Archive for April, 2014

Muddying the waters

What was the real news in a week when there has been a lot going on in the energy space?

For ordinary New South Welsh, undoubtedly that gas prices are heading higher.

For policy wonks, undoubtedly the release of the Coalition’s “Direct Action” white paper, which underlines that this federal government will not pursue the conceit of the Rudd/Gillard regime that Australia aims to “lead the world” in “saving the planet.”

This attitude is anathema to the green commentariat and large amounts of media space have been taken up with their reactions.

A key question is who is listening?

One of the most interesting commentaries I have read this year is by the veteran “Australian Financial Review” writer Geoff Kitney (“Ever more media, but voters tune out #auspol”). It seems to me to be required reading for anyone with a serious interest in communication of energy issues.

Kitney quotes the head of JWS Research, John Scales, who says “Think of the worst level of voter cynicism you believe exists in the community, then double it.”

Scales argues that Australian voters are utterly switched off politics. “I am amazed how little day-to-day awareness people have about political issues.”

What focus groups like the ones run by JWS do throw up is that “the mob,” as Paul Keating used to refer to Us Outdoors, are continuously unhappy about the cost of living and not least about their energy bills.

Which brings me around to the latest (draft) determination of the NSW Independent Pricing and Regulatory Tribunal (IPART).

Casual media followers (ie the majority of the population) will have gleaned that gas prices in the State are about to spike and that it’s the fault of those darned LNG exporters selling all “our” east coast gas for a fat profit.

So what did IPART actually say?

First, that retail customers’ bills in NSW the 2014-15 will rise by an extra $152 to $219 for householders (it varies by region) and by $610 to $848 annually for small businesses.

What this actually means for householders is that most of them, paying an average of $901 annually in the financial year now ending, will be spending $1,060 in 2015-16 (the determination covers two years). A small business person paying on average $4,201 now will be shelling out $4,942 in 2015-16.

It should be pointed out, too, that less than 25 per cent of small customers in NSW are still on regulated gas prices but the unregulated market can be expected to take up the rises too.

(And it should also be pointed out, quoting IPART, that, for the majority of households using gas, the cost represents less than two per cent of their disposable income and energy bills overall represent less than six per cent of what they have available to spend.)

Second, that the reasons for these increases are different in 2014-15 to those that applied to price rises for 2012-13 and 2013-14.

The latter relate to “sustained rises in network costs.”

The new spike, says IPART, is a product of “structural change emerging in the wholesale market.”

The regulator adds: “wholesale prices are likely to be influenced by the development of LNG facilities on the east coast – this means that the domestic gas market will be influenced increasingly by the international market.”

However, it says, there is still “significant uncertainty” about the impact the LNG activity will have on future domestic gas prices but it believes that “it is clear the domestic wholesale price will move towards the international price over time.”

Right now, IPART says “the supply and demand dynamics in east Australian gas markets are uncertain.”

There is “considerable uncertainty” about how far and how fast prices will rise, not least because of a lack of clarity about how the the Gladstone LNG projects’ needs will be met.

And it adds: “The impact of additional CSG supply on domestic gas prices is uncertain.”

Higher international prices, it points out, can provide incentives for further development of supplies – but this, of course, depends on how far and how fast the NSW Coalition government can get its act together. And, further down the track, the Victorian government too.

In this respect, one notes that NSW has a new Premier, Mike Baird, while the energy portfolio remains in the hands of Anthony Roberts following this week’s cabinet reshuffle.

The argy-bargy between lobbyists on the gas availability and cost issues rolls on, as one would expect.

The industry’s opponents argue that a huge increase in gas supplies over the past eight years make it impossible to justify price increases on the basis of a shortage (ignoring the fact that the availability of export markets is the engine that has pulled this development train).

The Australian Petroleum Production & Exploration Association argues back that you can’t expect downward pressure on rising prices in NSW if restrictions continue on the industry’s prospects in the State.

“The successful natural gas development story unfolding in most parts of Australia but not NSW,” says APPEA, “is underpinned by sufficient gas reserves to meet both domestic and export markets.”

APPEA chief executive David Byers adds: “Yes, gas prices are rising in the eastern States. This reflects increased costs of supply as low-cost deposits become depleted and production shifts to higher-cost reserves (as well as the response to export incentives).”

The waters of this debate are muddied by the ongoing wrangle over the impact of the current gas development impasse on jobs.

Incitec Pivot, for example, a loud voice for a reservation policy, says the present set-up is a threat to 100,000 manufacturing jobs.

Byers argues back that this line is “flawed” because it assumes anyone losing a job in manufacturing will be permanently unemployed.

“The reality is that resources and people will move from declining sectors to thriving ones.”

Government policies that support, rather than hinder, upstream petroleum activities “create the most net economic benefit,” he adds.

In the context of the Kitney commentary, getting this story across to tuned-out voters is a significant challenge.

AGL Energy’s Paul Simshauser had a stab at it in an interview with the ABC as the IPART determination was being released.

“In a worst case scenario,” he said, “you could see wholesale gas prices move from the more recent $4 to $5 per gigajoule to $10 or $11, a doubling.”

For households, however, he said, the delivered cost to their homes is more like $20 to $40 per GJ (when all cost factors are taken in to account).

So doubling the wholesale price might be an inconvenience for householders “but it is not going to have a profound effect on their budgets.”

(Here, consumer advocates like St Vincent de Paul hop in to point out that, in cold regions, like Victoria and the ACT, an extra $200 to $300 a year taken out of a pensioner’s wages is a big deal, leaving them stressing about what corners to cut to cope.

(As I have written before, the political challenge of dealing with “energy poverty” in Australia, even though it is a flea compared with an elephant on a global scale, has still to be adequately grasped – and a big point is that it is a challenge for governments not suppliers of energy. What is the rationale for adding to energy costs to alleviate community poverty?)

