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More gas exploration isn’t the solution to our problems

Resource Minister Gary Gray has called for greater natural gas exploration and warned that Australia would become less competitive in Asia if industry fails to take heed. But is insufficient exploration…

High costs, confusing regulation and changing markets are troubling Australia’s natural gas industry. Flickr/stevendepolo

Resource Minister Gary Gray has called for greater natural gas exploration and warned that Australia would become less competitive in Asia if industry fails to take heed. But is insufficient exploration really the problem?

While Australia is now less competitive as a location for natural gas investment, lack of exploration is more a symptom than a cause of this reduced competitiveness.

Costs too high

There are a number of factors reducing Australia’s competitiveness. First, the costs of developing resource projects in Australia have become too high.

There is a shortage of skilled labour, and opposition to importing specialist workers - either permanently or on special visas - doesn’t help.

There is also a shortage of some specialised equipment, such as rigs with horizontal drilling capability.

The remote location of many of Australia’s gas resources add to the cost of transporting equipment and supplies.

Finally, restrictions on land development increase costs for workers wanting to buy or rent real estate, or fly-in, fly-out to jobs so they can avoid those costs. High land costs also make it difficult to attract teachers, police, doctors and small businesses to resource areas. These disadvantages of living and working in remote locations in turn lead to demands for higher wages.

Regulation changes

Changes to labour market laws embodied in the Fair Work Act have increased the threat of industrial disruptions, and limited opportunities to improve productivity. Concerns have been expressed by the previous chair of the Productivity Commission, business leaders across many sectors and specifically the mining sector.

In some ways, it does not matter whether these criticisms are valid. So long as they accurately reflect investor perceptions they will adversely impact investment decisions.

Australia also has imposed some “feel good” regulations that have raised costs while providing few if any benefits. The requirement to sequester the carbon dioxide (CO2) produced in the Gorgon project substantially increased costs. However, no climate model would predict a measurable impact on global temperatures from total CO2 emissions over the life of the project.

New regulations on the coal seam gas sector have also been said to add nothing of value to state regulations but will nevertheless increase costs.

Failed trust

Unanticipated changes to Australian tax laws have also damaged Australia’s reputation as a trustworthy investment location.

I attended a meeting of the Houston chapter of the US Association for Energy Economics soon after the first Rudd Government started discussing a mining tax. The chapter includes economists at the major energy firms in Houston among its members. Knowing that I was from Australia, those members mobbed me when I entered the room and asked, “What in the world is your government thinking? Don’t they understand that Australia’s main advantage as a location for investment is that it has stable and predictable policy? Even talking about such a tax damages that reputation.”

The blow-out in government spending, and especially the budget deficit, over the last few years has also increased the risk of macroeconomic instability in Australia. Future governments may be tempted to inflate to reduce the real value of the outstanding debt, or will need to raise real interest rates above where they otherwise would have been. In either case, the risk of investing here has increased.

Given its disadvantages - such as higher costs - one of Australia’s main attractions to long-lived, risky investments was that it had a stable and predictable policy environment, giving investors the chance to earn a competitive rate of return.

Unfortunately, while a good reputation is easy it to lose, it takes a long time to rebuild.

East Asian demand

There is increasing uncertainty about how much longer East Asian demand for Australian natural gas will grow at recent rapid rates.

China may turn to increased pipeline imports, including from Russia as the latter seeks alternative sources of natural gas revenue to compensate for diminished prospects in Europe. There is also a reasonable chance that China will develop domestic shale gas resources over the next decade.

The currently high demand for natural gas in Japan and South Korea is related to shutdowns of nuclear power plants, most of which are likely to be re-opened.

Finally, prospective exports of liquefied natural gas (LNG) from the US and Canada will also take market share from Australia. More importantly, perhaps, such exports will also likely intensify a move to shorter term and more flexible LNG trading arrangements, which could disadvantage larger, more capital intensive projects like the ones recently pursued in Australia.

Where does this leave Australia?

In the long term, there is good evidence that natural gas is a superior fuel to coal and oil. First, it is less polluting than these other fossil fuels.

