It ordered a 1500 km pipeline at $1 billion which today is still one of the longest natural gas pipelines in the world. It then entered in a take-or-pay contract to buy gas and subsequently sold it to electricity producers, gas distributors, and major gas users such as the emerging aluminum industry at the time. The project was therefore very much underwritten by the state government. That provided the base for initial offshore development and domestic sales which allowed the project to take the next step into LNG export.

That was a different era. Today the state government is engaged in a different role; not so much putting money directly into projects but finding sites and negotiating terms for their development. We are working in the Browse Basin where there is not yet any production; it is a totally untapped and very underexplored field. The state is leading the development of an industrial site at James Price Point. The state owns the land, industry will develop an LNG facility there, and the area will be a precinct for LNG. We are doing similar development work in Onslow for the Wheatstone Project.

The Gorgon Gas Project will be operated from Barrow Island, which is land owned by the State of WA. We therefore negotiated the use of the island and the geosequestration of C02 emissions coming from the project. For over 100 years Barrow Island has been an A-class reserve. There would be very few parts in the world, particularly in developed countries, where the oil and gas industry would be allowed to develop in a conservation state. That is a positive reflection on Chevron as the company operating and producing there, but it also shows that the state is very pro-development at the highest possible standards. The environmental standards and C02 requirements for geosequestration for Gorgon are the strictest of anywhere in the world.

We continually work to ensure that we operate under the highest environmental and safety standards. We had two recent safety incidents in Australia. Two years ago there was an explosion of an onshore production facility on Veranis Island. There was no loss of life or injury but it certainly disrupted domestic gas supply. Second was the West Atlas rig explosion last year. Again there was no loss of life but it was still a serious incident and not dissimilar to the current situation in the Gulf of Mexico. I stress that the West Atlas incident was not in the waters that WA administers. Our safety record in WA has been very good, but we never relax on it because those incidents show that things can go wrong.

Western Australia is competing with the Northern Territory over the site for Inpex’s Ichthys LNG facility. Darwin is a likely location for the facility despite the gas coming from fields very far away. Did the WA government not push hard enough to house this facility or was the Northern Territory determined to win selection at all costs?

The previous Labour government negotiated with the Aboriginal communities about finding sites for the projects and gave them a right of refusal. I was elected in September 2008 and we reached an agreement with the Aboriginal people for James Price Point as an LNG site to eventually service several projects. I can understand Inpex’s frustration in uncertainty over a West Australian site of Ichthys. They were not given the right level of support by the previous government. We are not quite there yet in developing James Price Point, but we will be in a matter of time. If it is necessary for us to use compulsory powers as the state government to secure that land, we will. It is vacant crown land. It belongs to the state of WA and there is not native title to it although we recognize that there is a traditional link to the land.

We are also working with Inpex on a supply base which will most likely be at Point Torment. Their supply base has to be here. We would not allow supply base operations from Darwin for safety reasons alone. You cannot have rescue operations from 800-900 km away; it is unacceptable from a safety standards perspective.

Ultimately whether Inpex transports gas to Darwin or uses James Price Point is their decision. It would certainly be the best commercial decision for them to choose James Price Point as it would save them billions of dollars. The commercial cost and the technical risk in transporting gas the distance from their fields of development to Darwin has not been done anywhere before. Piping gas 800 km subsea going across three Grand Canyons is a big task. The cost of doing the underground pipe is about $2-3 million per kilometer. I do not see why any commercial operation would pipe gas 800-900 km when you can bring it ashore 200 km away. So we will wait and see.

There is much talk about a two-speeded economy in Australia with the boom in resources and commodities. Indeed that was part of the rationale of the recent super-tax proposed by the federal government. As a man of government looking out for the common wealth of citizens but also the Premier of the state that is the heart of mining, oil, and gas, what is your view of the proposed policy?

I estimate that WA has about $170 billion of prospective projects in both petroleum and mining. I would guess that we would lose about ¼ of them. The industry will not decline; it will continue to grow because of demand and international prices, but we will lose about ¼ of prospective projects.

The offshore oil and gas industry will not be greatly affected because they already operate under a resource rent tax which is far more generous than what was proposed for mining. It is true, by constitutional agreement, that the Commonwealth has ownership of offshore resources beyond three miles out to sea. But the minerals and onshore petroleum belong to the state of WA, not the Commonwealth. The royalties charged by the state are not a resource rent tax. They are a surcharge on company tax. The state, constitutionally, owns the resources. When Prime Minister Rudd talks about resources belonging to all of Australia, they actually do not. The minerals belong to WA, not the Tasmanians or Victorians.

