Submission to:
Energy Green Paper, September 2014
Emailed to: ewp@industry.gov.au
Introduction
The Energy Green Paper is to a large extent, comprehensive and should form a good
starting point for the White Paper and development of policy initiatives into the future.
However, four issues warrant more in depth assessment and discussion of policy
options:
1. Domestic gas action plan and national gas pipeline grid,
2. Australia’s declining crude oil and condensate production and the resulting trade
deficit and security issues,
3. Opportunities for transport fuel substitution, and
4. Impact of resource management regulation on production, economic rent, and
government revenues.
The Green Paper should and does reflect principles of the Government, which are
based on free market enterprise and not trying to pick winners but instead creating an
efficient level playing field where best enterprise will win out. However, the process
should be rigorous and fully assess policy options in order to fully meet the Energy
White Paper Terms of Reference and form a basis for a national agenda.
In addition, a few proposed visionary leadership actions would galvanize the “Energy” of
the White Paper and assist in gaining public interest and national support.
The Green Paper indicates that “additional supplies of gas are needed to avoid potential
near-term gas shortages on the east coast, and ensure long-term supply availability”.
This is an issue that could upset a major portion of Australia’s population and inhibit
national growth. A key energy policy goal was indicated as “bring on new gas supply as
quickly as possible to avoid potential supply shortages so that domestic gas users do
not pay higher prices than necessary”. However, proposed actions did not include
visionary action plans for how this would be achieved. Coal Seam Gas (CSG)
exploration in NSW and Victoria remains bogged. It will take years to demonstrate and
develop significant gas supplies. Shale gas and tight gas resources, while attractive in
the longer term, are likely to be ten years from significant supply. The only significant
demonstrated and uncommitted gas resources are offshore the northwest of the country
where on the order of 30 to 40 Tcf (30,000 to 40,000 PJ) of gas remains stranded. A
pipeline tying these resources to east coast markets would be a nation building project,
assuring Australia’s energy future. A concept feasibility study assessing the
commerciality of the project would be an early action. Development of these resources
would also support additional LNG export projects and facilitate additional exploration
and development of other resources along the pipeline.
The Green paper talks about the increasing gap between transport fuel and reduced
refining capacity, saying that this needs to be monitored but does not mention declining
production. A number of initiatives for attracting resources investment in general are
discussed but nothing to encourage exploration for oil in particular. An exploration
subsidy for shale oil drilling in conjunction with similar state/NT programs, should be
considered to encourage exploration.
A number of initiatives for increasing alternative fuel use and increased exports of
energy commodities are mentioned but reducing imports of transport fuels and refinery
feedstock through transport fuel substitution; particularly using Australia’s large gas
resources are not discussed in any detail.
Resource management regulation will be reviewed for Commonwealth waters to ensure
commitment to supporting effective, innovative and cost effective exploration and
development. However, impacts on production, economic rents and government
revenues are not mentioned.
Domestic gas action plan and national gas pipeline grid
The Green Paper summarizes the domestic gas situation as follows, “The Government
will take opportunities to improve gas supply and market operation. As the sources of
gas are changing, it is becoming more expensive to extract, and the growing export of
LNG is affecting gas markets as increased competition from higher priced international
markets pushes up local prices. All parts of the gas markets, from production to use,
need to be examined under these new market conditions. Better transparency, including
of supply availability and pricing within gas markets, is also needed. Additional supplies
of gas are needed to avoid potential near-term gas shortages on the east coast, and
ensure long-term supply availability. New unconventional sources such as coal seam
and shale gas also give potential for huge growth in export earnings.”
The Government’s energy policy goals from the paper include, “bring on new gas supply
as quickly as possible to avoid potential supply shortages so that domestic gas users do
not pay higher prices than necessary” and actions that “the Australian Government is
either currently pursuing, or which are proposed” includes, “more gas supply needs to
be supplied quickly to avoid potential near-term east coast shortages”. However,
proposed actions did not include action plans for how this would be achieved other than
general actions towards creating an efficient level playing field where best enterprise will
win out.
