Archive for May, 2012

Climbing the energy mountain

Soon after Barry O’Farrell was elected leader of the New South Wales Liberal Party, and hence leader of the State opposition, someone thought it might be a good idea to have me brief him on issues electric.

So it came to pass on a sunny morning that we sat down for a chat in the opposition’s quite salubrious offices in Parliament House, Macquarie Street.

In his avuncular fashion, O’Farrell kicked off by saying “So, Keith, what’s your advice about electricity?”

My retort was “Given the way things are, don’t win the next election.”

There was a pause and then O’Farrell said gamely “Well, that’s not actually my plan.”

I wonder, now that he is Premier of the State, whether he remembers that conversation? Certainly, by now, he will know that my comment was not an idle one.

Among the issues he has to handle in the hot seat are:

(1) The State, in the words of his own minister, is facing an energy crisis mid-decade because of the ending of the existing contracts for gas supply from interstate – accounting for 95 per cent of consumption – and the immediate lack of options to replace them.

(2) There is an insurrection among farmers in the State’s north, aided and abetted by the environmental movement, against coal seam gas development and also a running row between the petroleum industry and manufacturers over a reservations policy to sequester some of the resource for domestic use. Without local coal seam methane and low access to interstate supplies, 1.1 million NSW gas customers have a big problem ahead.

(3) The festering sore of rising power bills, which can only briefly be sheeted home to the federal Labor government until Tony Abbott secures victory and ditches the carbon tax – with it out of the way, prices will continue to rise for a range of reasons, not least increasing network charges.

(4) The fact that the trajectory for NSW network capex is set in concrete until mid-2014 by the Australian Energy Regulator’s determinations and ongoing substantial retail price rises are a given with more to come because the AER may slice and dice the 2014-19 bids but the capex it approves will still run to billions more dollars and hence higher tariffs.

(5) The problem he has made for himself by committing before the 2011 election not to privatise the networks, thus denying his government some $25 billion in essential infrastructure funding until at least after March 2015 (when the next poll will be held).

(6) The complexity of melding the three distribution businesses in to one, a task now under way and one unlikely to deliver significant savings when set against ongoing expenditure and ensuing charges. Get the cuts and the set-up wrong and a series of blackouts will be even less acceptable to voters – confer the Queensland experience under Peter Beattie.

(7) The inevitably unpopular deal he has had to cut with the Shooters’ Party to get his generation privatisation through State parliament, returning the government, he says, a meagre $3 billion. (See below.)

(8) The major problem of peak demand, which is worse in NSW than anywhere else in the country, with predictions that, if current trends are maintained, the State’s peak capacity will need to rise from almost 15,000 MW in 2010-11 to more than 20,000 MW in 2030 with perhaps 3,000 MW of the increase occurring this decade. Every megawatt adds about $4 million in capex requirements.

(9) The supply industry expectation that the State will agree to abolish regulation of household and small business power prices as part of a longstanding COAG agreement and will embark on a roll-out of smart meters and a consequent introduction of time-of-use charges, not an easy or popular exercise.

(10) Continuing pressure on the State government to allow large-scale wind farm development as part of the national renewable energy target set against a vocal rural community opposition to such projects and O’Farrell’s own negative outlook on wind power.

One could go on. The list is by no means complete – but, as it stands, is already enough for a major political headache over the course of the Coalition’s first term in office. (And I have not even mentioned privatisation of Snowy Hydro………)

Unpopular though it is – especially with the ABC, the Fairfax media, the environmental movement, doctors’ wives and the inner-urban types who seldom set foot in a State forest but like the thought that they are there – O’Farrell’s deal with the shooters to enable the generation sales is a pragmatic step to resolve a mess inherited from Labor.

The present “gen-trader” situation for two of the three generators – Delta Electricity and Eraring Energy – is simply unworkable and there is no case for selling them and holding on to Macquarie Generation.

Indeed, MacGen is where the sales value now lies.

The ACCC, however, has signalled already that it will not wear MacGen being retained in its present form.

The market power to be gleaned from Bayswater and Liddell plants in the hands of one private business is simply not on.

Logically, the break-up will see Bayswater and the Bayswater B site sold together and Liddell in a second package.

However, the latter power station will be 50 years old in 2022 and what it is worth in a carbon-constrained environment – which we will still have even when the Coalition has won office federally – is an open question.

I confess to being puzzled as to why O’Farrell and his Treasurer, Mike Baird, or the Sydney media are letting the Labor leader, John Robertson, get away with a re-run of his tendentious argument that the sales will push up electricity prices – dog-whistling as he goes about a 30 per cent increase in South Australian prices following that State’s sell-off of ETSA (it’s distribution and transmission business).

The simple point about the NSW generators is that they have to sell their product in to a competitive wholesale market.

What’s more they do not have enough output to completely meet State demand – about seven per cent of NSW consumption comes from Queensland.

The State gencos are price takers not price fixers and any suggestion that private investors could game the market is to assume that Rod Sims and the ACCC will be asleep at the regulatory wheel when it is rather obvious that the contrary is the case.

NSW wholesale power prices may rise substantially this decade – but it will be because of greater reliance on gas generation, whether supplied from coal seam methane or other sources interstate, plus whether or not there is a carbon tax. The gencos’ ownership is not the point at issue.

It is terrible journalism for the ABC and the newspapers to allow Robertson to parrot his “prices will rise” line without pinning him on why he claims it will happen.

The bald assertion (!) should not be allowed to pass unchallenged.

The bottom line here is that a successful genco sale – and there will be endless debate about what success looks like – will not solve the energy challenges facing O’Farrell and his government even if it gives them a short breathing space.

Managing energy policy is one of the hardest tricks in government today – overseas as well as here – and spin simply will not work.

My suggestion is that O’Farrell needs an energy white paper, something that Bob Carr squibbed in 2005-06, and that it needs to look out to at least 2022 and perhaps 2025 and to be scheduling the task for revision in 2016 and 2020.

The problem for the government is that this will require it to take a stand on a range of issues and to be well-prepared to deal with the brickbats, of which there will be many.

Where the action really is

In mid-May Australia’s dreams and concerns about its gas future were well on display at the Australian Petroleum Production & Exploration Association annual conference in Adelaide.

Next week a fair few of those involved will be in Kuala Lumpur because the issues and opportunities that brought them to South Australia will be on display all over again in the Malaysian capital.

