Issue 52, June 2009
The Australian Petroleum Production & Exploration Association has used its 49th annual conference in Darwin to promote the potential of the gas industry to make a major economic and environmental contribution.
According to APPEA, new investment in the petroleum industry has the potential in the next decade to create 52,000 jobs and to deliver an additional $10 billion a year in tax revenue.
A large part of the mooted contribution lies in gas exports. APPEA says that the total existing, committed and proposed LNG capacity exceeds 97 million tonnes a year. With one tonne of carbon emissions from LNG production recorded in Australia able to deliver 9.5 tonnes of emissions overseas, APPEA estimates that the projected exports could avoid 180 million tonnes of greenhouse gases annually.
Another perspective on development prospects was provided at the conference by consultants Wood Mackenzie, releasing a report on Australasian LNG. Richard Quin, a lead analyst for the firm and one of the report’s authors, said decisions to go ahead with just three of the proposed LNG projects – one in Papua New Guinea, the Gorgon development offshore Western Australia and the Curtis plant, using coal seam gas, in Queensland – would require more than $US60 billion in capital outlays and create 15,000 construction jobs.
Roy Krzywosinski, managing director of Chevron Australia, told the 1,600 Darwin conference delegates that the use of natural gas from the proposed Gorgon project on its own would deliver international abatement of 45 million tonnes of GHG a year. “That is the same impact on emisisons as removing two-thirds of all vehciles off Australian roads,” he pointed out.
To emphasise the potential value of gas, Krzywosinksi added that replacing all coal-fired power plants in Australia today with gas generation would by itself achieve the Rudd government minimum target of a five percent cut in 2020 emisisons below 2000 levels.
Gorgon holds the single largest gas resource in the country, with Chevron saying it has enough reserves to power a city of one million people for 800 years – and the little Top End capital for 10,000 years.
Krzywosinksi added Chevron’s contribution to the controversial carbon policy jobs debate by revealing that consultants ACIL Tasman have revised the Gorgon peak construction estimates upwards from 6,000 direct and indirect employees to 10,000. Pushing the value of the project to Australia, he claimed that more than $33 billion will flow in to purchase of local goods and services in Gorgon’s first 30 years’ operation.
The company plans to sequester 40 percent of Gorgon’s carbon emissions in a sandstone reservoir 2.5 kilometres under Barrow Island.
Blair Comley, deputy secretary of the Rudd government’s Climate Change department, has told the APPEA conference that achievement of the initial five percent abatement target for 2020 will require a cut of a minimum 135 million tonnes of greenhouse gases compared with “business as usual” measures, including the expanded renewaable energy goal.
Comley also revealed that the government believes that the $3.9 billion insulation and hot water initiative it included in this year’s economic stimulus package will achieve emission reductions of five million tonnes annually in 2020 – comparing this with the average annual emissions of a domestic LNG project of between three and 10 million tonnes of carbon dioxide a year. The highest target – 25 percent – would deliver 250 million tonnes below BAU, he added.
He put the much-vaunted rooftop solar initiatives in perspective by indicating that providing every household in Australia with a 1.5 kW panel, meeting about a quarter of annual residential power demand, would achieve abatement of 16 million tonnes annually by 2020, but would cost $200 billion to deliver.
Deloitte Economics has put forward four “strategic propositions” for Australia public policy in taking action to reduce greenhouse gas emissions.
In a paper delivered to the APPEA conference, partner Jon Stanford said the four propositions are:
Stanford told the Darwin conference that federal Treasury modelling showed that, by about 2075, nuclear power and renewable energy would account for about 45 percent of the world’s electricity, shared evenly between them, while fossil fuels utilising carbon capture and storage would provide the balance. Absent viable CCS, he said, the Rudd government modelling indicated that nuclear and renewables would each account for 50 percent of power generation worldwide in 2075.
Adelaide-based Santos came to the Darwin APPEA conference armed with a detailed argument for greater support of natural gas by Australian governments, a proposal it has put forward to Energy Minister Martin Ferguson’s ongoing energy security review process.
In a riposte to coal-fired generation claims about inadequate reserves to meet a large-scale increase in domestic gas-fuelled power supply, Santos, with new managing director David Knox doing the talking at Darwin, argued that, in fact, there are sufficient resources close to domestic and foreign demand points to establish a new comparative advantage for Australia in electricity production.