Development of additional supply from CSG in NSW and Victoria has stalled with much
of the population opposed. Significant supply from these sources seems to be many
years away. Shale gas and tight gas resources, while attractive in the longer term, are
likely to be ten years from significant supply. Even if public opposition and regulatory
barriers were to be removed immediately, technical knowledge, equipment availability,
and time for exploration assessment will take years to work through.
The only significant known and uncommitted gas resources are offshore the northwest
of the country where on the order of 30 to 40 Tcf (30,000 to 40,000 PJ) of gas remains
stranded in the Browse Basin, outer Carnarvon Basin, and Timor Sea. A pipeline tying
these resources to east coast markets would be a nation building project, assuring
Australia’s energy future. A concept feasibility study assessing the commerciality of the
project would be an early action.
Development of these resources would also support additional LNG export projects. A
west to east natural gas pipeline would facilitate exploration and development of shale
and tight gas resources in basins along the way, including what is assessed as
Australia’s potentially most prolific basin, the Canning Basin. The pipeline would also
facilitate exploration and development of mineral resources.
The hub location at James Price Point has already been progressed. Significant
feasibility work has been undertaken for bringing offshore gas onshore. Western
Australia’s domestic gas supplies would be assured and gas feed for the NWS could
extend the life of those facilities.
The situation seems reminiscent of the late 1970s when Western Australia was running
out of gas. Government commitments to take or pay gas contracts and building of the
Dampier to Bunbury Natural Gas Pipeline was a catalyst for development of the NWS
LNG project, which in turn, provided 25 years of reasonably priced domestic gas as well
as huge economic benefits to Australia.
It would seem that the concept of a nation building project would attract the support of
many key stakeholders: governments, industry, gas consumers and the general public.
Declining crude oil and condensate production and the resulting trade deficit and
security issues
The Green Paper indicates that “The Government will continue to monitor liquid
(transport) fuel supply. More diversity in, and more efficient use of, cost-competitive
sources of liquid fuel for transport would increase security of supply and help to reduce
fuel costs.” And further that, “In the longer-term, declining domestic refining capacity
and increasing dependency on fuel imports, particularly for specific fuel types, could
enhance concerns about the level of risk to Australia’s national security.” Australia’s
energy mix is discussed in the introduction section and the graph shows that transport
fuels made up 38% of total energy consumed. It was indicated that, “Energy resources
exports contributed $69 billion in income in 2012-13.” In the section, Attracting Energy
Resource Investment, considerable emphasis was placed on energy exports.
No mention was made, however, of the cost of petroleum imports. From the BREE
September 2014 Resources and Energy Quarterly, although not specifically reported,
petroleum imports costs can be estimated as on the order of $36 billion for 2012-13. In
other words, of the $69 billion in income from exporting energy resources, made up of
coal, LNG, LPG, uranium, and crude and condensate, Australia spent $36 billion to
import crude oil and refined petroleum products.
The gap between production and demand is getting worse. A BREE 2011 report
indicated that, “Without major new discoveries, domestic crude and condensate
production is projected to decline to 2035, with a rising share of imports required to
meet growing demand.1 Imports of refined petroleum products have more than tripled
over the last 10 years as demand has risen and domestic supply has fallen. Diesel
imports constitute the majority of this growth. Diesel is the primary fuel used in the
freight transport, mining and agriculture sectors, and imports are expected to increase
further, particularly as the mining sector expands.”
And further that, “The 2011 National Energy Security Assessment (NESA) forecasts
Australia’s overall liquid fuel security position as high2 to 2016 and moderate to 2035.
The rating shift to moderate beyond 2016 recognises increased risks such as: greater
reliance on global supply chains that require continued local investment in adequate
import and storage infrastructure; a likely trend towards relatively higher average crude
oil prices; greater global reliance on unconventional oil; the significant investment
challenge required to meet rising global demand; and the continued risks of geopolitical
uncertainty in key production centres.”