Australia gas future and present problems drew more than 3,000 people from 35 countries to Adelaide. The World Gas Conference in Kuala Lumpur has 5,000 registered from 46 countries.

For Australians, the big difference between the two events is that the home forum was as much about issues bedevilling development locally as sales prospects – while the KL exercise will highlight the global marketplace and, in particular and of special interest to developers locally, the prospects for gas sales in the Asia Pacific.

The central point is that we can navel gaze at home all we like – and this week’s “taking our jobs” shemozzle within the federal government is a vintage example of Australian small-mindedness – but the future of the next stage of the resources boom is going to be decided offshore by the needs and demands of customers, especially Asians.

The underlying theme of the APPEA conference was about whether we are capable of adding another $200 billion to $250 billion worth of LNG developments post-2017 to the $165 billion of projects currently commissioning (Woodside’s Pluto project) or under construction at various locations in northern Australia.

From the Saudi oil minister through a bevy of local and international petroleum executives, the message in Adelaide was that we have no reason to be cocksure about the next tranche of development.

Given local costs, the shortage of skilled workers and the myriad of barriers being thrown up by NIMBYs, radical environmentalists and politicians in desperate pursuit of votes, the chances are that pushing Australian LNG exports beyond 80 million tonnes a year – the level they will reach when the current crop of developments is completed around 2017 – may be beyond our grasp.

It was said with good humour, but the opening morning barb from Saudi Arabia’s Ali al-Naimi ricocheted around Adelaide’s convention centre for the three days of the APPEA conference: remember what tennis great Rod Laver said, al-Naimi warned, “your game is most vulnerable when you think you are ahead.”

A critical aspect of this issue is the great difficulty of getting Australians to understand how and to what extent the wealth of the resources boom is spread around the community, in terms of taxes paid, jobs provided directly and indirectly and products and services purchased by the developers.

The business community has yet to achieve any real success in this respect and most politicians are as much use as a fifth leg on a greyhound in communicating the benefits as well as the challenges.

“But look at their profits” is the catchcry of politicians, activists and unionists on the make, conveniently ignoring what has to be invested and the risks involved in order to generate the profits.

As I tried to explain in my own corner of north-west Sydney to someone at the weekend, if you have $100 and want to keep it safe you leave it in the bank and earn little more than six per cent. If you want a much bigger return, you take your chances investing in shares or property and, in this environment, you stand a fair chance of doing not so good – or you go to the casino and toss it on the roulette table.

The world gas market is one of the planet’s biggest roulette tables at the moment and the players have a lot more to worry about than the croupier’s wrist.

Today’s example comes from Fatih Birol, the International Energy Agency chief economist, who, speaking to the Australian Financial Review, has accused companies pursuing coal seam gas developments of not taking concerns about water contamination, land degradation and so on seriously enough.

The increase in costs faced by developers in dealing with regulation imposed by politicians reacting to noisy CSG opposition is “peanuts” compared to “the rather handsome revenues” they stand to gain, said Birol.

The extent to which companies in Australia can ameliorate policy and regulatory pressures was very much in focus at Adelaide earlier this month and will get another airing on a broader canvas in Kuala Lumpur.

Malaysia’s Abdul Rahim Hashim, the current president of the International Gas Union, whose party this is, says a key part of the answer is for companies engaged in unconventional gas business to be become more transparent and to make sure their operations are genuinely at a safe standard.

This is a critical factor affecting both the supply of onshore gas for Queensland and New South Wales in the decade ahead – with regular reminders in the media and from the NSW government that a shortage is looming – and the capacity of the big players to sustain their proposed LNG operations out of Gladstone.

KL is a goodly distance from Australia’s capital cities but the issues being discussed there next week are close to home for our gas supply companies, local gas customers and a range of political figures, some in government now, some hoping to be soon, who have to produce the policies to underpin the ongoing developments and ensure that Australians feel they are getting more of the pineapple than the rough end.

Scaling down the peaks

Of all the issue bedevilling the electricity supply system, none is more difficult than curbing peak power demand.

In recent years it has been a big driver of rising electricity prices because it is growing faster than total consumption, the more so in an environment where a range of factors is slightly depressing average residential power use at present.

Two pieces of data illustrate the dimensions of the problem.

In its submission to the Australian Energy Market Commission “power of choice” inquiry, NSW distribution business Ausgrid sums the situation up like this:

“The supply system is highly asset intensive. The key driver of cost is the size of the system required to supply electricity. Both the network and generation sectors are sized to meet expected peak demand and, therefore, in the long term peak demand is the determinant of cost.

“Ausgrid has estimated that each additional megawatt required needs $3.3 million of assets to be installed, maintained and eventually replaced.”

Put this with the Ernst & Young consultancy report to the AEMC which predicts that, if current trends are maintained to 2029-30, east coast peak demand will reach 61,000 MW compared with 39,225 MW in 2010-11.

Now the Energy Supply Association says in a submission sent to the AEMC inquiry this month: “We are spending billions of dollars to ensure that we have enough electricity for a few hours a day on a handful of hot and cold days each year.”

In the peakiest regions on the east coast – Victoria and South Australia – the top 20 per cent of load occurs for less than two per cent of the year, or around three days. In New South Wales and Queensland, the top 10 per cent of demand is used over less than three days annually.

Clearly any steps that can be taken to cut growth-related investment in generation and networks have a real role to play in reducing the rise and rise of power bills.

In a study commissioned by ESAA and just made public, management consultants Deloitte comment: “The impact of peak demand is similar to a busy highway at peak hour. Adding an extra lane can alleviate congestion at peak times. However, outside of peak hour the extra lane is superfluous.”

Deloitte’s work demonstrates that seven initiatives could deliver between $1.55 billion and $4.58 billion in savings over this decade.

The two big steps are introducing critical peak pricing and incentives (able to save up to $1.27 billion) and direct load control of air conditioners (saving as much as $1.33 billion).

The other initiatives suggested are time of using pricing (saving up to $193 million), direct load control of pool pumps ($231 million), energy efficiency measures ($486 million), enhanced uptake of solar PV systems ($528 million) and introduction of electric vehicles ($537 million).

The estimated reduction in total demand from pursuing these initiatives is between 2,382 MW and 7,410 MW.

It is important to point out that these are gross benefits and do not take in to account the costs to achieve the reductions.