Simshauser meanwhile acknowledges that the mooted doubling of wholesale gas prices (to, say, $10/GJ) “can end up being fatal for some manufacturers.”

Needless to say, a factory falling over because, among a host of other causes, its energy bills have rendered it unviable is big media news reaching even tuned-out voters.

How to place the situation in its full context is the challenge of the new century for the energy sector.

With regard to this, another important aspect of the Kitney commentary is the view that the most effective use of social media is for targeting receptive audiences rather than the wider public. The Twitter conversation tends to be confined to the same people who hog the mainstream media.

Reality here is (1) energy bills continue to rise, (2) the bulk of the community hate this but are ill-informed about the reasons for it happening and (3) politicians knees jerk in response to what the polls, the media headlines and the focus groups tell them.

Please explain

The New South Wales leader of the opposition, John Robertson, is already running hard on a scare campaign about privatisation of the State’s electricity network service businesses, 11 months from an election.

“It will be a disaster, a terrible outcome for consumers” Robertson has told the ABC. “The sale of electricity poles and wires will push household bills up,” he tells every media outlet he can find.

The question not being asked of Robertson is how this will happen? What is the “terrible outcome” he envisages? What supporting evidence does he offer for these claims?

“Please explain” was made notorious as a political phrase by Pauline Hanson but it is exactly the question that should be posed to Robertson and it is extra-ordinary that reporters don’t put it to him.

In a network environment regulated by the Australian Energy Regulator under recently-amended rules designed by the Council of Australian Governments to put downward pressure on network charges, how will transferring the businesses to private hands, as in Victoria and South Australia as well as the ACT (where the network is half-owned by AGL Energy), result in a “disastrous” spike in NSW household retail prices, not least when retail price deregulation (something else “Robbo” apparently thinks shocking) will result in mass market customers being able to shop around for the best value?

Apart from Robertson, it seems to me that most local media editors and news directors, and especially “our” ABC, should also explain why they feel content to allow him to make a claim over and over again that has no basis in reality.

The editors of the tabloid “Daily Telegraph,” who have a poor track record for carrying on about network “gold-plating” without acknowledging how the big capex outlay came about, at least are clearly not take in by “Robbo” in this case.

In an editorial at Easter the paper asserts that “Robertson’s scare campaign might not be as scary as he thinks,” adding that he sounds “like a throwback to 1970s.”

Actually, he sounds like what he is: a former organiser of the Electrical Trades Union, still spruiking the self-serving union line rather than considering the sales step in the long-term interest of the NSW community as a whole.

As it happens, the media and the rest of us have available an independent, up-to-date assessment of energy sector privatisation, provided to the West Australian government this month by that State’s Economic Regulation Authority as a segment of its report on WA micro-economic reform.

It’s well buried, unfortunately: the relevant segment runs from pages 112 to 130 of a 356-page report.

The ERA acknowledges that “some members of society have concerns regarding divestment of State-owned assets,” notably in relation to price increases, degradation of services and environmental standards and abandonment of activities such as educating customers to reducing power consumption.

It goes on to provide a detailed “how to do it properly” set of criteria for governments considering relinquishing ownership of these assets, developed it says from analysis of reports on best practice.

It points out that there is a conflict of interest between government owning electricity networks and setting policy objectives and legislation for regulation of them.

On the whole, it says, the private sector is best placed to manage electricity network risk due to its ability to innovate, diversify and price risk.

And, of course, in the case of monopolies like networks, there must be a regulatory process in place to supervise charges and performance.

To those who say that “but this hasn’t worked; soaring network charges have sent consumer prices through the roof on the east coast,” the answer, as I have written here a number of times, is that politicians, mainly in Labor governments, set out in the middle of the past decade to alter the regulatory framework to ensure a large increase in capital investments, having been thoroughly spooked by the breakdown of service in Queensland (where capex had been suppressed for years until 2004 with bad consequences).

This resetting of the rules was supported by the trade unions. Indeed, they ensured still higher expenditure by successfully pushing for reliability standards, approved by Labor governments, that have since been demonstrated to be too high.

None of the governments participating in the regulatory changes, including the NSW one in which Robertson became a minister in 2010, paid heed to the flow-on effects of $40 billion in infrastructure outlays for consumer power bills – until the issue became a white hot political potato and then the “out” was to blame the networks.

The Energy Supply Association, of course, is very happy with the new ERA report, arguing that it demonstrates privatisation is the key to a more productive and efficient energy sector.

ESAA is not alone in pointing out that State governments can put the billions of dollars they have tied up in energy assets to better use in providing essential services and infrastructure “to keep the State going.”

ESAA’s Matthew Warren argues that, with energy markets changing rapidly around the world, the smartest way to go is to rely on “dynamic, open and competitive markets that attract private finance rather than pile up State debt,” spending the money instead on schools, roads and hospitals.

If I was in new Premier Mike Baird’s shoes, I’d call Robertson on this one.

His predecessor, Barry O’Farrell, gave the impression that he was being pushed towards privatisation of networks and didn’t much like the idea, but he might (emphasis on might) put the issue to the electorate in the next election (in March 2015).

Baird was being careful at Easter not to get ahead of the cabinet he has yet to announce, but he, too, promises that network privatisation will not be pursued without going to the State’s people at the polls.

It seems to me that Baird needs to move swiftly after he has ministerial arrangements settled to say that the Opposition and Robertson in particular have raised a point that clearly will worry the community and therefore it should be independently assessed.

In his shoes, I would set up an independent inquiry, required to report in three or four months and open to public submissions, to assess the issue of whether the costs and benefits of privatising the three distribution businesses and TransGrid stack up.