Second, the share of electricity in final energy consumption tends to increase as economies develop, and natural gas has economic advantages for generating electricity. Combined cycle gas turbines are very efficient, while single cycle turbines are very flexible and provide valuable peaking and backup capacity for renewable electricity generators.

Natural gas thus is likely to continue to take market share from other energy sources for some time to come.

In addition, other large population developing countries, such as India, Indonesia and Brazil, are likely to enter high energy demand growth phases by the middle of the next decade. These developments will create further market opportunities for Australia in the latter half of the 2020s.

In the meantime, Australia should learn from the mistakes made during the recent investment boom and take policy actions to restore its reputation in time for the next one.

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19 Comments sorted by

  1. John Newlands

    tree changer

    Twenty years from now we might be grateful if we didn't export so much LNG. The assumption of free marketeers is that if you deplete one resource another takes its place. Maybe the alternative is far more expensive. In my opinion we should use less gas in combined cycle baseload plants and transfer that role to nuclear. More process heat should come from electrically driven heat pumps not onsite gas burning. As there is no current plan to replace Australia's dwindling oil production we should consider…

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    1. John Newton

      Author Journalist

      In reply to John Newlands

      "Even talking about such a tax damages that reputation.” said the economists from the major energy companies. what a surprise. Why shouldn't the people who own the resource - not the energy companies - benefit from it?

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  2. George Crisp

    Medical Practitioner

    Very disappointing for the conversation to host an essentially pro-industry PR piece ( like the usual media outlets ).

    The author downplays climate change implications of a specific project, ignoring the cumulative effect of fossil fuel industries. Ignoring also the subject of greenhouse gas emissions and risk of stranded assets altogether not to mention the lack of responsibility these industries have shown.

    Our regulatory regime in Australia is certainly not over zealous or overly onerous as the author implies. On the contrary, there has been wholesale destruction of habitats and a reckless disregard for the environmental and health consequences. We need tighter regulations that actually protect human health and our environment now and into the future.

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    1. Mark Lawson

      senior journalist at Australian Financial Review

      In reply to George Crisp

      pro-industry PR piece.. George consider yourself thoroughly reproved.. its simply a realistic look at the industry, like it or lump it. High costs are proving a problem in starting new gas projects; why is it so wrong to point that out? Whether or not you agree with the author's comments on tax are another matter, but I thought the idea behind the green push was to make such projects very expensive. So what are you complaining about? Or is it that you encountered an article that was not green propaganda and it proved so confronting you resorted to abuse?

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    2. Etc etc

      Project Surgeon Brain Manager

      In reply to Mark Lawson

      Without commenting directly on the truth of the various positions in the article, it is not innacccurate to characterise it generally as a piece of industry polemics (it should be too surprising, from the BHP Billiton Professor from UWA). The list of concerns (dumping the "solution to our problems" at the feet of Fair Work regulations, the tax environment and CO2 sequestration), and the vocabulary in which they are phrased, are wholly derivative of that old time industrial rag. It's even complete with a cry of "economic uncertainty".

      Whether you follow the line or not, it shouldn't so casually surface on a publication propounded to foster scholarly discourse over regular lefty-righty fisticuffs.

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    3. Felix MacNeill

      Environmental Manager

      In reply to Mark Lawson

      Mark, where do you get off with the pomposity and arrogance?

      'consider yourself reprimanded'
      'like it or lump it'

      At what point did George 'resort to abuse'.

      This is the most hysterical piece of whingening I've reads in years.

      Consider yourself dismissed.

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    4. Mark Lawson

      senior journalist at Australian Financial Review

      In reply to Etc etc

      Etc Etc - interesting name - although in one sense you have a point in that the article has a particular point of view.. more than a few of the articles on this site also have points of view, its just that this one approaches from the business side and makes a case that can't really be refuted. More exploration makes no sense in the current regime, as new projects just won't get up. they are too expensive. I don't think that's pro or anti business, it just is..