They do not translate in to huge costs savings per customer either.

Deloitte estimates these as being between as little as $1.46 per megawatt hour and $14.88/MWh. The average for Australian household consumption is about 7.5 MWh a year with a total bill pushing towards $2,000 a year at present.

But when you consider, on the Ernst & Young forecast, that the total capex cost of a “business as usual” rise in peak demand over 20 years will be of the order of $72 billion, a start down this road, even of smallish steps, is not to be sneezed at.

ESAA makes the important point in its AEMC submission that it is going to take changes to both energy policy and the east coast market regulatory system to pursue such benefits.

The association says the starting point is an end to government regulation of retail prices where effective competition exists.

Second, and perhaps more controversially, it wants an end to the “postage stamp” method of network pricing where the price per unit is the same regardless of how much energy a consumer uses or where he or she is located. Retailers, it says, must be able to pass on changes in network costs to incentivise customers to be more efficient.

Thirdly, ESAA says, there has to be a better information feed to customers so that they can understand how to be more efficient and how they will benefit.

This, of course, is no overnight fix – which is the drug politicians crave as they confront the energy cost issue and quail when they are told that, on present indications, in NSW and Queensland, for example, residential bills in 2017 will be double what they were last year.

This, also, is yet another issue where policymakers have watched the storm brewing for literally years and moved far too slowly to implement change. Now their drenched and windblown constituents are as mad as wet hens and a great deal more dangerous because of their ability to kill political careers with a pencil at the ballot box.

One of the problems in this environment, I think, is the lack of joining-the-dots that has gone on and of explanations for politicians in language they can understand.

The Coalition in government around the country is hanging on for Tony Abbott to win office federally and to kill the carbon tax, but this will not stop the inexorable rise in residential and small business power costs.

The tip of this political volcano, to change metaphors, at present is to be found in Western Australia where for a year the cost-of-living row in the State has focussed on one number: 57. This is the percentage increase in power bills imposed by the Barnett government since it took over three years ago from a Labor regime that had suppressed residential bills for a decade.

The railing of the present Labor opposition against Barnett is especially egregious because, confronted with a debt from its power game of $1 billion, it had decided before being tossed out of office to introduce a “glide path” rise of 10 per cent a year until 2020 – by which stage the accrued debt would exceed $6 billion.

In other words, if it had not lost the last State election, by now it would have imposed a 30 per cent price rise on household electricity bills rather than Barnett’s 57 per cent.

What most WA voters don’t realise is that, on coming to office, Barnett was told it would take a price increase of 117 per cent to make household bills cost-reflective.

Nor do they seem to get their heads around the fact that they are helping to pay for the accrued debt anyway – through their tax bills and through higher prices imposed by businesses who have had to share this pain.

Barnett has been trying to ameliorate his political trouble by pushing the idea that remerging the State generator, Verve Energy, and the retailer, Synergy, both broken out of the old State Electricity Commission, would somehow cut householder costs.

It won’t, of course, and ESAA’s chief executive, Matthew Warren, among those telling him so, who include the State’s independent regulator, has pointed out that, if a remerger scares off investors in new generation capacity, the taxpayers are going to have to support $2 billion in new plant investment this decade.

The bottom line here nationally is that residential bills should be cost-reflective, that households should not be shielded from necessary price rises, that an important part of curbing these spikes is to curb peak power demand and this all needs politicians around the country to be both effective policymakers and honest communicators with the electorate.

We are now in about year four or five of them falling down on both counts.

This is where the media come in to play. A concerted effort by editors and their commentary writers to understand the issues and to strive to facilitate real change rather than play witch-hunters would be more than useful just now.

I’m not holding my breath, mind you.

Kurri Kurri capers

This week’s announcement of the impending closure of the aluminium operations at the little Hunter Valley town of Kurri Kurri can come as no surprise to close observers of the resources and energy scene.

It has been in the wind for a while.

Nor is it particularly surprising to see and hear the running commentary from media pundits, unionists, politicians of differing persuasions and apologists for the current “clean energy future” policies.

It is, however, a bid sad/depressing/irritating (take your pick) that, after almost four years of debate in this space, it is obvious from the published and broadcast comments that the aluminium situation is still poorly understood.

Perhaps the most important thing needing to be said today is that, as a result of various developments local and international, including a comprehensive mess-up of the electricity price negotiations by the previous Keneally government, not only is New South Wales losing the existing Norsk Hydro operation, shedding 344 jobs, but this also seems to signal that the rather-ailing State economy can kiss goodbye to a proposed $4 billion project that was being evaluated by the company for Kurri Kurri.

Also gone by the board is $500 million worth of upgrading work on the existing smelter.

The new Kurri Kurri smelter would have expanded production from 175,000 tonnes a year, small by world standards, to around 600,000 tonnes, creating 3,000 long-term jobs and about 15,000 construction positions.

To quote Norsk Hydro, when it first mooted this new development, the project would have created substantial and ongoing economic stimulus for the Hunter Valley, the State and throughout the aluminium value chain in Australia.

The fact is that better deals are now available to aluminium companies for new developments in Africa, the Middle East and Iceland (hydro) than in Australia – just as 30-plus years ago we offered better deals than Japan, where the soaring oil prices had undermined its attraction.

The local carbon price, labor costs, construction costs, currency value and steadily-rising power bills are all factors in the mix.

The second important issue is whether the smelters at Bell Bay in Tasmania and Point Henry in Victoria, both also aged contenders in the cut-throat global aluminium trade, will survive the present economic environment.

In the medium-term the odds are that they will not.

Alcoa is due to release its findings from a review of Point Henry at Geelong (employing 600 people directly) at the end of June.

All of which leaves the present federal government and its union backers wedged between ranting at “big polluters” and promising abatement targets on the one hand and desperately seeking to avoid the odium of job losses in a fevered political environment on the other.

As the Newcastle Herald newspaper has pointed out this week, it isn’t only the direct employees at Kurri Kurri who will suffer from the closure – there is a whole chain of people earning a living because it is there, including 150 contractors.

Inevitably, the Norsk Hydro decision is being tied in to the impending carbon tax.

The company itself says this: “The profitability of the plant has suffered as a result of weak macro-economic conditions, with low metal prices and an uncertain market outlook, as well as the strong Australian dollar. It is clear the plant will not be profitable in the short term with current market prices, while long-term viability will be negatively affected by a number of factors, including increasing energy costs and the carbon tax.”