Let the ETU, the trade union movement and Robertson explain to this inquiry how they justify their scare-mongering.

Not to do this leaves Robertson free to continue his tactics and the media (especially television and radio, the main sources of information for the majority of the community) to keep putting his “disaster” claims to air without challenge.

Baird’s gas challenge

It would be ever-so-interesting to know what is on new Premier Mike Baird’s private “to do” list for the 11 months running up to the March 2015 New South Wales election.

“Energy” has to be there but is it solely with respect to the privatization of the State’s network businesses, which he has promised to put to the voters next year if he decides to pursue the potentially $30 billion sales, or does it include trying to make a better fist of the gas supply situation than did his predecessor, Barry O’Farrell?

There could be no certainty about which way O’Farrell would have jumped on the first and only a sense of gloom about what he spent his three years in the top job doing with respect to coal seam gas development and would have gone on doing right up to the next poll.

Baird’s instinct is clearly to pursue privatization, but it is a political hot potato and how far he will be willing to grasp it after Grange-gate has cost the Coalition government the high ground remains to be seen.

People will have many issues on which they will judge Baird in his first year as Premier. For me, it will be par excellence how he manages the gas imbroglio.

O’Farrell seemed to me throughout his three years in office to be either unaware or unworried about the effect his poor handling of the CSG issue was having on investors, not just those directly involved in gas development but any business considering NSW for a project that might draw the ire of the Greens and their fellow travellers.

I can think of no aspect of the CSG issue over the past three years where the O’Farrell government’s management was not cack-handed or, in some aspects, craven. Nor does it have the excuse that the way things have panned out caught it by surprise – it was fully aware from the get-go of its term in office of all aspects of this issue.

What has been missing for three years is genuine leadership and pro-active thinking. Now the leader’s baton passes to Baird and the situation is much worse than it was when O’Farrell was sworn in as Premier.

Not to put too fine a point on it, O’Farrell allowed the Greens and radical sideshows, as well as a radio commentator and some other media elements, to dominate this debate and there is now insufficient time to ward off at least some serious affects when present supply contracts run out over the next three years.

By accident or design, the upstream petroleum industry moved as Baird was transferring in to the NSW top job to drive home the point that management of the CSG issue has delivered Queensland development “underpinning the State economy” at the same time that south of the Tweed a failure of management has gas activity at a standstill in a State where, if this continues, the consequences will be real and unpleasant.

The Australian Petroleum Production & Exploration Association issued a media statement hailing the number of land agreements signed between gas companies and Queensland farmers and pointedly comparing this with NSW in a range of ways.

For example, there are now 6,821 direct employees of the industry in Queensland versus 201 in NSW – and 40,583 direct employees and contractors’ staff versus 258 in NSW.

The Queensland numbers will change, of course, as the $70 billion worth of Gladstone LNG projects move from construction to operation, but APPEA sees “enormous potential” for further gas exploration and production in Queensland.

The Queensland developments have so far seen 4,516 land access agreements written in the State (versus 285 in NSW) and 5,228 wells drilled (versus 232 in NSW).

Down the track, both the Queensland government and the federal government are going to benefit substantially from royalties and taxes. The gas industry contributed eight per cent of Queensland gross State product in 2013 and this has a flow-on effect for the national economy.

The overall impact of a gas crisis in NSW on that State’s economy and on the national economy has still to be spelled out, but “non-trivial” will sum it up nicely.

The main APPEA thrust at present is that more than 4,000 farmers have over time started to trust the gas industry in Queensland and that the same can happen in NSW, but this requires a very different approach from Macquarie Street to the one O’Farrell pursued.

There is another aspect of this issue that will have to start taking up Baird cabinet time: to quote federal Industry Minister Ian Macfarlane, NSW now faces a gas shortage from 2016, with consequences in particular for manufacturing and other industries that rely on gas for their operations – and for jobs in these industries.

As AGL Energy pointed out in its most recent economic paper, the onus in this situation falls on the State government to manage who gets gas in shortfall periods.

If I was Baird, I wouldn’t bet on the Labor Opposition not making a meal of this threat in the political jockeying ahead of next March’s election. Soothing noises won’t wash with voters if a scare campaign gets traction.

Even if the new Premier can oversee the start of CSG activity by March next year, it will be close to impossible for adequate new production to be at hand by the 2016-17 winters – and this is in addition to the issue of substantial retail price spikes, which we know will start in mid-2014.

Mike Baird is going to have a great deal on his hands over the next year.

His highest priority, no doubt, will be to limit the Coalition’s Legislative Assembly seat losses – it is near impossible for Labor to win the next election but a Baird government mark two will be severely hampered if it takes a hammering at this poll – and to engineer a majority in the Legislative Council (which is not impossible but a tricky endeavor).

How he rates the State’s gas challenge amongst all the rest facing him will more than just interesting.

What farmers want

Like many sectors of the economy, agriculture has become increasingly energy intensive to sustain its international competitiveness. The flip side is that a fair few in the farming community are also more combative when energy supply activities come anywhere near their land.

This dichotomy is well on display in the submission the National Farmers Federation has made on the energy white paper. How far the Coalition is taking account of agricultural voices will emerge when the green paper appears next month.

The NFF sums up rural concerns like this: “Continuous expansion of the energy sector and escalating energy price pressures (are having) a severe impact on individual farmers and agriculture more broadly, contributing to significant financial hardship in some area.”

The federation points out that farmers and their supply chain are highly dependent on energy for their production of food and fibre, whether it is for fuelling tractors and farm machinery or electricity to power food processing facilities.

The NFF is especially aggrieved by the power network sector. Its submission complains: “There is minimal consultation between network service providers/retailers and customers. Many farmers and irrigators are unaware of their current tariff structure or the level of associated charges. In many cases, the only interaction farmers have with (power) suppliers is through their monthly electricity bills that show the dollar value of their network costs.”

