APPEA Perth April 2011 "The industry is coming to a community near you! It is just over the horizon! Does the industry have a social contract with the communities to operate?"
1. Observations from the APPEA Conference
a. APPEA Conference 2011.
Impact. This Conference had a vitality about it that reflected the growth of the industry around gas developments, an attendance of 3200 + delegates, as well as an excellent Industry Exhibition of skills, capabilities and advanced technologies that drive the exploitation industry.
It showcased the importance of WA to the industry. The State accounts for 67% of the annual production valued at A$19.0 billion, currently 44% of the Australian annual exploration expenditure and estimated to increase to 60% by 2020. With gas reserves in excess of 160TCF, a major share of the estimated LNG production by 2020 of 60 MTPA nationally, a likely surge in investment of some $170 billion over the next 5 years in LNG and iron ore projects and their associated infrastructure needs, WA accounts for about 70% of the resource developments in Australia and is therefore a "powerhouse" of the Australia's prosperity.
Tax revenue sharing. WA can and has demanded that the Federal Government review the taxation sharing of GST to fund important infrastructure developments to service the burgeoning export demands for Australian resources. WA points out that it receives only $0.68/$1.0 of GST collected, while the eastern seaboard States receive more than $0.90/$1.0 collected. The WA receipts are expected to fall to $0.44/$1.0 collected by 2014 under current Federal/State taxation sharing arrangements. Any redistribution will almost certainly have negative impacts on the revenue positions of both NSW and Victoria. So, stand by for a political stoush with WA in the driver seat given its importance to national developments and prosperity!
Exploitation policy. In addition, by pointedly saying "keep your hands off Woodside", the current WA State Government has clearly put a shot across the bows of the international energy companies, directing them to focus on exploitation of the onshore and offshore resources in the State and to keep the Commonwealth Government's best interests in mind rather than pursuing their own global resource exploitation strategies. This is paramount to WA and infers that the strong working relationships between the State Government and Woodside will only be maintained with an independent Woodside.
In addition, the State Government is clearly signalling to the Federal Government to act in the national interest. Given the Australian resource prospectively, globally competitive PSC, adherence to "rule of law", environmental credentials, strong economic performance and democratic processes, it is a strong call by the WA Government to put the both the Federal Government and international companies on notice that Australia's energy developments can be pursued with capable local ownership and that resource exploitation is not necessarily a "poker game" for international companies to optimise their respective global investment portfolios !
Gas as an energy source. The overwhelming focus of the Conference was the confirmation of the emergence of gas (conventional gas and non conventional CSG and shale gas) as the dominant future fuel source. There was limited discussion of the widening gap created by declining domestic liquids production and the impact of this on the country's balance of payments. The dominance of gas occurs on the West Coast with existing and new LNG projects as well as the emergence within five years of 2 to 4 LNG projects at Gladstone, Queensland.
Gas also has the advantage of being a transition fuel to green clean low carbon emissions fuels in the next 50 years given its low greenhouse gas emissions compared to coal used for power generation.
Format. The Conference plenary session format reflected the leadership role the industry is taking by focussing on safety and risk management at all levels of the industry to identify and mitigate the risks. Industry is also pushing technology as a key driver to deliver projects to its customers in more challenging work environments and by using nonconventional resources. It is in agreement with the Federal Government's position of a single National Safety Regulator, notwithstanding the States' opposition to such a safety authority.
Technology. A key plenary session was the focus on the critical importance of technology in commercialising all forms of resources and the "value-add" to processing of gas to liquids. Technology has changed exploitation practices to enhance recovery of resources and emissions abatement, commercialise non-conventional resources, improve hydrocarbon processing and make changes to transportation. This brings huge benefits to safety and management of the environment.
The improvement in technology is not well appreciated by the community, however people just expect it to be there and working at no cost! The Shell presentation brought this into sharp relief when the company indicated that Qatar GTL project took about 40 years of research (in Holland, Shell employs 60 FTE specialist engineers and scientists working in R&D at an annual cost of US 1.0 billion), commercialisation and construction at cost of US$ 18 billion for 140,000 boepd starting in 2011. Technology is a long-term and expensive commitment and the industry needs to do a much better job in communicating its importance to achieving superior outcomes for all stakeholders as it justifies its right to have a social contract to operate.
2. Social Contract to Operate.
"Does the industry have a social contract to operate?"