Earlier this year the National Generators Forum told the federal and Queensland governments that a combination of the proposed eastern seaboard LNG developments and domestic demand for gas for power generation to meet up to 60 percent of baseload electricity demand as a result of the impact of emissions trading could see the gas price reaching twice its current average of $3.50 per gigajoule.
“While the growing demand will continue to put some pressure on domestic gas prices,” Santos has now retorted, “predictions of export parity are not supported by market analysts. The consensus outlook for eastern Australia gas prices is (for them to be) relatively flat with limited external price shock from the LNG industry.”
The company acknowledges that there have been past legitimate concerns about the long-term availability of gas to the eastern Australian market – and the view that the large offshore resources might be required to underwrite major domestic demand as well as serve international requirements – but the emergence of coal seam methane as a major resource meant this fear could be “unwound,” it said.
It noted that estimates of the Queensland CSM resource varied from 250 to 500 trillion cubic feet – Australia’s current domestic consumption of gas stands at one trillion cubic feet a year – and claimed these reserves could meet needs for more than a century.
Santos sees the “compelling” case for gas lying in the fuel’s potential to immediately deliver baseload power generation. It is deploying modelling that claims a 100 percent retirement of coal-fired baseload power in Australia by 2050 and its replacement with gas generation could deliver a 20 percent reduction in NEM electricity emissions below 2000 levels. This could be achieved by building between two and three 400 MW combined-cycle gas turbines a year over the period, fewer, it points out, than are actually in planning for delivery in the present decade.
Strong growth in the generation sector, the company argues, will mean “thousands of new skilled jobs, tens of billions of dollars in new investment and more again in export revenues and royalty payments to governments.” It points out that gas-fired generation will deliver $2.50 per MWh in state government royalties to New South Wales and Queensland versus 84 and 66 cents respectively for black coal and just six cents in Victoria for brown coal.
Community recognition of the potential role of natural gas in Australia’s energy future remained low, Santos said, and there needed to be a better understanding of both its capacity to deliver baseload generation and its ability to support the uptake of intermittent renewable generation.
The eastern seaboard’s gas grid has been expanded with completion of a 180 km “missing link” to connect the Moomba-Adelaide and Moomba-Sydney pipelines, creating a “strategically important high pressure transmission backbone running 1,716 km from Wallumbilla in Queensland to Adelaide,” to quote constructor Epic Energy’s managing director, Steve Banning.
The link is one of two pipelines commissioned by AGL Energy – a second will be built to transport gas from central Queensland to the Wallumbilla hub. The infrastructure will enable AGL to deliver coal seam gas bought from the Queensland Gas Company (now part of Britain’s BG Group) under a 20-year, 740 PJ deal to its southern markets.
Meanwhile the Australian Bureau of Agricultural & Resource Economics reports that there are three other gas pipelines at advanced stages of development, including the $700 million commitment by the Dampier Bunbury pipeline owners that will increase the capacity of the vital WA energy link by 40 PJ a year when completed in 2010.
The Paris-based International Energy Agency’s deputy director, Richard Jones, told the Darwin petroleum conference that global oil and gas search and development expenditures in 2009 are estimated to be $US100 billion down on last year – expected to come in at $US375 billion this year.
This represented a potential problem, he pointed out, because massive investment would be required to meet the IEA’s estimate that global capacity of 64 million barrels of oil a day needed to be added by 2030 – seven times the current capacity of Saudi Arabia – to meet both demand growth and the decline in existing production.
Jones said lower energy prices along with falling demand and cash flows have made new investments less attractive to energy suppliers. Further cutbacks in spending below the 2009 levels could be expected and the overall economic crisis would delay the development and commercialisation of more energy-efficient demand-side technologies.
“Governments,” he said, “are right to be concerned about the consequences that these investment cutbacks will have for energy security and climate change actions.” However, the IEA believed that the measures being taken to revive economies presented an opportunity to not only strengthen essential infrastructure, but also to build a more sustainable energy system.
Meanwhile, Michael Stoppard, managing director (global gas) of US-based Cambridge Energy Research Associates, told delegates that Australia faced four critical policy questions for natural gas: (1) how fast did it wish to produce the resource base, (2) what balance did it wish to strike between exporting gas and developing gas-intensive domestic industries, (3) what was a good price for the fuel – how should the value be determined of a commodity that had not clear international price, and (4) what were fair fiscal terms between the mineral resource owner and the investors?
Australia, he said, had an opportunity to become a leading global gas player. Currently ranked sixth among the largest national holders of 2P reserves and one of the world’s four leading countries for gas discoveries at present, it had the scope to become the largest exporter of LNG. The country had emerged in recent years, he added, as an investment area of choice for finding and developing gas. This appetite for investment from domestic and international players now required policymakers to address key strategic issues.