The federation complains too that many farmers have been moved recently to demand-driven tariffs without any consultation or explanation of why the change is occurring. It asserts that “the lack of consultation together with the complexity of the electricity pricing structure has made it nearly possible for business owners to choose a suitable tariff.”

It calls for “the issue of transparency, communication and consultation across the energy supply chain” to be addressed by the white paper as a major concern.

The sub-text to these complaints is a long-held unhappiness of farmers that network charges are much higher for the Bush than for urban areas, an issue explained by the comparative costs of sending long,skinny lines deep in to the countryside to serve relatively few customers compared with the systems required to meet higher density urban loads. As the NFF points out, this means that regional Queensland and New South Wales network charges are about 30 per cent higher than those in urban areas.

Under the heading “what farmers want,” the NFF calls for “lower energy costs, transparency in the energy market and consideration of tariffs that are tailored to suit the needs of agricultural interests.”

It also says the federal government should “encourage” energy efficiency audits on farms and upgrades to farming equipment.

While the submission calls for “policy incentives for utility-scale renewable power generation based in regional centres,” in the same segment it then decries the renewable energy target. “Any policy that simply adds costs in to farm businesses should be removed — and the RET has certainly driven up costs on farms,” it says. The RET, it adds, imposes costs while providing “little or no benefit.”

Nonetheless, the NFF believes that there is “a pressing need for ongoing national dialogue about the potential for utility-scale renewable energy as a new business sector in regional Australia.”

Regional and remote towns, it adds, are “the easiest to supply with renewable energy due to the availability of land for solar and wind generation as well as access t abundant natural fuel sources for bio-energy.” The NFF calls for modelling of transmission line networks and energy demand in regional centres to facilitate development of a “robust, integrated, least-cost planning model” for a rural transition to renewables.

Looking at the coal seam gas situation, the NFF observes that the energy sector is increasingly impacting on food and fibre producers, especially in areas that have had little involvement with the resources sector in the past. The federation says that, for the sectors to co-exist, “solid assurances” need to be provided that “natural resources” will not be adversely affected and that land will be rehabilitated.

Some parts of the CSG experience, it argues, have demonstrated how poor outcomes can result when “an industry is allowed to expand without appropriate regulation and oversight.”

It adds “government, State and federal, cannot make the same mistakes should an industry like shale oil and gas begin to expand.”

How far the Abbott government can respond to all this remains to be seen. The response also has to be read against the agricultural competitiveness and Northern Australia white papers the government has in the works.  One can only hope that someone is co-ordinating what these documents say. The NFF is not alone in seeking a woke-of-government approach to policy.

FOOTNOTE: Having read the NFF submission, I also looked at the irrigators’ separate input and noted this point, which goes strongly yet again to the need for governments to not take silo approaches to issues: “Electricity and diesel are vital input factors for irrigated agricultural production. The sonservantionist policies of the previous (federal Labor) government have forced irrigators to undertake large-scale structural adjustments to reduce water use. The result has been large-scale investment in highly electricity (and diesel) intensive irrigation equipment. With the recent rises in electricity prices, use f this equipment has in some instances become unviable and many irrigators have been forced to modify their practices back to less efficient and more water intensive operations.” Is it any wonder that they are grumpy?

Power shift

Depending on where you stand, the most interesting electricity happening of the past 10 days is either the decision by the New South Wales government to introduce mass market retail deregulation or the publication of the issues paper for the renewable energy target review.

“Cheaper electricity” is not a headline that has been seen in NSW for some years and the message for a million or so customers is that the benefits won’t be handed to you; they have to be pursued by coming to terms with energy retailers and contracts that are not all that easy to follow.

The prize, for people paying about $2,250 a year today, is a saving of the order of $350 a year, which is not to be sneezed at.

Sixty per cent of NSW residential customers won’t see anything to excite them because they have already taken advantage of playing the market. Interestingly, according to the State government, 70 per cent of Western Sydney householders have already opted to shop around.

Needless to say, the Labor rump sitting in State Parliament has found a reason to carp, claiming that consumers, and especially those on low incomes, “will be left without protection.”

The Energy Supply Association’s Matthew Warren has countered this by promising that the industry will work with the O’Farrell government to see consumer needs are met and pointing out that, as with groceries and phones, for example, competition means that retailers will work to offer customers attractive prices and better choices.

The NSW move brings the State in to line with Victoria and South Australia — where Labor governments saw the value in deregulation.

The actual step in NSW is to provide a platform for those now paying regulated tariffs by dropping them 1.5 per cent for a year and increasing them by the CPI thereafter. The State’s Independent Pricing & Regulatory Tribunal is going to continue to monitor power prices and continue to regulate gas prices (which are going to soar because of the inability of successive governments to plan the State’s gas supply future).

The RET issues paper, meanwhile, has confirmed the fears of the target’s boosters, mostly coloured deep green, who read sinister intent in to the slightest gesture on the part of the Abbott government.

They and everyone else will get their say in the form of submissions to the panel reviewing the RET (chaired by manufacturer Dick Warburton) and they have to deliver their views by 16 May. The issues paper says the panel’s report is expected to be completed by “mid-2014.”

For me, the paper’s interest lies in the data it contains.

For example, the majority of the $18 billion investment stimulated by the RET since 2001 has fallen on the small-scale (ie mostly solar PV, including solar water heaters) side, an area also heavily subsidised by State governments until the insanity of the offers became only too apparent.

The paper says $11 billion has been invested in small-scale renewables and this is where the bulk of the much-touted 24,000 jobs created by the RET is to be found — 17,000 of them, according to the paper.