This, at least in part, gives the lie to Industry & Climate Change Minister Greg Combet, whose electorate is home to the plant and who issued a statement claiming the announcement “has been driven by current financial losses unrelated to the carbon price.”

Combet also couldn’t bring himself to acknowledge the role of the past State Labor government is this saga, choosing to say “the key uncertainty facing the company has been reaching agreement with the NSW government over a long-term electricity supply contract.”

This sort of spin doctoring belongs in the same (round) basket as the claim by the Australian Workers Union that the O’Farrell government is “running the smelter out of business by charging sky-high power prices.”

As the party the union supports presided over three of the past four years of NSW price rises and as the major influence on them has been the network charges set by the independent Australian Energy Regulator plus the federal government’s green scheme costs, this is the sort of chicanery that should be exposed by the media not cheerfully reported without balancing comment.

This line continues to run today with reported federal government “anger” at the Coalition failure in NSW to resolve the contract issue – which rather overlooks the fact that it takes two to tango and clearly Norsk Hydro’s interest in making a commitment have waned since the day the Keaneally government called back electricity industry negotiators from their car ride to sign the papers.

Many in the media have been quick enough to leap on Tony Abbott’s claim that the plant is one of the “first victims of the carbon tax” as a drawing of the long political bow (which it is), so why are Labor and its footsoldiers being allowed this licence?

Among the central issues affecting the viability of the more than 30-year-old Kurri Kurri set-up is the amount of electricity it uses to make a tonne of aluminium, 22 per cent more than Norsk Hydro’s new operation in Qatar.

With electricity accounting for about 30 per cent of cash operating costs of a smelter, this is important.

If the new Kurri Kurri development had gone ahead, similar levels of energy efficiency would have been delivered here.

Let’s not lose sight of the fact that, with all that has gone on, we (Australia) have managed to let slip a modern investment that would have contributed to the balance of trade and national wealth.

Inevitably, of course, we are hearing “big polluter” trash talk from some quarters.

It is worth noting that the emissions intensity of the greenhouse gases directly produced by the existing Kurri Kurri plant have been reduced by 75 per cent from 1990 levels and its electricity intensity (the number of megawatt hours needed to produce a tonne of product) has been cut by 92 per cent.

Recently, each tonne of aluminium from Kurri Kurri has also seen production of 2.4 tonnes of carbon dioxide from direct emissions and 14.4 tonnes from the coal-burning power stations supplying its power.

With 85 per cent of their emissions in coal country coming from power stations, smelters on the east coast have no control over the vast bulk of greenhouse gases attributed to their activities.

To put things in context, Kurri Kurri has accounted for about three per cent of NSW electricity demand.

(Pulling this out of the mix, of course, will impact on consideration of new baseload power for the State, a requirement already extended from 2013, as indicated by the Owen inquiry, to around 2018.)

Looking at submissions Norsk Hydro has made to parliamentary committees and the federal government during the life of the Rudd/Gillard regime, several other points stand out.

The first is that primary aluminium production is 100 per cent trade exposed. The Australian companies have no ability to recover locally-imposed costs increases (eg the carbon tax and the RET) through product pricing.

As Norsk Hydro says, in the absence of a global carbon scheme, imposing a substantial cost here risks local economic damage without commensurate international abatement.

Ironically, despite the badmouthing the industry gets, aluminium has a substantial role to play in a lower-carbon global economy because of its light weight. Demand for the metal is growing with the worldwide pressure to reduce emissions.

Imposing heavy carbon burdens (which go beyond the carbon tax) on the remaining, much more modern operations in Australia to drive them away from our shores would not be sensible, not least because this country has some natural competitive advantages to offer, including a strong resource base, fairly good transport and energy infrastructure and proximity to the Asia Pacific market, enabling the full value chain to be established here.

As well, there is always chatter by some about power subsidies for smelters.

Unusually among energy-intensive, trade-exposed businesses, they rely exclusively on baseload electricity rather than at least some proportion of peaking and intermediate power.

Their contracts reflect this because they are generators’ lowest-cost customers.

Of course, State governments have also worked to tilt overall conditions to attract such prized developments.

It is claimed, for example, that support for the Victorian aluminium smelters, one of them Pt Henry, has served to add $2.45 per megawatt hour to all State consumption over the past three decades.

The debate rolls on about how and whether a community benefits from this. It is far from a black-and-white issue.

Conversely, to give in today to union demands to throw more public money at a smelter now closing, and two considering shutting down, for good business reasons is just daft.

Return of the Brisbane Line

The Brisbane Line is back.

The notorious defensive line along the Darling/Murray river system from Brisbane to Adelaide was supposedly the fall-back position for Australian and American troops in the event of a World War 2 Japanese invasion.

Ian Harper of Deloitte Access Economics brought it back at the conference of the Australian Petroleum Production & Exploration Association last week, a clever point that seemed to wash over the media pack but, in conversations I had on the floor of the Adelaide convention centre, struck home with more than a few of the 3,008 delegates.

Harper is one of Australia’s best-known economists and was a leading light of the University of Melbourne’s Business School until he went to Access Economics.

His role on the APPEA conference plenary speaking list was to present the findings of Deloitte’s research, commissioned by the association, on the economic contribution of Australia’s upstream oil and gas industry.

The core of his talk was a focus on the major policy issues raised by the rapid growth of the industry and the need to manage its impact on the non-resource-related parts of the economy to secure a sustainable lift for our prosperity over the longer term.

This is where the Brisbane Line was introduced, with a map of Australia that was bright green for 80 per cent of the land mass and dark blue for the south-east segment below a line from Brisbane to Adelaide, including struggling Tasmania.

“North-west of the Brisbane Line,” Harper told the APPEA audience, “lies 53 per cent of investment projects and 20 per cent of employment. South-east of the line is 80 per cent of employment and 47 per cent of investment projects.”

South-east of the line, of course, also lies the bulk of seething voters, who, on the basis of media reports and talk-back radio, are convinced they are not benefitting from the the resources boom, aided and abetted by some parts of a federal government, and a Treasurer in particular, apparently hell-bent on demonising “the mining industry.”