Belinda Robinson, APPEA chief executive, has predicted that, without major new discoveries, Australia’s crude oil and condensate production will represent less than a third of domestic demand within eight years. Commenting on the federal government’s latest release of exploration acreage, Robinson said that, having stood at nearly 100 percent of Australia’s needs in 2000, production was now 55 percent of demand and would slip to 32 percent by 2017 unless reserves were substantially replenished.
She said this translated in to a shift from a transport fuels trade surplus of some $900 million in 2000 to a deficit today of $13.2 billion and a projected $28 billion in 2017.
The upside, she added, was that less than a quarter of Australia’s 50 potential petroleum provinces had been explored so far. “If we are to rein in the burgeoning trade deficit in petroleum, we need to find more oil and the most promising areas are the high-risk, frontier sedimentary basins.”
In a report released at the conference, APPEA said Australian oil and condensate production had declined from 715,000 barrels a day in 2000 to 461,000 bpd in 2008.
Two years ago an earlier association review had predicted production would spike up to more than 600 bpd in 2008, but the higher output had not occurred “due to facilities issues and a greater than expected decline in some producing fields.” Production might increase temporarily in 2009, the report added, but then will go back in to decline without major new discoveries.
The decline is the more marked because the 2008 figures include production totalling 235,000 barrels a day from new oil and gas/condensate developments brought on stream since the last quarter of 2007.
The annual APPEA conference is a great place for speculation about the international price of oil. Bulls and bears abound. A senior petroleum manager of one of the world’s largest management consultancies was prepared to forecast – in private – a return in the near future to $US150 a barrel. The chairman of a successful small oil production business said $US150 would be very good, but he thought $US90 was a more likely possibility – “and I’d settle for a figure a little lower if I could only be sure that it would be a stable price,” he added.
APPEA chairman Eric Streitberg told delegates that it was “inconceivable to most of us at least year’s (Perth) conference that the oil price could spike to nearly $US150 and then collapse to $US35.” Noting the recent recovery to more than $US60, he said the price was “precariously vulnerable to demand swings and speculative forces.”
Streitberg added that recent analysts’ reports suggested a consensus among oil-producing nations that a sustained price of at least $US75 a barrel is needed to support full-cycle economics and restart exploration.
Veteran analyst Fereidun Fesharaki, chairman of Honolulu-based FACTS Global Energy, which advises governments and companies on refining and oil marketing issues, told the conference that, without OPEC, oil prices could have dropped to $US20. The cartel, he added, was facing a decline in its production rates of 1.5 million barrels a day. With an assumed demand growth of around the same level, OPEC needed to add 15 million bpd to its output every five years.
He warned, however, that the huge stockpiling of oil currently under way could see a sudden drop in the price. It could slide back down to $US40. If it did, OPEC would move to cut output.
A key figure to watch in the run-up to the UN climate policy summit in Copenhagen in December is the American administration’s chief negotiator, Todd Stern.
Speaking earlier in June at the Centre for American Progress, Stern, who was also chief negotiator at the Kyoto treaty talks a decade ago, made it clear that a key to the Obama government’s approach is bilateral negotiating with China. “China,” he observed,” may not be the alpha and omega of these negotiations – but it’s close. No deal is possible if we don’t find a way forward with China.”
The fact that Chinese emissions, now at seven billion tonnes a year, were expected to reach 12 billion tonnes by 2030 under present economic and social development trends, he added, meant that they would “profoundly affect” the ability of the world to come even close to holding global concentration of greenhouse gases to a level most climate scientists advise.
He pointed to recent modelling indicating that, even if the rest of the world succeeded in reducing its emissions by 80 percent by 2050 – “a thoroughly unrealistic assumption” –China’s greenhouse gases, under its BAU scenario, would be sufficient on their own to put the world on track for a 2.7 degree Celsius temperature increase, above what scientists advising the UN consider to be safe.
Stern noted that the Chinese leadership had a range of reasons for changing its present course, of which environmental pressures were only one. The climate change issue, he pointed out, gave Beijing the opportunity for a new engine for job creation.
The five biggest emitting industries in China, Stern said, were accountable for nearly half of the country’s emissions while providing only 14 million jobs – “a drop in the bucket in a labor pool of 770 million.”