Elsewhere, the paper says the small-scale systems (PVs) provided 2,570 gigawatt hours of electricity in 2012 while small hydro subsidised by the RET contributed slightly more versus 7,706 GWh from wind generation.

The paper reports that wind generation capacity has risen from 100 megawatts in 2001 to 3,800MW in 2013.

It adds that modelling for the Clean Energy Council estimates the aggregate carbon emissions abatement achieved by the RET between 2001 and 2012 to be 22.5 million tonnes. The Warburton panel will receive modelling commissioned by the federal government to update emissions reductions and estimate their unit cost, a figure on which critics of the concept can be expected to seize because it will be a lot more than $23 per tonne.

Perhaps the biggest single factor in all this is that Australia-wide demand for electricity was expected to be 300,000 GWh a year by 2020 and it is going to be a lot less in any new modelling.

Seven Cs at APPEA

Big doesn’t do justice to the 2014 annual conference of the Australian Petroleum Production & Exploration Association, just completed in Perth.

The event drew 3,677 delegates to the cavernous Perth Convention Centre, coming from 35 countries and 1,000 companies, plus 230 exhibits and their attendant staff. It featured more than 100 presentations.

Trying to draw some coherent threads from such an event is challenging to put it mildly and then I hit on this notion of focussing on the seven Cs at APPEA.

The first “C” is cost — APPEA hit the ground running last Sunday on this issue and the association and speakers harped on it to the very end of the conference. APPEA chief executive David Byers says that, along with the access problem (see community below), construction and operating costs pose the greatest threat to Australia’s natural advantage as a global gas producer. The price Australia will pay, Byers, Industry Minister Ian Macfarlane and a conga-line of company executives warn, will be losing out in the international competition for the next tranche of major LNG developments to serve, in particular, the needs of energy-hungry Asia. This problem applies not only to building any greenfields projects but to brownfield opportunities, too — that is expanding existing developments, which, in theory, should provide this country with an advantage in the race to meet expanding demand.

The second “C,” competition, is a real spectre for the LNG businesses and for the federal government. How fast can companies based in North America enter the global race? How much gas can they make available? What will their engagement do for prices? Macfarlane told journalists on the sidelines of the conference that, having asked aloud two years ago whether there would be any new Australian greenfields developments, he now wonders if there can even be any brownfields ones in the next decade?

The third “C,” China, has never been far from the centre of the attention at the forum, not just because it represents an enormous market for Australian LNG but because it has shale deposits that, if successfully tapped, have the potential to change the geopolitical set-up just as US shale has done in recent years. International Gas Union vice-president David Carroll said that whether or not China pursued natural gas development on its own lands could create a huge swing in the global market. Couple this with the re-emergence of nuclear power generation in Japan, he added, and the LNG market could be a very different place. The prize in Asia at the moment is seen as another 160 million tonnes of demand beyond the new volumes from Australia now under contract.

The fourth “C” stands for community and represents one of the biggest challenges for the domestic gas industry. It’s not just the looming basket case of the New South Wales gas market that represents a failure of the industry to win over community support, and therefore political support to reject the propaganda of the radical environmental movement, but there are problems in Victoria, too, and a constant need to keep Queensland’s rural community onside to realise an eight to ten-fold increase in CSG well drilling to fulfil the Gladstone LNG contracts. A significant issue for APPEA and its members is finding the wherewithal to prosecute the persuasion game to its optimum extent, not least because the whole industry is being called on to fund what is essentially an eastern Australian producer problem.

The fifth “C” has to be attributed to central Australia’s Cooper Basin, now in its sixth decade as a source of oil and gas production with its shale oil and gas resources a topic of fascination for the upstream petroleum industry and its small army of analysts. “Super Cooper,” as Gas Today magazine dubs it, with its associated Eromanga Basin, is reckoned to hold 310,000 petajoules of unconventional gas resources (emphatically not reserves) — the size of which may be judged against the fact that New South Wales’s total annual needs are around 160 PJ. The Cooper is being talked up as “the pre-eminent shale resource outside the US” in some quarters and Santos Limited’s James Baulderstone says it could “fuel Australia for decades.” The size and the cost of the effort it will take to realise any version of this dream is, as the economists like to say, non-trivial, but the industry is at least happy that, in the South Australian government, is has a willing accomplice whose approach is held up as a model for other State governments.

The sixth “C” of the conference is co-operation. I lost count of how often it got mentioned by everyone from West Australian Premier Colin Barnett (who thinks WA companies could be more co-operative with him), to managers spruiking the value of companies that might otherwise be rivals working together to lower the barriers to timely, efficient development and on to strong urging by the Boston Consulting Group for Australian governments and companies to collaborate to lift the innovation effort — the firm says Australia lags its peers in energy R&D and especially upstream petroleum research, something that comes as no surprise to your’s truly, who spent years in another life cajoling companies to work with governments to lift R&D efforts, especially in the electricity sector.

The seventh “C” is the most surprising — because it’s coal, which got a seeing to from the IGU president Jerome Ferrier as he argued for gas producers to attack it vigorously and work with the renewables sector to bolster the use of gas. These energy sources “should be acknowledged as the two main pillars of an environmentally friendly and sustainable long-term global energy policy,” he said, leaving me thinking in the audience that APPEA should wheel him out at the Pillaga scrub in New South Wales for a chat with the “Lock the Gate” crew.

Now I don’t pretend that this paraphrase wholly canvasses or encapsulates the 2014 APPEA conference. Everyone there will take away their own views on the gist of the event. But I hope this provides at least a glimpse of a major effort in portraying the upstream petroleum industry at a moment in time.

Energy whirlygig

It’s a fast and furious week for the energy sector.

Over in Perth the Australian Petroleum Production & Exploration Association annual conference is at full throttle, with 3,570 delegates from 1,000 companies and 37 countries.