If the opinion polls are right, some time in the next 18 months these voters and those in Western Australia will throw the reins of power to Tony Abbott and the Coalition in a massive rejection of the Labor party – a sentiment which has already manifested itself in thumping defeats at State level in New South Wales and Queensland.

Harper at APPEA presented three “Do’s” and three “Don’ts” for the federal policymakers.

Do run the federal budget in surplus and target monetary policy on inflation.

Do reform State regulation to facilitate interstate transfers of labor and capital.

Do invest in infrastructure, skills and education to promote productivity growth in the non-resource sector.

Don’t subsidise industries in which Australia has no comparative advantage.

Don’t let policy become unpredictable and directionless or subject to the veto of special interests.

Don’t establish a sovereign wealth fund because we don’t need it.

One of the key needs for the upstream petroleum industry and the mining industry is to demonstrate that benefits from the boom are flowing to all the community, a task that it not proving easy – and is manifesting itself on the eastern seaboard in a worrying blowback against the onshore gas sector over coal seam methane developments.

As was pointed out at APPEA, when members of the Country Women’s Association take to the streets in Lismore, you know you have a problem.

The Deloitte study emphasises that the oil and gas sector’s economic linkages in Australia are broader and deeper than commonly appreciated, a point that, reading the media files a week after the APPEA conference, I can see has not been conveyed to the public in any shape or form.

According to Deloitte, about $4.3 billion of the $28.3 billion value-added provided by the industry in 2010-11 flowed to supplying industries across the country, including maintenance and construction and professional services.

These are linkages more likely to be visible in Brisbane and Perth than other capitals.

Deloitte argue that the robust export performance of the resources sector provided important national income and employment over the course of the global downturn and played a key role in Australia being able to withstand the more dramatic impacts that confronted other economies.

Being able to distill this message in to one that can be appreciated by the bulk of voters living below Harper’s new Brisbane Line is a large challenge for APPEA, its members and the broader resource sector – and one that a Coalition government will need to help to drive.

This includes selling the story of how the oil and gas sector is contributing to the broader community’s welfare through its tax payments, now running at about $8 billion a year. This will be a lot more when LNG sales treble over the course of the decade.

You would need to scratch a lot of my neighbours in the leafy Hills district on Sydney’s north-west or on the pavements of Marrickville in the city’s inner west, where my son and his family live, before you found anyone who knows and appreciates this.

In economist-speak, Harper and Deloitte present the issue like this: “The level of industry investment and the substantial boost in production slated to come on line over the next decade will provide enormous economic benefits to the country.

“However, in order to fully harness these gains, there will need to be further adjustment to the allocation of resources within the economy.

“This has already presented various sectoral and workforce pressures, such that the ‘multi-speed’ or ‘patchwork’ economy, is now a common thread in the national conversation.”

Yes, quite.

And it is not working below the Brisbane Line to the advantage of the resources sector.

Nor, post-2013, will it do so for a new-minted Coalition federal government elected on a backlash against Labor from the community that can be expected to quickly turn to discontent that new leadership is not providing a dramatic change.

Observe Victoria and New South Wales today for examples of the point.

The Coalition’s Ian Macfarlane summed up this anti-boom sentiment in his APPEA talk as the easiest of populist lines to sell to the community: Why should we let huge, greedy multinationals rip us off to boost their profits while we pay through the nose for services?

As Macfarlane said, electricity prices have become a totem issue of public anger, and therefore political concern, in recent years – and there are more price rises to come, accompanied by higher gas prices, too, as the Queensland-based LNG trade gets going and world parity prices flow in here to at least some extent.

Resentment of the leadership of the resources sector, which has been blatantly one of Wayne Swan’s tricks for the past year and more, is going to continue to ripple through the community well after the voters have ejected this government.

Macfarlane observed at APPEA that the pressure on State governments to “do something” about energy prices is likely to become irresistible and he frets about how counter-productive this will be if the “something” is a kneejerk response.

The resources sector as a whole has been caught off guard three times in the past two years – first by Julia Gillard’s U-turn on a carbon price, second by Swan’s endless attacks on the resources robbers and third by grassroots reaction of farmers, aided and abetted by environmentalists, who can hardly believe their luck, against coal seam methane development.

As the APPEA chief executive, David Byers, put it in Adelaide, the energy industry is at the centre of a furious public policy debate because of its importance to Australians’ standard of living, the competitiveness of key parts of the economy and the quality of the environment.

I agree with him that the industry needs to do more to build public appreciation for its contribution, current and potential, and clearly the target area is south-east of Harper’s new Brisbane Line.

Clearly, too, as Byers and others like AGL Energy’s Michael Fraser have been saying, the clock is ticking on this issue.

There are more than a few rivals eager and able to grab the Asian markets if sufficient of those living below the Brisbane Line, and the politicians reacting to them, end up placing us in an environment where we do not, after all, win the gold medal.

The big sleeper

There are so many hares running on gas in Australia now that even the professionals are finding it hard to keep up.

While coal seam gas and its host of detractors hold a lot of media attention, the potential gas shortage plight of New South Wales mid-decade is starting to emerge as a major issue and the argument about whether or not gas should be reserved for domestic use remains a very live topic.

The LNG developments, both in Australia’s north and north-west and in Queensland, are a dominant discussion point and their fate, especially those still waiting a final investment decision, now that the US is poised to enter the export market, is a matter of some controversy.

For me, one of the most interesting issues is whether we are on the cusp of adding shale gas to our resources wealth in a substantial way, when this might happen, what the gas will cost and how it will impact on the east coast energy market.

Federal Coalition energy spokesman Ian Macfarlane summed things up succinctly at the APPEA conference in Adelaide this week when he said: “The big sleeper (in resources development) is if the shale gas industry gets off the ground in the next two or three years. Then we’re never going to have a domestic gas supply issue.”

A paper released by Geoscience Australia at the conference says the shale resources could double this country’s gas reserves.

Standing on the floor of the APPEA trade exhibition this week, looking at a map on the Beach Energy stand (one of 150 firms pursuing the attention of more than 3,000 delegates), I was struck by the proximity of its tenements and others nearby in the Cooper Basin (crossing the South Australia/Queensland borders) to major east coast markets, not least NSW, and to the existing Moomba-based infrastructure.

Talking to Beach Energy CEO Reg Nelson later in the day, I am also struck by his quiet confidence that shale gas will be in the market somewhat sooner than others believe.