The real test of emissions intensity, Stern suggested, was per unit of GDP not per capita. Under this measure China today emitted about four times as much greenhouse gases as the US and six times as much as Japan or the European Union.
This, he argued, required China in its own interests to steer a new course that (a) rebalanced its economy away from high-emitting industry towards job-creating services, (b) increased the efficiency with which its industry and buildings consume energy and (c) found alternatives to coal for power generation or ways to use it cleanly.
The punchline in this talk, especially for those who are watching closely to see if the Obama administration and the Beijing government can negotiate a bilateral agreement on global warming policy, was: “What the US must be willing to do, for its own sake as well as China’s, is to meet China half-way and develop a genuine, collaborative partnership on climate change and clean energy. If the two goliaths on the world stage can join hands, it will truly change the world.”
He also offered a warning to the developed world: “If we aren’t careful, we may spend the next few years pushing China to do more (on emissions) and then spend all the years after that chasing them as they hurtle profitably down the road to a low-carbon transformation.”
In the same time frame Stern told journalists that the US rejected the latest Chinese call at the talkfests leading up to the Copenhagen summit for “rich nations” to slash greenhouse gas emissions by 40 percent below 1990 levels by 2020. “It’s not realistic,” he said. “(In the US) we are jumping as high as the political system will tolerate.” The Obama administration is seeking to steer through the US Congress legislation that would enable it to target a six percent cut.
South Australia’s Premier Mike Rann is a relentless booster of the state’s capacity to develop renewable energy, especially wind farms, but also geothermal, solar and wave power energy. In his latest foray to the media on the topic, Rann is claiming that SA will be the first state to achieve the Rudd government’s RET of 20 percent by 2020 – meeting this goal in 2013 – and he is now promising, but not legislating, a new target of having a third of electricity supplied from renewables by the end of the next decade.
Pushing the hyperbole a long way, Rann claimed his decision would put South Australia “in a world leadership position with Denmark” for renewable energy production.
By 2013, he said SA would have 56 percent of national wind farm capacity, 90 percent of geothermal investment and 30 percent of solar power.
Clean Energy Council CEO Matthew Warren welcomed the Rann commitment but warned that delivery of renewable targets in SA would depend on a multi-billion dollar expansion and upgrade of transmission networks to deliver remote generation to the NEM load centres. “The key challenge is how this (network) investment will be funded,” he added. “This will impact on the level of risk associated with investment in these clean energy generation projects.”
Meanwhile, estimates in analysis by Frontier Economics suggest that Rann’s hype for South Australia may be a bit overblown. The consultants say that, assuming all proposed wind farms are built, Victoria would have the largest capacity (3,932 MW), followed by SA (2,910 MW) and New South Wales (2,280 MW). Queensland could have 907 MW and Tasmania 565 MW.
One of Australia’s senior economists, Geoff Carmody, a co-founder of Access Economics and now a private consultant, has described the emissions trading scheme in an ABC radio interview as “like a GST from hell,” arguing that it is bound to fail economically and environmentally.
Carmody supports policy to measure emissions at the point of consumption rather than production and believes the only workable global scheme is to price carbon in the hands of users. The ETS, he told the ABC, will tax exports but not the exports in to Australia of its trading partners. Such a scheme, he argues, would be trade neutral and would be in line with the requirements of the World Trade Organisation.
Coolibah’s Keith Orchison now has a blog, entitled PowerLine, on the Business Spectator website at www.businessspectator.com.au.
Most of this issue of the newsletter is drawn from discussion at the 49th annual conference of the Australian Petroleum Production & Exploration Association (APPEA) conference in Darwin in early June. Having been executive director of the organisation from 1980 to 1991 and an honorary life member since, I may be guilty of some bias, but the APPEA conferences – the 50th will be held next year in Brisbane – are by a long way, in my opinion, the most interesting and genuinely informative of regular resources and energy events in Australia.
As can be seen from the reports above (which represent a fraction of the information available), the Darwin conference focussed to a major extent on the gas industry, a far cry from my period managing the association where the oil interests dominated. There can be no arguing with the potential for the gas industry to make a major economic and environmental contribution, through domestic supply and exports, in the next decade – or that failure to meet this potential will represent a significant investor and policy problem – but it is also worth underlining the looming crisis in transport fuel supply that, like the elephant in the dining room, refuses to go away.
At the start of this decade there were industry rumblings about the potential threat of a transport fuel trade problem, but the traffic was actually almost a billion dollars in surplus and the potential seriousness of the issue did not resonate in Canberra or in the general community. Even now, with this trade in deficit to the tune of more than $13 billion a year, the issue tends to be over-ridden in the media by interest in LNG developments and the decarbonisation issue.