In Sydney, the O’Farrell government has heartened the electricity industry by finally agreeing to deregulate power pricing, offering consumers on regulated tariffs an immediate if minor reduction as a sweetener.

In Canberra the federal government has published an issues paper on the renewable energy target review, setting mid-May as the date for submissions (of which there will be more than a few) to reach the task force chaired by Dick Warburton.

From a consumer perspective, the biggest immediate news is the New South Wales price deregulation decision because it affects a million accountholders, or about one in nine of east coast consumers. From an energy retailer perspective, it re-opens the churn game in a substantial way and that is generally expected to flow on to those households who choose to pursue new contracts in the form of larger power bill reductions.

Here, the next cab off the rank is expected to be Queensland with deregulation for the south-east corner, three per cent of the State physically but home to most of its energy customers, in the new year.

Meanwhile, the gas games roll on and the APPEA conference in Perth’s cavernous convention centre has all the aspects, domestic and international, of this saga on display.

One of the papers really ought to be despatched asap to every member of the O’Farrell government’s parliamentary team. It was delivered by John Cotter, chairman of the Queensland GasFields Commission, set up as an independent statutory body to oversee relations between the industry, rural landholders and regional communities.

Here’s Cotter describing a meeting of stakeholders at Chinchilla, about 200 kilometres west of Brisbane. “There was no screaming or protests, but rather frank, open, robust and fearless discussion (between) landholders, State and local governments, community representatives and CEOs of four CSG export projects,” he told the APPEA audience. “All seeking genuinely to resolve issues.”

How different is that from the endless performance at farm gates in northern NSW? And who should long since has set up a NSW GasFields Commission to deal with the State’s really quite dire gas supply situation?

“One key factor enabling development of Queensland’s onshore gas fields over recent years has been strong political leadership,” said Cotter. Yes, quite.

Cotter, a farmer, rightly makes the point that the debate over coal seam gas and onshore gas development generally has been distorted by fear and misinformation. Bringing real science and research to the table has been a key focus for his commission. It works with CSIRO, universities and other research agencies to improve communication of science facts.

The challenge he threw out to the APPEA audience interesting, too. You proudly talk about your safety culture, he said. “I look forward to the day when the industry can talk more confidently and consistently about its community engagement or social culture.”

And he makes a valid point — farmers have a continuing challenge in explaining how food is produced to the urban Australian audience and so does the upstream petroleum industry in explaining its industry.

In this vein, it was rather curious to sit through another APPEA presentation from the president of the International Gas Union, TOTAL executive Jerome Ferrier, who will be bringing the IGU’s triennial jamboree to Perth in 2016, a conference that will probably even outdo the APPEA event in participation.

I don’t think it would be an exaggeration to describe Ferrier’s speech as a declaration of a world war on the coal industry on behalf of gas producers. He excoriated coal and talked up natural gas and renewables as the “two main pillars” of an “environmentally friendly and sustainable long-term global energy policy.”  The IGU, he said, is engaging on a long-term campaign to “bring gas to its rightful place in the world.”

We really should transport him to the back blocks of NSW the next time he visits.

Meanwhile, the APPEA show continues — with federal Industry Minister Ian Macfarlane the next big speaking attraction.

Breaking the barriers

In the context of my last post on this site (“Seeing LNG for what it is”), it is interesting to get to the Australian Petroleum Production & Exploration Association conference in Perth and find the organisation fretting that the perception of this country as a welcoming destination for investment is under challenge.

Martin Ferguson, who is an advisor to APPEA now, is one who believes that “there is a very real danger of Australia pricing itself out of the global LNG market.”

APPEA says that the major challenge to the LNG industry’s further growth in Australia is competitiveness in a catch-as-catch-can global environment where more than 200 million tonnes of extra annual capacity will be needed by 2030 (bringing the world’s consumption to 470 Mt a year at that point).

The endless conflict with the Greens and the environmental movement over gas development is one aspect of the barriers to Australia achieving further LNG investment, which APPEA estimates could potentially require capex of another $180 billion, but so, too, it points out in its opening conference salvo, is addressing the cost and productivity barriers.

The risk, it says, is that we price ourselves out of the growth opportunities in the LNG market, citing as an example the fact that local costs for delivering gas to Japan can be up to 30 per cent higher here than for projects in Mocambique and Canada.

Part of meeting this challenge lies in industry’s own hands through working harder to constrain costs, including investment in new technology as well as upskilling the workforce.

Like most in the business community, APPEA wants to see significant changes to the workplace and labor market regulatory set-up. Removing anti-competitive restrictions in the labor arena, it argues, ultimately will create more jobs as companies are better equipped to win new contracts.

In addition, it wants pruning shears taken to the 150 statutes and more than 50 agencies overseeing the oil and gas business at Territory, State and federal levels. Much of this regulation has been prompted by political factors rather than science or operational realities.

The Abbott government’s efforts to reduce this red and green tape is a step in the right direction, but not a cure-all.

Right now, APPEA’s main focus is on pushing for the labor market reform.

As CEO David Byers says, “a system that drives investment to other countries is not in the interest of any Australians.”

Byers has joined Trade Minister Andrew Robb (see my previous post) in rejecting acceptance of the “end of the resources boom.”

Welcoming some 3,600 delegates to the APPEA conference via the association journal “Flowline,” Byers urges Australians not to take this talk at face value. “The mining boom may be losing steam, but the oil and gas component of the resources sector is about to enter an exciting new phase,” he argues.

He also makes a point relating to the public debate on gas that  I think is essential to success in breaking these barriers — and this, in my terms, is that there is something going on here that ordinary Australians should find exciting and re-assuring.