One recurrent theme during the Conference was the need for the industry to understand the communities they work in. The industry has never really had to deal with the proximity of its operations to many communities or deal with a collection of resource projects so immense that its strains their infrastructure. But many operations now abut and co-exist with other important land users, such as farming and cropping on the Darling Downs in Queensland and in central NSW as well as running into objections on heritage and cultural grounds. The industry by and large has operated "over the horizon" in offshore and remote areas that didn't require consideration of community aspirations and concerns.
The industry has not needed to deal with this issue as a matter of survival. But now a confluence of events has made this a critical issue for the industry to operate. Such events include the dramatic expansion of nonconventional resources involving projects on a mega scale that have the potential to monopolise local infrastructure; strong economic parameters nationally; and very tight labour and skills markets coupled with a community desire to protect its environment and interests as well as to participate in the development process and receive a share of the national benefits.
The community concerns revolve around the need for information, confidence and transparency in all dealings. A failure to "take the communities with you", runs the risk of a loss of political support and the imposition of more regulations. Already, the CSG/LNG onshore projects need some 1500 headline approvals from Federal/State/Local governments and possibly as many as 3000 approvals overall required before they can proceed. This level of scrutiny is greater than that required by the Uranium industry!
In particular, the communities are looking to be satisfied with
i. Environmental management. They need to be assured that there is transparency and accountability over time with industry practices.
ii. Local content to generate local employment. Local suppliers need to have a "piece of the pie" but there are quality, cost and capability issues that industry needs to communicate effectively; it is a key issue to maintain Government support.
iii. Safety issues. The lessons from Montara and GOM spills are still to be enacted. There is a focus on the safety processes to develop a core culture that will ensure that all incidents/lessons from accidents are communicated within companies and that senior executives know and will be held accountable for material breaches in safety and poor risk management.
iv. Work skills and Training- There is Federal Government recognition of a shortage of skilled workers to meet the resource development requirements during the next 5 years. Government needs to manage this issue to avoid inflationary impacts of wages breakout through a mixture of policies involving more training, temporary 457 visas for skilled workers, Enterprise Migration Agreements and work force planning. The industry will need to continually demonstrate its commitments to employee productivity.
v. Supply and pricing of resources for local consumption. In WA, the community is concerned about the availability and the gas price for domestic consumption with gas prices there about double those in the prevailing Eastern Seaboard markets. WA will maintain with flexibility the domestic restriction allocation of project resources to the local market. It is essential that the community sees that affordably priced gas is available to that market as a precursor for continued support of the LNG developments with their market based contracts.
vi. Willingness of the industry to address community issues (listen, educate and act) and develop a sense of participation in the process. The industry must be prepared to negotiate and deal with community issues.
Follow-on from 2010 As per the 2010 Conference, the importance to the Australia economy - the dominance of LNG to Australia was re-enforced.
To 2025, LNG demand is expected to grow globally to 460 MTPA, but will be influenced by the changing gas markets of the Americas as unconventional gas such coal shale gas (CSG & shale gas) wins market share at competitive prices. The WA developments of Pluto are surging to first production in 2011, 2 new projects in Queensland have achieved FID with a third expected in 2011. First shipment has slipped to 2015/2016 time frame but still a massive achievement for the industry to move from concept to market commercialisation to FID within 5 to 6 years and then to construct and within a further 4 years.
In addition to the existing LNG projects at NW Shelf, Darwin and at Gorgon ( 2014 production) and further LNG developments at Chevron's Wheatstone and Shell's FLNG at the Prelude which are likely to get FID in 2011 and first production in the2016/2017 time frame , Australia will propel itself into 2nd place internationally as an LNG supplier globally. This will be more evident as the traditional global producers such as Nigeria, Russia Malaysia, Indonesia and Iran will have reduced capacity.
There were differing views as to the global supply/demand equation for LNG over the next 5 years especially for the Asian markets as developments mature and demand changes. The views include a tightening supply position in Asia as both India and China will account collectively for about 50% of uncontracted demand to 2020, while a contrary view is that there will be limited opportunities for "new players" as the uncontracted demand in the next decade in Asia will be re-supplied from existing fields. This latter view depends on the supply availability and surety from existing LNG producers.