Suggestions that the deficit may more than double halfway through the next decade are mere shadows on the wall of the national debating chamber, it seems. If the international crude oil price heads back towards $US150 a barrel and the Australian dollar falls away in value over the next 5-8 years, these shadows may well take on a more ominous hue.
It is understandable that APPEA, when dealing with this issue, as it does continuously, should push the need for incentives to explore in the so-called “frontier” sedimentary basins, the geological areas little searched or not searched at all. No-one can argue with the proposition that there may be large oil discoveries to be made in these areas or that their exploration, which will cost billions of dollars, may throw up a substantial amount of condensate in association with natural gas, thereby helping to reduce the looming deficit.
The hard truth, however, is that policymakers would be unwise to rely on the lottery of the oil search – and a gamble it still is even when aided, as these days, by an array of technological support explorers of 40 years ago could only dream about.
(Why 40 years? It happens that 2009 is the 40th anniversary of the first flows of oil and gas – and 45 years since the first seismic survey leading to drilling -- in the Gippsland basin offshore Victoria, discoveries that have delivered four billion barrels of liquids and seven trillion cubic feet of natural gas in the years since, generating $300 billion in today’s money values in government revenues, a little over two percent of all funds collected in this period. The project operator, ExxonMobil, says it expects production to continue for many years yet – but not of the large flows of oil. Governments and investors can only dream that we and they should be so fortunate again.)
Important as the carbon issues are, there is no more vital energy question to be asked and answered in today’s Australia than “where will our future transport fuel come from and at what cost?” Some will argue that the answer is a massive shift to use of electric vehicles, but that is not going to happen in the next decade – and the large impact of Australia’s failure to replicate the Bass Strait discoveries in the past four decades is now very near at hand.
The bottom lines here start with the acceptance that, if the economy is going to grow in the next decade in the fashion that Kevin Rudd and Wayne Swan have been asserting since the May Budget, transport fuel consumption will also rise. Projections by modellers are available that suggest the trend to 2030 under “business as usual” scenarios is for a 35-40 percent increase. Without new discoveries of large size, domestic crude oil production will have halved from its 2000 level by 2020 – down to about 130 million barrels annually – and nearly halved again by 2030.
The issue is compounded by the fact that the seven national petroleum refineries are getting old, that they lack the economies of scale and operational flexibility to be found in their modern rivals in the Asia Pacific region and that the burden of a carbon charge will make them even less viable.
A supply gap increasingly met by imports may – probably will, given the projections for global oil by the IEA and others – expose this country to higher and higher transport fuel trade deficits, with implications for the overall balance of trade and other economic areas. A severe decrease in energy security and reliance on seaborne supply has profound implications for areas like defence policy.
Enter the proponents of synthetic fuels – gas-to-liquids, coal-to-liquids and shale-to-liquids – who assert that these projects could meet about 40 percent of Australia’s needs by 2030 and deliver economic benefits of tens of billions of dollars in net present value terms while providing a high quality of diesel with its environmental benefits.
Such projects, of course, come with multi-billion dollar price tags and carbon emission baggage.
The energy white paper on which the Rudd government – and specifically Martin Ferguson’s resources and energy department – is now working, for delivery in 2010, obviously has to deal with this issue. Given the handling – would it be so harsh to describe it as mis-handling – of the emissions trading issue to date, confidence cannot be high that the government will act strongly and expeditiously to produce a policy that can address this problem in a relatively short time frame (a lot earlier than 2020, which is the comfortable “near” target for Rudd on carbon emissions). Fortunately, the white paper is being prepared by different cooks from those who have served up the strange meal that is ETS, but the head chef, to strain the metaphor, is the same and Rudd’s supervision of carbon policy does not inspire any confidence in me, for one.
The Coalition cannot be left out of this commentary, either. The Liberals and Nationals have no excuse for not being fully briefed on the transport fuels issue – just go back and read the energy white paper produced five years ago by the Howard government.
Given the information flowing from the APPEA conference – admittedly not front-page stuff, but hardly hidden – when will the Coalition hold the Rudd government to account on transport fuels and start putting forward its own views?
The real crunch time for this issue – when the fuels deficit hits $20 billion and keeps climbing, possibly fuelled by a runaway crude oil price – is not in the dim and distant future. It is no further away from us today than was 2002.
10 June 2009
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