Palliser Report APPEA Perth (May 2014)
It is all about Gas but what will make our future developments competitive- IR changes and new technology and understanding all stakeholders? You may have a social contract to operate after reading from American business books but do you have a licence from the owner of the resource - State Governments - to develop the resources? Is there alignment between resource owner and resource developer? – Premier Barnett.
Introduction and Summary : The April 2014 Palliser Report is a compilation of the discussions and
views expressed at this year’s APPEA Conference in Perth. The Conference attracted 3,600 delegates from 37 countries and represented a significant window on the industry in Australia that should have enabled delegates to network throughout the event. Disappointingly, however, the Exhibition Area was largely devoid of the buzz of networking as delegates either returned to their office or met elsewhere. A future challenge for APPEA needs to make sure the Exhibition Area works as it is designed to do.
The Exhibition area at APPEA conferences is usually populated with service providers, particularly small medium enterprises (“SMEs”) demonstrating their capabilities. It illustrates the depth of the multiplier effect of skilled people and value that energy exploitation has on high valued service activities in the economy. Sadly though, the SMEs explorers who are the risk takers and generators of new ideas and prospects were in the minority this year and their importance is underestimated for the long term viability of the industry. At APPEA, the focus is on gas as LNG!
The key themes of the APPEA conference to emerge were
- The importance of understanding that an alignment between the industry participants and the State Governments is essential if JVs want to develop their resources that reside in State lands and waters. Despite being amongst “friends”, Premier Barnett made this point abundantly clear in his address. He sent a loud message to industry: work requirements and all stakeholder interests should be aligned if developments are to proceed. State Governments still have a “big stick” of influence to wield even in offshore developments.
- Australia will be a global LNG player and the 2nd largest exporter of LNG after Qatar by 2020’s as new projects come on stream with about 90MTPA of LNG. This will be given added impetus as traditional suppliers in Asia such as Thailand, Indonesia and Malaysia turn from export to imports of LNG product to satisfy their domestic demands.
- Future LNG developments for Australia’s offshore gas resources will be via an FLNG system. Australian land-based gas developments for LNG export have been about 40% more costly than competitive developments in East Africa, Gulf States and USA. Palliser Report APPEA Perth (May 2014) Palliser Strategic Management Companies rely on economic developments and at this stage land-based developments don’t make the cut.
- To counter the deteriorating economics of future projects caused by significant increases in development costs and regain the development momentum of the last decade, the industry is looking on three fronts: new technology, assaults on both the inflexible, costly IR regime and the level of red/green tape. (Revisions in these areas are needed to create a flexible work force and positive investment climate to back up the industry’s reliability and safety record that delivers product to customers in Asian markets in a timely manner. Only then will there be sound commercial reasons to have future developments in Australia.
- The Conference always focuses on safety, productivity and the environment. A delegate can be in no doubt about the importance of these themes to the Industry in terms of its future sustainability. A prime example was the key note plenary session paper by Sir Charles Haddon-Cave of the High Court UK who presided over the 2006 Nimrod Disaster Report. Sir Charles delivered key messages for the creation of a safety culture within the industry and its operations based on the “Safety Case” risk management issues.
- As I indicated in the 2013 APPEA Palliser Report, the industry continues to under- estimate and act adequately to counter the negative community sentiment about non- conventional gas (NCG) development technologies such Fracture Stimulation Technology (FST) and the issue of protection of landowner rights. Since 2013 the NSW and Victorian situations have deteriorated further, despite the attempts by stakeholders (Governments, Industry, landowners and protestors) to negotiate sensible outcomes. With the exception of Queensland and South Australia, NCG developments are not progressing because industry fears the pressure exerted by communities concerning these developments/technologies. Industry also sees a weakness in the political process to base decisions on the science of the issues involved. Instead it sees politicians more interested in their self-preservation with the electorate. As a consequence, State Governments are pandering to “mob rule” and restricting or eliminating gas developments pending lengthy inquiries or imposing moratoriums that may get them into the next election cycle whatever the consequences on supply /demand and pricing.
It is beyond doubt that the Industry is dominated by the emerging supply abundance and competitive market pressures for commercial exploitation of natural gas; both technologically and as transition energy supply to lower carbon emissions and improve environmental outcomes.
Its importance is driven by its increased trade and liquidity through the global commercialisation of gas as LNG.
LNG is the mechanism to develop gas!
The Australian LNG has a number of significant of challenges into the 2030s….
Currently there are 10 LNG projects worth A$200 billion under construction with exports to commence in 2017. This will make Australia the 2nd largest exporter of LNG after Qatar by 2020 as new projects come on stream at about 90 MTPA and traditional suppliers in Asia such as Thailand, Indonesia and Malaysia turn from export to imports of LNG product to satisfy their domestic demands.
It is likely that there will be no more land-based LNG developments in Australia post Wheatstone given the very high development costs and regulatory delays compared to neighbouring jurisdictions. This may change if IR and development cost issues are competitively addressed, but until then FLNG will be the preferred development mode with the consequent loss of engineering capability and employment skills to the Australian market.
The industry needs to wrestle back the competitive advantage we have with our strong safety record and trading partner reliability to secure supplies. To be competitive in the future, the industry is focussing on two broad fronts to deliver an improved competitive advantage
- In technology. Industry is promoting the idea that gas will be delivered partly through “yet to be defined” technological advances to re-create the cost competitive advantage such as FLNG. To do this Industry leaders must encourage innovation and look for productivity improvements for all its exploitation activities. This is not without commercial risks! The big question: Is this the “big white hope” rather than the Industry dealing with the hard reform issues? Time will tell, but that is not a luxury the Industry has in maintaining its global pre- eminence.