This is also the day that KPMG releases its global shale gas commentary at the conference – you can find the paper (“Shale gas – a global perspective”) on the consultants’ website – listing a litany of reasons to be cautious about Australian prospects.

The biggest issues for shale gas here, KPMG says, are the cost of extraction, the lack of infrastructure, ongoing community and environmental concerns over fraccing and the competition it will face from coal seam methane.

One of its key points holds equally good for coal seam gas. Development, it says, will “hinge on the industry’s ability to control reputational risk and manage public opinion.”

This was perhaps the biggest theme running through the APPEA conference, with the upstream petroleum industry now hard up against the realisation that the heady early “let it rip” years of the coal seam boom have backfired in a big way, creating problems that can’t be quickly or easily fixed.

In one respect, KPMG states the bleeding obvious when it points out that the local shale gas industry needs to import global skills and technology to optimise the opportunities.

This has been the story of upstream petroleum development in Australia for a half century. Upstream petroleum exploration and production is a global business and the skills, equipment and techniques migrate across international borders, carried by the major companies and picked up by the smaller local players.

One of the interesting aspects to emerge from the APPEA conference is that the major companies are now interested in Australia’s domestic gas markets as well as the first prize of using our gas in international trade.

Santos executive James Baulderstone told journalists that the big overseas firms are taking an interest in the Melbourne, Sydney and Brisbane markets.

This is not so hard to understand.

Although our east coast is a much smaller consumption area than, say, western Europe, a sales potential of 21,000 PJ cumulatively over the next two decades – it’s an EnergyQuest estimate used by the Energy Supply Association in its energy white paper submission – is not to be sneezed at.

For companies like Beach Energy, overseas interest opens the way for joint venturers with deep-ish pockets.

“You always listen to what people might be inclined to offer,” says Nelson.

He hopes that Beach may be selling shale gas via Moomba late this year or early next year.

Much now rests on the gas flow rates when horizontal drilling is undertaken in its tenements in the months ahead.

Interestingly, the amount of oil available from the shale plays may be a deciding factor in how far and how fast things progress.

This is the perspective of consultants Wood Mackenzie, who expressed the view this week that shale explorers here may be a decade away from large-scale production – citing a lack of drilling rigs, labor costs and infrastructure barriers – unless the initial drillings prove to be liquids-rich, pushing up the value proposition for development.

(There are about 30 onshore drilling rigs available in Australia today versus about 1,600 operating in the United States.)

The Wood Mackenzie thinking is supported by ConocoPhillips, whose Australian president, Todd Creeger, told Bloomberg news agency: “If you have liquids, the economics are much, much better right now than a pure gas play.”

While current attention is most strongly on the Cooper Basin, there are also shale opportunities in the Georgina Basin, straddling the border of the Northern Territory and Queensland, and in Western Australia’s Canning Basin, which covers a big area of the State’s north and extends offshore.

Santos, which is committed to large-scale export of coal seam gas through Gladstone and seeks to be the major player in developing the industry in NSW, where there are already 1.1 million residential and business gas customers and opportunities for gas to supplant coal in baseload generation,
is another expressing caution about shale’s immediate prospects.

Baulderstone quotes production costs for shale gas at $6 per gigajoule, up to 30 per cent more expensive than CSG, and has the view that, taking in to account technology and capital constraints, it is unlikely to be economic this decade.

(Conventional Cooper Basin gas sells at between $3 and $4 per GJ at present.)

For Santos, NSW is a significant domestic opportunity, with its coal seam methane tenements close to the largest market in the country and a 2015-25 window of opportunity to cash in.

Its managing director, David Knox, finds himself in the interesting position this year of wearing two hats – he is also chairman of APPEA.

Wearing both, he told “Business Spectator” at the end of a busy week that the key to realising the full potential of our gas resources is “to get the drill bit out – to unlock these resources.”

Ominously for those – politicians, manufacturers, householders, small business – who worry about energy costs, Knox noted that the upstream industry needs rising prices to drive major investment.

“Then,” he said, “as we are successful, as we unlock the continent, the gas prices will start to come down (as they have in America).”

He adds the interesting point that, when this country finds it has very large proven resources, an opportunity also opens to turn the gas in to transport fuel – it can provide superior quality diesel – and this will contribute to lowering the national carbon footprint along with a substantial use of gas for electricity generation.

The key, Knox argues, is to allow the market to work, as he says the Americans have done.

How willing politicians, especially State policymakers, are to let the market work, with an eye to long-term national economic benefits, is the $64 billion question.

The problem is that, politically, in the long run they know they are all dead – the nearer horizons are where their focus lies.

On message

It is interesting to return home from four days in Adelaide at the upstream oil and gas industry annual conference to discover that the chairman of BHP Billiton has nailed the gist of the meeting in one sentence in a speech to company directors back east.

“Constant discussion about change creates substantial uncertainty, which in turn changes sentiment and the dynamics of long-term investment,” says Jac Nasser.

Also interesting to find that John Pierce, chairman of the Australian Energy Market Commission, has been in far-away Quebec City, Canada, telling the world forum on energy regulation that this country is challenged to develop a clear, concise policy that will allow the east coast electricity market (the “NEM”) to function effectively.

Pierce’s 43-page paper is available on the AEMC’s website and is required reading for those of us engaged in the domestic energy debate.

His conclusion, with one word changed (energy for electricity), is also a succinct summary of what the petroleum people were saying and hearing half a world away: “Australia’s electricity market is currently faced with a number of challenges that require careful management in order to ensure that consumers continue to be provided with a reliable, secure supply at an efficient price.”

As he says, “the current transformation of the stationary energy sector requires careful, synchronised development of both high level, economy-wide policy and focussed, market-specific frameworks.”

This APPEA conference – the 52nd, attracting more than 3,000 people from 35 countries – was notable for its focus on domestic gas supply as well as the to-be-expected hoopla about our LNG projects current and proposed.

It was also notable for the minister responsible for the largest energy sub-market in the country, Chris Hartcher of New South Wales, telling delegates that his State faces a serious energy shortage because the existing gas supply contracts are running out and it is not at all clear where the needs of 1.1 million household and business customers will be sourced by mid-decade.

In most respects, including manufacturing, NSW represents roughly a third of Australia. As the gas pipeline explosion in Western Australia late in the past decade demonstrated, substantial energy supply disturbances have national economic implications – and NSW has a bigger role in the current scheme of things than even the booming West.