In the short term this will be especially important as Japan adjusts its fuel mix by about 6% - 13% of their energy needs post the Fukushima nuclear mishap. In the short term, this change will require about 6 MTPA of LNG to meet energy needs to be supplied initially from LNG destined for the Atlantic Basin market. The longer term demands are still being assessed.
For Australian sourced LNG that probably means a benefit of upward price pressure to their contracts. In addition, Australia has a reputation for supply security, stability and reliability which translates into demand for Australian sourced LNG. However, there are near-term risks that the proposed MRRT/extension of the PRRT that will add costs pressures to the projects that Australia's competitors are unlikely to have. Therefore, it will add to the commercial uncertainty of some projects.
Price negotiations will be very competitive, especially those contracts that have oil indexation as a price driver. In the longer term, it is estimated that a FOB gas price of $12/MMBTU (at least $US 80/BBL) is required to have a sustainable project at current costs and regulations. Project viability is very sensitive to market delays, cost overruns and worker productivity. Industry estimates on other LNG projects, have shown that a combination of a years delay in production coupled with a 20% cost overrun can reduce project economics by up to 80%. These parameters are within the range of potential outcomes for Australian projects!
These massive resource projects demand solid partnerships between all participants- Governments at all levels, resource owners and developers, banks, regulators, customers and community.
4. Global Supply and Demand. The issue of China/India liquids demand growth to 2030, as they raise their respective living standards and hence the impact on the global supply/demand equation for petroluem products raises serious questions about supply. The conference heard that through energy efficiency with both the EU and the USA changing their respective energy consumption mixes and with China's drive into gas ( environmental reason the driver), the global supply will be able to cater for increased liquids demand and usage in China and India and not necessarily at the expense of industrialised countries.
By 2030 it is estimated global demand for petroleum will be 102 million bopd - up from 85 million bopd in 2010 - of which 75% of the growth will come from Asia and the balance from non- OECD counties where oil dependency will remain very high.
To 2030, OECD countries will reduce their demand by 4 million bopd due to changes in their fuel mix equivalent to 1990 usage levels. This reduction will come from higher gas usage (LNG) and lower oil usage driven by technology and efficiencies. A similar story emerges for USA where the main source of gas will be non-conventional (coal shale and csg). Power generation will be the main use for gas and that will assist in emissions control. Electric cars will have limited impact on demand patterns until post 2030.
75% of the oil supply will come from OPEC which will entrench the organisation's market power on pricing and supply. Interestingly, by 2030, biofuels will max out at 6% of the fuel mix with 6 million bopd due to land access issues.
This analysis starts to put a "fence" around the issues of energy convergence (energy per capita of GDP) as countries industrialise and as the pattern for USA, Japan and UK (market economies) follow the same efficiencies trends. Also with China's move to industrialisation (central economy) following the same OECD patterns, it indicates how we should start to think about the sharing of scarce resources as the population grows to 2050.
5. Balance of Payments implications - Liquids deficit. In 2010 Minister Ferguson's presentation at APPEA provided a stark reality check on the dramatic impact on the nation's balance of payments outlook of rapidly declining domestic oil production. Again in 2011, the APPEA Chairman reiterated this looming critical issue.
The Palliser Report from previous APPEA Conferences has highlighted this impact as critical to future standards of living with significant risks to the Australian dollar as the currency adjusts to increasing energy imports and the general demand for overseas goods and services. The Government's own figures forecast that the deficit, from increased purchases of imported petroleum will increase from A$16 billion in 2010 to A$30 billion in 2015 at current prices. Tightening oil supply over this period due to increased Chinese and Indian demand will likely increase prices and hence the deficit. Payment has to come from somewhere - increased exports of LNG would be critical.
This issue is "a ticking time bomb" for the Federal Government which has few policy levers to use to ameloirate the inevitable rise in bowser petrol prices. The community deserves to have some serious policy debates about the options not just "knee-jerk" political comments when the community feels the economic pain at the petrol pump!
Geoffrey R Widmer
PO Box, 544 Hawthorn Vic, 3122.
20th April 2011
The preceding commentary is a compilation of views and data expressed at the 10th April to 14th April 2011 APPEA Conference expressed by the various participants. The Palliser Group has not verified these facts as presented to the conference and has not made independent enquiries as to the validity of the statements made or of the data presented. The Palliser Group recognises the authors of the various views as detailed in the APPEA Conference Program.