Sure, the Greens and their fellow-travellers don’t want a bar of it, but they represent at best one in eight  of the voting population — this fell back in the last federal election and at the Tasmanian and South Australian polls even if support for the mainstream parties has dropped in this weekends wacky Western Australian Senate by-election with teed-off Sandgropers either not voting at all or turning their backs on Labor and the Liberals as a protest gesture over the earlier polling stuff-up.

However, in my book, the gas industry has to do much more to sell its value to mainstream Australia, who represent some seven-tenths of voters.

Byers says the impact of the LNG industry is widely under-estimated (for which, may I suggest, the industry has itself at least partly to blame — the deity helps those who help themselves).

These projects, he rightly adds, deliver jobs and training opportunities, drive regional development and deliver export income — how many of us do you think understand the balance of trade and its importance to how we live? — as well as tax/royalty revenue.

The official figures always lag 2-3 years. It is the nature of data collection and verification. But, as Byers notes,in 2011-12 our LNG cargoes earned $12 billion in export revenue and put more than $29 billion in to the national economy.  Would someone like to compare this with the contribution of the automotive industry over which so much emotion has been spilled in recent months?

At the 2011-12 point, the upstream petroleum industry’s contributions to governments’ revenue was almost $8 billion. By the middle of next decade this will be more than $12 billion annually — from existing projects and those currently under development.

Such LNG projects are not fly-by-night ventures. They have lives of at at least three decades. The first of them all, the North-West Shelf Project, which started shipping gas 25 years ago, is expected to have a 45-year life.

It’s not just the LNG operations tax payments that matter or the employment they directly and indirectly engender, but also  the money they spend buying goods and services.

Byers points out that Chevron’s Gorgon development will have spent $20 billion on services and supplies from Australian businesses by the time it is commissioned in 2016 — and that it is expected to spend another $33 billion on goods and services over 30 years.

Morgan Stanley said late last year that “it is difficult to over-estimate the long-term structural importance of the (LNG) industry to Australia.”

Maybe so, but it is only too easy to not appreciate it beyond a relatively small circle of Australians and a great deal more needs to be done to close this appreciation gap for the majority of the population.

I think that breaking down this community mindset barrier is as important to the LNG business as the other areas now receiving focus at the APPEA conference.

One might argue that it is the most important challenge because success here will grease the wheels for other changes APPEA and its members are pursuing.

As Byers told journalists in Perth this afternoon: “The size of the prize is immense.”  The size of the effort to change the public esteem of the LNG sector should be commensurate.

 

 

 

 

 

 

See LNG for what it is

As the newspapers and airwaves are filling with reports that Treasury Secretary Martin Parkinson is warning Australians “to prepare for a recession in the next decade” – the opening sentence of one story – I am reading his actual speech as well as a recent one by Trade Minister Andrew Robb and reflecting that it is mighty hard, if you are the person in the street, to get a clear idea of where things are at.

This is especially apt as I prepare to join 3400 others (latest count) at the annual conference of the Australian Petroleum Production & Exploration where the focus will be heavily on the current and future contributions of LNG as well as the current barriers to these being realised and to adequate domestic gas development.

Starting with Parkinson, his own interpretation of the gist of his speech – via his wind-up comments – is worth noting.

“We do not face a living standards crisis,” Parkinson said. “We should not lose sight of the fact that we are a rich country. But we do face a significant challenge in maintaining the rate of growth in living standards Australians have come to expect.”

Can I invite you to read that again when you come to the end of this commentary.

Part of meeting the challenge Parkinson highlighted must be coupled with improving fiscal sustainability, he said, so we don’t get hurt by global shocks.

“Efforts across the economy to boost productivity are central to the living standards challenge and very important to the fiscal challenge.”

Part of this is the need to introduce a better tax system, he added.

Part is the need to continue to invest in infrastructure, a sustained effort to cut unnecessary regulations, a focus on freeing up firms and workers to respond to changing markets plus measures to encourage an innovation culture.

Now, what I find interesting, is that never once in a 21-page speech did the Secretary refer to LNG.

Not once, although a bar chart of major projects he used does throw up the large LNG contribution to capex between 2010-11 and 2016-17.

Parkinson did, however, talk about the “mining investment boom” – the end of which, he said, is now becoming apparent.

“The contribution of the resources sector to Australia’s aggregate economic growth will decline over time,” he asserted.

One might think that a wee caveat here about the contribution present and future of LNG might be in order, but no.

Contrast this with what Robb, on a visit to Asia, was saying a week earlier.

“Reports of the death of the mining and energy boom in Australia are significantly exaggerated,” he said. “Over the next three to four years, and especially in energy, there will be decisions about some $250 billion of new (global) projects and we are well-placed to capture much of this.”

And this is what he added on LNG to a Hong Kong audience.

“Australia’s LNG story is set to be phenomenal. We are already the third largest exporter in the world and by the end of the year another chapter will open with the three Gladstone projects. By 2017-18 Australia could overtake Qatar as the world’s largest LNG exporter.

“But there is a lot more to play for in global LNG, underpinned by growth in Asia’s energy hungry middle classes.

“Between 2016 and 2025 global demand is tipped to grow by 15 million tonnes above and beyond projects already sanctioned or in advanced planning. That’s a Gorgon project each year.”

And, he pointed out, there are still our shale resources, the seventh largest deposits seen to be recoverable in the world.

“This could add another century to our gas resource life.”

I don’t propose to psycho-analyse the Treasury Secretary, a former secretary of the climate change and environment department in the Rudd/Gillard era, but I find it curious that the head of this critical agency could talk for so long without at least mentioning LNG is his tour of the horizon, one that is being interpreted by the media as emphasizing the economic dangers to come.

It seems to me that this fits with the mindset on the east coast that “gas” and “trouble” belong in the same sentence – where, in fact, “gas” and “opportunity” are one of the biggest stories of early 21st century Australia.