Is the proposed tax a means for the federal government to reach into state profits?

I think they are trying to squeeze the ability of the states. The royalties that the state charges are a value based percentage of the minerals and oil sold to companies. We will continue to levy the royalties. The Commonwealth has the power to impose a surcharge on company tax. I think if they do it will be very damaging to the industry. It will drive investment out.

Given that WA’s economy is resource-driven and subject to the frequent volatilities of commodity prices, is this latest tax review and government response different in magnitude to what has occurred in previous booms?

There was a spurt in commodity prices in 2006 which was cut off by the global financial crisis. I think WA has potentially 20 years of expansion ahead of it. The investment going into mining and petroleum is one of the world’s great investment cycles, no doubt about it. It is also unique that it is happening in a developed, as opposed to a developing, nation. The only dark cloud in the horizon is this tax proposal of the Commonwealth government. We will continue to work and build the infrastructure, both economic and social, to support it, but we will lose projects and investment because of what the Prime Minister is proposing.

How is the state government addressing the human resources need in order to fulfill the potential of upcoming projects?

There is certainly a lot more happening in terms of training. We are doing all we can to encourage both international and interstate migration of skilled workers. I would like to see a guest worker program which brings in workers with specific skills to work on particular projects. We need to do that to deal with what could be a real heavy concentration of major construction. There is no doubt that with Gorgon, Wheatstone, Browse, and prospective iron ore expansion there is going to be a huge concentration of construction at one time. I think some of the figures that are quoted about the requirements for skills are exaggerated. The industry and government will handle these projects in a sequential manner.

You have argued for many years that natural gas for electricity generation is much more effective for emissions reduction than a complex emissions trading scheme. How has WA put this philosophy into action?

About 60% of power generation in WA is based on natural gas whereas in the rest of Australia it is 90% based on coal. We have the cleanest power generation in Australia and one of the cleanest in the world being highly dependent on natural gas. As a minister in the 1990s I played a fairly significant role in building new gas pipelines, both government and private sector operated. Our energy grid in WA is a pipeline grid. We will continue that and push the policy of having clean energy through the use of natural gas and renewables. Coal will continue to play a role. It will not disappear, but in percentage terms it will become less important.

As the Premier of WA to what extent are you as much a diplomat or ambassador having to court investment from abroad?

I have been Premier for approximately 20 months. My first overseas visit was quite intentionally to Japan. The Japanese have been a major trading and investment partner over the last 50 years. I think Japan felt it was being overlooked with all the attention that has been given to China. I deliberately chose to go to Japan first out of respect for that relationship and to reassure its importance to Japanese industry and government. I met the foreign minister at the time and conveyed my desire to see the relationship grow.

My second visit was to China in July 2009. It coincided with a very tense period in the relationship between China and Australia. Whereas Australia’s relationship with Japan was well thought through, the relationship with China just happened because of their rapid economic expansion. I don’t think Australia put as much thought into that relationship as China grew so quickly. My main purpose when visiting China was to put more substance and parameters into the relationship. We are seeing that happening now with many new Chinese investment flows. We are seeing China buying smaller shares of quality projects with quality partners rather than the aggressive activities on the stock market. That has calmed down from where it was 12 months ago. If I can say so I think I played a fairly important role in improving that relationship, particularly with respect to WA. I went from being coolly received in the beginning of the week to being warmly embraced by week’s end.
The industry is private enterprise here. I am not involved in financial deals or pricing. But my role is to make sure our relationship with investors and customers is healthy and to make sure that we develop infrastructure at the highest environmental and safety standards.

Of all the projects in the pipeline which one excites you the most?

The project that I am particularly keen to see happen is the Oakajee deep sea port and the new rail infrastructure that it will connect to. It is a partly government and partly private venture. The whole area near Oakajee and Geraldton is quite a diverse mining area with magnitide iron ore, copper, gold, and uranium. That will create a whole new mining province in the southern part of the state.

When I first became Premier the Gorgon Gas Project was mildly progressing. My staff and I put an enormous intensity of effort to get Gorgon up. I met with Chevron and took personal responsibility in government for Gorgon. We got all Gorgon approvals through, obtained all environmental approvals, sorted out the project’s relationship with the Commonwealth, and in one year Gorgon was finalized. It is Chevron’s largest project anywhere in the world including the US.

I am also very keen on seeing James Price Point develop. It is a unique time for WA which is why I am so angry about this resource tax. If ever Australia did not need to complicate matters it is now. The world is not out of a recession just yet. Europe is in trouble, Japan is flat, as is the US. Parts of Australia are growing such as the mining and petroleum industries but I think the federal government overestimates the strength of the Australian economy.

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