The NSW situation is exacerbated by the fracas over access to rural properties to pursue coal seam gas development, the State government’s preferred solution to the looming problem, and a substantial chunk of APPEA plenary session time was taken up addressing how to resolve the current mess – with the association acknowledging that a lot of work is needed to earn community acceptance that CSG operations are safe.

Santos managing director David Knox, who is also the current APPEA chairman, conceded to journalists as the conference neared its end that the rate of the gas industry’s expansion on the east coast will be dictated by community acceptance – and he believes negative sentiment about coal seam gas operations, as illustrated by a 7,000-strong demonstration in Lismore last weekend, has peaked.

The over-riding issue for both domestic and export gas ambitions is the Jac Nasser warning: policy and regulatory uncertainty is a cancer for investors considering projects in this high-cost working environment,

Peter Coleman, the new managing director of Woodside Energy, said that the LNG industry has benefitted enormously from Australia’s low sovereign risk profile and open investment regime.

“Australia is a place where major oil and gas companies want to do business,” he said, but he urges politicians not to take this for granted in today’s global market environment.

“Policymakers,” said Coleman,” must ensure that new regulation does not risk the cost-effectiveness and competitiveness of the gas industry. What business needs most of all from government is consistent and predictable policy.”

The same message was handed out by Christophe de Margerie, the bushy-moustached global head of Total, one of the world’s super-major petroleum companies and now a strong investor here.

“Australia,” declared de Margerie, “is not a low-cost environment. Governments need to ensure that stable regulatory and fiscal rules exist to encourage companies to deliver projects in a way acceptable to local communities and with an appropriate return to investors.”

De Margerie also made a key point with respect to the efforts to get coal seam gas fully off the ground in Queensland and NSW.

“A critical dimension of this industry relates to its acceptability,” he said. “We are a big business, our operations have an environmental impact and use of fossil fuels is part of the greenhouse effect. We have to demonstrate we behave as good citizens.”

It is hard to understate the importance of government and business getting their ducks lined in proper order.

Deloitte, in a paper handed out at the APPEA conference, nailed this aspect, I think: “Eastern Australia’s gas market is currently facing an unprecedented convergence of issues that have the potential to transform it in to one of the world’s largest LNG exporters while also threatening the future security of domestic gas supply.”

As the consultants observe, most of the issues confronting policymakers and business are not new, but they have reached a stage in Australia, and especially on the east coast, where both the petroleum industry’s ability to achieve its economic potential and the federal government’s ambitions for a cleaner energy future are challenged.

APPEA itself got the Adelaide conference going by releasing a Deloitte Access Economics study on the scale and significance of the oil and gas industry’s national contribution.

The report, said the association, flags a raft of policy areas “in which complacency and political expedience can threaten Australia’s attractiveness as a place to do business.”

In a media statement, APPEA focussed on one of the key areas of debate between the industry and government at present – the reservation of gas supplies for domestic use, an issue being driven hard by energy-intensive industry and strongly resisted by the suppliers.

The association theme is that, in a free economy, no business should be forced to sell its product at lower than market prices. A protectionist policy such as the reservationists are pursuing, it warns, “is an economic dead end.”

The gas industry fears that the NSW government is flirting with the reservation idea, possibly as a stick to use to herd it towards offering the rural community a sufficiently attractive deal to get farmers off political backs.

Chris Hartcher, I gather, feels he was verballed by reports of what he said at a media conference in Adelaide, but he said enough to attract attention on this issue.

The State government says its decisions relating to CSG are some months away yet.

In response, it seems almost everyone in the industry is quoting Michael Fraser, the AGL Energy managing director, who said last month that “the clock is ticking” on Australian energy policy.

The energy industry’s problem is that no amount of ticking or talking will change the fact that national policy formation is in limbo until after the next federal election.

Which why “when do you think we will have an election?” was one of the most frequent questions I heard on the conference sidelines this week.

No reservations

The upstream petroleum industry is confronted on Australia’s east coast by a policy move to which it is steadfastly opposed but which is attractive to some politicians.

No, not the carbon price and other bits of the Gillard government’s “clean energy future” program, at least not this time, but what the Coalition’s energy spokesman, Ian Macfarlane, describes as “popular sentiment” for a domestic gas reservation policy as energy prices go up.

Macfarlane, who held the energy portfolio in the closing years of the Howard government, reminded delegates to the Australian Petroleum Production & Exploration Association conference in Adelaide that there have been calls for years for a policy mandating that a percentage of gas extracted from local reservoirs be reserved for domestic use. Major business consumers at present are pressing for 15 per cent of gas from local projects to be set aside on the east coast as well as in Western Australia.

Journalists attending the APPEA forum took away the view from a media conference with New South Wales Energy Minister Chris Hartcher on Tuesday that his government is at least considering the option as it wrestles with twin problems: the expiry of key gas contracts and the upward spiral of electricity and gas prices in the State.

The most pressing issue for Hartcher is that, because the previous Labor government was dilatory about a strategy for gas supply for a State that imports 95 per cent what it uses, the 1.1 million business and household users of the fuel are faced with the main contracts ending between 2014 and 2016.

“NSW faces a serious energy shortage,” Hartcher told APPEA’s 3,008 delegate.

As gas provides a third of the energy consumed in NSW, this is not a minor economic or political problem.

Consultants ACIL Tasman say the State is “materially uncontracted” by 2017.

Hartcher’s solution of choice is to fast-track develop of NSW’s large coal seam methane reserves, but this is not straightforward.

For a start, a large part of the State farming community, aided and abetted by radical environmentalists, who know an opportunity to do a mischief to the fossil fuels industry when they see one,is fiercely opposed to CSM.

The allies brought together 4,000 people to demonstrate in Macquarie Street, Sydney, earlier this month and 7,000 in Lismore last weekend.

In addition, the gas developers are not going to plunge in to multi-billion dollar projects without long-term and favorable policy arrangements — and the O’Farrell government still has a lot of work to do in this respect in a not-very-long time frame.

Santos, the biggest holder of petroleum acreage in NSW, says the State government can reserve all it likes, but that won’t bring gas out of the ground. The other idea floated by Hartcher, however, is a differential royalty system, weighted to encourage domestic supply, and this, the company says, “may have some legs.”