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    5. George Crisp

      Medical Practitioner

      In reply to Mark Lawson

      Mark, rather than rather pompously dismiss what I have written and tried to imply that it is ideologically based, I would ask you,as a journalist, to actually critically assess the points raised.

      Firstly how can an article on gas ignore and dismiss impacts of greenhouse gasses. The social cost of carbon is estimated to be around $100 / ton, more than 4 time our carbon price, and would be considerably higher save for future discounting. This omission in the economics of gas is a blatant bias and…

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    6. Etc etc

      Project Surgeon Brain Manager

      In reply to Mark Lawson

      The biggest issue for me is that the author presents these issues for business as though they are accidental obstacles to the heavenly domain of economic advancement. The conditions are the result of hard-fought ethical battles, whose arguments (be they sound or otherwise) the author completely skirts around in favour of harnessing the common fear campaigns favoured in industry astroturfing.

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  3. Alex Cannara

    logged in via LinkedIn

    Not only is gas exportation a risk economically, gas is as bad or worse than coal as soon as leakage (from exploration through delivery) rises above 1%. In the US, it's around 7%, so gas is worse than coal in GHG production.

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  4. Liam Hanlon
    Liam Hanlon is a Friend of The Conversation.

    Student

    I had to stop reading when you said the crap about more industrial action. Australia currently has its lowest level of industrial action in decades, yet you greedy lot want to squeeze even more out of the workforce.

    And in regards to the gas, we should leave it where it is. Its just another fossil fuel leading us to catastrophic climate change. Its about time that industry hacks like yourself were ignored and scorned and scientists and researchers who can lead us to a clean future given all the column space.

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    1. Mark Lawson

      senior journalist at Australian Financial Review

      In reply to Liam Hanlon

      Liam - the main reason industrial activity is so low generally is that the vast bulk of the work force is not unionised. The parts that are unionised give trouble, and wage costs remain very high. I'm not arguing that wages should go down, but I am saying that to argue that Australian workers are oppressed or downtrodden is absurd. If you want projects to go forward then labor has to give a little ground on mattes such as rostering, say - but then you don't want them to go forward, so ther will be no jobs at all. Then they will be oppressed.

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  5. Fred Payne

    retired

    I have to agree with John Newlands that in Twenty years we might be grateful that we didn't export so much LNG, however for quite different reasons.
    Even though there are claims that LNG is a more environmentally friendly fuel (but this is still contentious), it still only reduces emissions by less than a half - So if twice as much is used there is no benefit.
    Also in light of the Climate Commissions report suggesting that burning more than 20% of the world's carbon fuel reserves will lead to even…

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  6. Felix MacNeill

    Environmental Manager

    Is Peter really expecting to be taken seriously when he says:
    "However, no climate model would predict a measurable impact on global temperatures from total CO2 emissions over the life of the project."

    This actually says nothing more than 'no project will ever have a higher impact than the impact it has'.

    Is this a candidate for the Sibyll Faulty Award for Stating the Bleeding Obvious? Or sgould ir be entered in the Cheap Excuses for Fat, Lazy, Spoilt Nations to Avoid Taking their Fair Share…

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  7. Trevor S

    Jack of all Trades

    I find myself agreeing with Mark on this. This is a good intellectual piece. One has to wonder at the statements about it being a polemic from Etc etc, that same applies to all. Who do you think pays the money to fund all Education positions ? Business does. ALL Tax is paid by business. You can't pay tax unless you have money to pay it, you can't get that money unless you are involved in business either directly or indirectly with a further degree of separation ie have someone who can use…

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  8. Doug Hutcheson

    Poet

    The title says it all: "more gas exploration isn't the solution to our problems". In fact, more gas exploration is intended to be followed by more gas exploitation, which is in nobody's long-term interest. Gas being less polluting than coal is not the point: gas is more polluting than our species can afford, if our species is to have a future here on Lifeboat Earth. Leave the poisonous stuff in the ground and start getting used to a less energetic future, or there won't BE a future for our mob. Cockroaches may yet end up inheriting the Earth ...

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