It fits too with the latte coffee mindset that gas is a fossil fuel and not a good idea. That technologies like hydraulic fracturing are the devil’s work and that gas developments under much of the east coast are an affront to the way we (that is the residents of inner suburbs and some leafy outer suburbs) want to live.

For sure, LNG development comes with issues, including challenging domestic gas supply ones – but a balanced national outlook requires that we also fully appreciate the upside, not just for the companies involved but for the community at large.

In one of its current submissions to government, APPEA says this: “While the economy has benefitted, and will continue to benefit, significantly from LNG investments, there are even more projects under consideration, representing a potential additional investment of $180 billion.

“Realising this would benefit the entire nation.

“McKinsey & Co (say) GDP would increase by 1.5 per cent (and) about 150,000 jobs would be created across the economy – the tax revenues created (if this development happens) would be equivalent to half the total federal debt.”

Speaking at the Credit Suisse investment conference, Robb commented that succeeding in our current efforts to capture new resources exports, and especially energy exports, will “give us a bridge while we develop our food and agriculture, while we enhance education, our tourism, our medical research and health fields, all areas of great strength in Australia.”

This, he added, is “where we see our future in many respects, a balance between (these) resources and energy.”

Unfortunately this message simply does not make it through the mainstream and social media fog.

Perhaps the Perth APPEA conference will contribute some balance – there are 50 journalists attending.

On writing a yearbook

Writing a yearbook is an interesting challenge, not least when you open it on the day of publication and look at its contents against what is going on around you at the present time.

Today is one such day for me.

Standing the offices of ArmstrongQ, design agency and publishers of my OnPower yearbook, at Sydney’s Darling Harbor today, I was happy to congratulate MD Peter Armstrong on its visual qualities, while flipping through it one more time to see if I had tripped up.

I did it again on the train back to The Hills from the Sydney CBD.

My grandmother Kathleen Danoher used to tell me 60 years ago that self-praise is no advertisement, but I do think the book passes the test of timeliness, which is good  because we are despatching it shortly to every MP in the country (all 860 of them across the jurisdictions).

The publication’s 10 chapters focus on 2014 as a critical policy year (tick), on the relevance of the 2012 energy white paper to current developments (tick), on the need to shift from rhetoric to action in network reform (tick), on the pursuit of zero emissions in power generation (tick), on the fate of gas-fired generation in today’s market environment (tick), on the fate of east coast manufacturing and its impacts on energy supply (tick), on the challenges to energy security in New South Wales (tick, that one was a slam dunk), on the importance of long-term strategic planning for energy (tick), on the longevity of coal on the energy scene (tick) and, finally, on the importance of data in discussing electricity issues, in a commentary that should make my friend Matthew Warren (CEO of the Energy Supply Association) smile as he gears up to deliver ESAA’s 2014 yearbook (“Electricity Gas Australia,” a data bible for me) in mid-year.

Would I have written the OnPower yearbook in a somewhat different vein if I had had access to the 250 submissions to the Abbott government’s energy white paper process, all published since my text was signed away? Yep.

But do these commentaries, which readers of this blog know I have since read and re-read, invalidate the yearbook’s scope and direction? Nope. If anything, I think they are a reinforcement.

So I look forward now to seeing OnPower yearbook making its way out in to our local energy world – and, if you would like to acquire a copy, I direct you to the website at www.onpower.com.au or you can email the publisher, Jaqui Lane, at jaqui@armstrongq.com.au.

(Jaqui and I, of course, collaborated on producing the “Powering Australia” yearbook from 2007 to 2012 before events conspired to bring that venture to an end. I’m pleased to say that I think the OnPower 2014 yearbook stands comparison with that publication.)

On the point of topicality, as it happens I had reason to be chasing through the energy white paper submissions for comment on carbon capture and storage for a Coolibah client on Tuesday night and the “Still about coal” chapter in the new yearbook makes interesting reading against several EWP contributions, not least that from Centennial Coal.

The company’s CEO, David Moult, is a member of the Abbott government’s EWP reference group, and the submission (number 162 on the Department of Industry EWP website) is a neat capsule of the coal sector’s perspective.

I don’t have room to canvass it in any detail here, but a few of the assertions are worth noting.

Moult and Centennial point out that, although black and brown coal plants account for 55 per cent of registered generation capacity, they deliver 70 per cent of our power output.

“There is no other fuel that can perform this vital role (here),” the submission says, “(and) coal is set to continue to play (this role) in meeting energy security objectives for the foreseeable future.”

This is something that seems to get lost a lot in the day-to-day media gibber, leading ordinary Australians and no doubt not a few of our MPs in to believing a green power revolution is just around the corner.

Centennial also point to the prospects for high efficiency, lower emission coal generation, including technology intended to match the flexible performance of gas turbines while using what is going to be a much less expensive fuel under the eastern Australian conditions now looming – and, of course, go on to urge a strong local strategic focus on carbon capture and storage.

Gesturing to the Gillard government’s exclusion of CCS and related low-emission technologies from the $10 billion activities of the Clean Energy Finance Corporation and from the RET, Moult argues that the focus on intermittent renewables at their expense will help to create market distortions and increase electricity prices.

Centennial is one of quite a number of EWP contributors pressing for fuel neutrality in the new policy approaches now being mulled by the Abbott government.

As I write in the yearbook, one of the big questions for east coast power supply for the ‘Thirties is whether the substantial coal contribution envisaged for then by even the Gillard government will come from new plant or from existing ones that are already middle-aged in terms of their working lives?

How far my new yearbook can go towards influencing our 860 MPs – more than 90 per cent of whom will never read an EWP submission – is anyone’s guess, but I am content that the publication lives up to its opening promise to add some context, insight and additional thought to today’s energy debate.

Forgive me, granny!