- In IR. For the first time at APPEA in a while the industry publicly addressed the decline in productivity. Speakers attacked the non-competitive and inflexible union work practices that plague the developments on both sides of the country with evocative language such “thuggery and lawlessness” and “urban vandals”. This is evocative stuff but clearly indicates that industry has decided to “get into the ball game “to influence public policy in these areas and to arrest some of the extreme union behaviours and demands that impact on the collective wealth generation of the economy. Industry is prompting ideas of collaborative national thinking on IR issues, training and education in technology through TAFEs and Universities in technology. This has a way to go, but at least the leaders in the industry are focussing on these important issues.
LNG Demand and Supply
The demand for LNG is forecast to be very positive in the Asian markets with estimated demand at 320 MTPA by 2025 of which Australia will provide 90MTPA. The demand projection stems from China’s expected long-term growth of around 7% continues and the country swaps its energy mix to increase gas usage in transportation and power generation to deal with the serious environmental issues in its major cities. The market dynamics are changing as traditional LNG exporters in Asia (Indonesia, Malaysia and Thailand) move to importation of LNG to sate domestic requirements.
The gas supply market is competitive but fluid as significant new gas supplies are discovered off East Africa that will compete for new market share in the 2020s. The impact of the USA NCG resource as LNG into Asia is not considered a “game- changer” to Australia due to pricing and USA Federal Government approvals, but at 70 MTPA it is significant competitor. The risks to future LNG development in Australia broadly relate to an inflexible IR system that results in development costs some 40% higher than other global competitors, over regulation during the FID and development stages and the pricing mechanisms from other competitive sources such as USA NCG exports.
Competitive LNG pricing schemes are a risk to the economics of the future LNG developments. So it was interesting to hear INPEX‘s thoughts on the subject given their Ichthys development and other large interests in Australia. The company talked around the issue of LNG pricing by suggesting that in some fashion LNG pricing will be linked to an oil price mechanism and the use of collaborative partnerships (built around positive dialogue, equity, use of technology) in the supply chain to give all parties a win-win in negotiations. However, it is hard to see how that would benefit Australian LNG exporters!
Interestingly USA Henry Hub pricing did not get much of a mention in the Plenary sessions. This may be a result of the much heralded criticism from Japanese customers in 2013 as they tried to leverage changes to the current and future supply contracts by promoting this competitive alternative of USA LNG supply. The issue was highlighted in the 2013 APPEA Palliser Report
State Government Politics
The most contentious presentation to the industry was delivered by the WA Premier Colin Barnett who lauded the importance of future Australian LNG gas developments given the positive long term Asian macro market growth parameters and the consequential demand for LNG.
He bluntly told the gathering that Industry had significant problems in securing his government’s support and development of gas resources in State lands. He noted that on the East Coast, changes in the domestic gas market through export-led LNG developments of NCG resources
had resulted in domestic prices increasing three-fold accompanied by uncertainty of supply.
Good luck with that political sell was his comment!
On the West Coast, the Premier said there was an urgent need for an alignment of interests between the resource developer and the resource owner. Whilst he noted the rights of JV participants to change their plans for resource development, he said companies should be aware of the needs of the resource owner – the State Government - to ensure continued consultations.
He cited the recent decision for the Browse Basin LNG development(s) to be FLNG and not land based. He said that the State Government had negotiated in good faith an extensive agreement with indigenous people for the Kimberley region based on an onshore LNG development which
gave benefits, training and employment to this area. This had now been much reduced by the JV decision for FLNG. He noted a JV may have started to develop its social licence to operate within the region, but that it is time to put away “the American management books” and create a licence to operate with the owner of the resource so interests are aligned.
The “big stick” is that 15% of the offshore Browse resource lies under three State Retention Licences. No development will occur until the State Government is satisfied that the JVs domestic gas market plans meet the Government’s requirements and the location of the supply base for this FLNG development is known. I am betting the location of that supply base will be near or at James Price Point! Too often politicians talk in riddles, but there was no riddle herethe Premier indicated his Government’s price for development and the JV will need to align itself with this or have very good reason(s) to convince him otherwise.
The Federal Minister for Industry Hon Ian Macfarlane also weighed in these offshore developments and continued the bipartisan line on retention licences “if you don’t use it, you will lose it!” This combined stance will probably create some pressure and dynamics for the JV to align with all Governments interests’ or deal with the consequences on finalising the FLNG development.
APPEA is be congratulated for bringing out Sir Charles Haddon-Cave, a global expert on Safety Case risk management who presided over and delivered the findings of the in-depth Hearing in to the Nimrod disaster in 2006.
Delivered in a thoughtful and humorous manner, Sir Charles provided real insight into key points that the Industry should note in their Risk Management procedures using Safety Case Principles.
1) Understand that organisations cause disasters.
2) Beware of assumptions made about operations and risk.
3) Avoid changes for changes sake.
4) Avoid comfort zone: compliance, conform and consensus.
5) Safety case is an aid to thinking and not an end in itself.
6) Equipment age is critical in risk assessment.
7) Accountability for risk management is crucial and responsibilities must be clearly defined.
8) Value technology and engineering skills.
9) Outsource, but not your thinking and be a smart customer.
10) What you cannot see is critical, so data collection and analysis are vital.
He finalised the presentation by using an acronym – LIPS meaning
- People (not just process and paper)
In Sir Charles’ view these are the key values that should be the central core of the culture of a Safety Case risk management regime.
It would be interesting to know whether or not the Industry leadership could aver that their safety management practices have a culture based on these principles. This was an excellent presentation to underpin the safety management practices in the Industry going forward.
Overall, an excellent APPEA.
Geoffrey R Widmer
Disclaimer: The preceding commentary is a compilation of views and data of The Palliser Group from the 6th to 9th April 2014 APPEA Conference in Perth 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 program material of the APPEA Conference 2014.