Macfarlane, too, is strongly opposed to a reservation policy, describing it as a Bandaid solution that may drive away gas exploration and development. “For years,” he adds, coal has been used locally and exported — why should gas be treated differently?”

A no less difficult issue for Hartcher and the NSW government, and one that is running in Queensland, too, is the issue of access to rural properties.

Duncan Fraser, vice-president of the National Farmers’ Federation, told the APPEA delegates that “cowboy” companies, contractors and individuals have created this problem with farmers and driven them in to an “unholy alliance” with their “natural enemies,” the radical environmentalists. The issue’s resolution, he says, requires the industry to understand and respect farmers’ connections to the land and provide them with real assurance that coal seam gas exploration and extraction would not affect water quality and quantity.

There is a further issue that the NSW government needs to think through before it resolves its policy and this why, necessarily, it should be focussing on gas to be found within the State’s borders.

The shale resources that are currently being delineated over the border in the Cooper Basin are also apparently large, are located near well-established petroleum infrastructure, are claimed to have a 2014 production horizon and have channels to the south and east coast markets.

“Gas is gas, for goodness sake,” a senior industry figure said to me at the APPEA conference. “Why should the NSW government care where it comes from so long a it is a secure supply at a sensible price?”

Striking the right balance

Saudi Arabian Petroleum & Mineral Resources Minister Ali al-Naimi made a telling point to the Australian Petroleum Production & Exploration Association conference in Adelaide, citing tennis great Rod Laver.

The legendary Laver said: “Your game is most vulnerable when you are ahead.”

It was a salutary reminder to an audience of 2,850 delegates that, despite all the current exuberance about Australia’s potential as an LNG exporter, the road ahead is not downhill and is littered with potential impediments.

Woodside Energy’s new-ish CEO, Peter Coleman, reinforced the point when, in his talk, he noted that, in terms of new gas supply for the Asia-Pacific, the two key questions out to mid-decade and beyond are whether current leading trader Qatar will divert more LNG from its North Atlantic market and how quickly the American shale gas boom will translate into LNG exports.

The vital ingredient will be the price of LNG because Australia is a high-cost production environment and the situation is exacerbated by the strong Aussie dollar and local oil and gas wages that are more than double the world average.

To this, Coleman said, may be added the cost impacts for local developers of rigorous environmental and safety requirements.

All up, Coleman pointed out, the Australian businesses had small margin for errors in project delivery.

Super-major Total’s global boss, Christophe de Margerie, whose company has Australian LNG interests that will see it holding 20 per cent of local capacity when they are in full operation, summed up the challenge: governments here need to ensure the existence of stable regulatory and fiscal rules while companies have to ensure that they deliver projects in a way acceptable to communities and with appropriate returns for shareholders.

“We certainly have to better communicate about the environmental impact of projects upon air, water and biodiversity,” he said.

Professional service providers Deloitte, in a monograph being circulated at the APPEA conference, summed up the challenge in these terms: “While the economic benefits of a booming LNG export market should not be under-estimated, these could be lost if the domestic market fails to supply gas in a quantity and at price that maintains economic competitiveness.”

Deloitte makes an interesting point about the risks involved: Malaysia, which is currently the world’s third-largest LNG exporter, will start importing the fuel this year after declining local gas output and rising demand from power generators began to erode export supply.

The consequences of such an outcome here would extend well beyond the petroleum industry, Deloitte warns. “An uncertain regulatory environment and rising extraction and production costs could deter the investment required.”

The east coast supply situation, it adds, requires the coal seam gas industry to resolve concerns in New South Wales over its environmental impact.

In an environment of rising excitement over the potential of Australian gas shale gas, Deloitte reminds government and industry stakeholders that, even if substantial reserves are proven tomorrow, it will still take 5-10 years to develop and commercialise them.

APPEA chairman David Knox (CEO of Santos) added his warning: Success in gas project delivery is fragile. Delay and uncertainty risks seeing overseas projects leapfrog those in Australia. “With the LNG characterised by contracts typically decades long, the cost of delay could be massive.”

For his part Federal Energy Minister Martin Ferguson noted that the right balance has to be found between developing gas resources for local households and businesses at the same time as pursuing the lucrative LNG trade.

How much time is available to get this balancing act just right is a multi-billion question.

Avoiding the dead end

The upstream oil and gas industry has been quick to get its core message across at the annual Australian Petroleum Production & Exploration Association conference in Adelaide.

Using the Deloitte Access Economics report, about which I wrote in my previous post on Sunday, APPEA has moved early to urge policymakers generally and the federal government in particular not to take for granted the success of the 11 LNG developments, four approved and another seven on the starting blocks, an investment of $260 billion.

(That’s seven times the investment value of the much-debated national broadband project.)

APPEA’s new chief executive, David Byers, only the seventh to hold the job in 52 years, used the Deloitte findings on Sunday afternoon to warn that “the growing revenues from the resources boom cannot be allowed to breed policy complacency on the very large, long-term investments under consideration.” They will only proceed if Australia continues to present as a stable and predictable destination for investment.

Byers was acerbic about last week’s Federal Budget — “precious little evidence of a commitment to the economic reforms needed to expand the prosperity pie” — and keen to press the point that Australia’s reputation with investors as a safe haven for long-term developments is being eroded.

It will be interesting to hear the response on Monday morning from Federal Energy Minister Martin Ferguson, who spent Sunday talking to the APPEA council and mingling with more than 2,850 delegates at the conference.

The industry’s shafts are not aimed at Ferguson, whose standing with the oil and gas men and women is high, but at the Labor leadership.

Byers told the media pack: “The challenge for the government is to create confidence, not uncertainty. Don’t take our industry for granted.”

The APPEA theme for the conference is built around the Deloitte commentary on the economic adjustments needed to maximise the benefits of the petroleum boom rather than focussing on redistribution of the wealth. One of the key points that Deloitte has to make is that policies slowing structural change emanating from the boom will be costly, ineffective and ultimately lower its dividends.

Byers is also keen to get across the industry’s concern about moves to reserve some of the gas lode, especially on the east coast, for domestic use, a big pressure point for State politicians and also the federal government as major users, worried about future domestic gas prices, press for a national reservations policy.

“In a free economy, no business should be forced to sell its product at lower than market prices,” says Byers, urging Canberra and the State policymakers to accept that “industry development” protectionist policies now under consideration “lead to an economic dead end.”