The Green Paper identifies a key policy area as Attracting Energy Resources
Investment and indicates that, “The Australian Government is committed to providing
policy stability and certainty as a priority so that Australia is an attractive investment
destination.” And that, “We need policies that attract the investment required to continue
growth in the sector.” Actions are outlined that the Australian Government is either
currently pursuing, or which are proposed, which include:
• Streamline regulatory processes
• Improving labour productivity and skills
• Create supply chain opportunities and Indigenous employment
• Better geoscience to encourage investment and assess impacts
• Identifying and addressing infrastructure constraints
• Promoting exports
While these actions will in assist resources exploration and development in general, no
specific mention is made of encouraging exploration for and development of liquid
petroleum. Past efforts by the Government to encourage exploration for conventional oil
are recognised, however, the White Paper should reflect current opportunities and
challenges.
1
Bureau of Resources and Energy Economics, Draft Energy Projections, 2011.
High energy security is when the economic and social needs of Australia are being met. Moderate energy security is when the
economic and social needs of Australia are being met; however, there could be a number of emerging issues that will need to be
addressed to maintain this level of security. Low energy security is when the economic and social needs of Australia are not, or
might not be met.
2
The US Energy Information Administration (EIA) estimated that Australia has technically
recoverable shale oil resource of 17.5 billion barrels3, placing it as the 6th largest shale
oil resource country in the world.
The EIA indicates that “The economic recoverability of oil and gas resources depends
on three factors: the costs of drilling and completing wells, the amount of oil or natural
gas produced from an average well over its lifetime, and the prices received for oil and
gas production. Recent experience with shale gas in the United States and other
countries suggests that economic recoverability can be significantly influenced by
above-the-ground factors as well as by geology. Key positive above-the-ground
advantages in the United States and Canada that may not apply in other locations
include private ownership of subsurface rights that provide a strong incentive for
development; availability of many independent operators and supporting contractors
with critical expertise and suitable drilling rigs and, pre-existing gathering and pipeline
infrastructure; and the availability of water resources for use in hydraulic fracturing.”
Conditions in Australia are different and this may explain why the technology of
exploring for and developing shale oil has been slow to be applied. Never the less, it
seems an opportunity lost, if the current situation is not reflected in the White Paper and
consideration given to policy initiatives aimed at encouraging the use of the technology
in Australia.
As most indicated shale oil resources are in State and Territories, this will mean working
cooperatively. However, as the Green Paper indicates, working with the States and
Territories is proposed to improve the cost effectiveness of electricity supply and
increasing momentum for productivity enhancing market reforms, as well as removing
barriers to new gas supplies and assisting to develop well-functioning gas markets. An
exploration subsidy for shale oil drilling in conjunction with similar state/NT programs,
should be considered to encourage exploration.
Opportunities for transport fuel substitution
The Terms of Reference for the Energy White Paper include consideration of the
following subjects that relate to transport fuel substitution:
• Energy related distribution infrastructure to deliver efficient national markets,
• Alternative transport fuel source, and
• Emerging energy technologies and new energy sources.
The Green Paper indicates that “Alternative transport fuels are niche products in
Australia, supplying around five per cent of demand.” And that “LPG… has around a
three per cent market share of transport energy use, mainly in light vehicles”. The Paper
basically lists other alternative fuel sources, including: Electric, Biofuels, including bio
diesel, Ethanol, LNG, and CNG but does not assess policy options to encourage use.
3
US EIA, Technically Recoverable Shale Oil and Shale Gas Resources: An assessment of 137 shale
formations in 41 countries outside the US, June 2013.
The report, The Prospects for Natural Gas as a Transportation Fuel in Europe4,
summarises the world wide situation as follows.
“The use of natural gas in transport is well established globally with over 17 million
natural gas vehicles worldwide. There are some 24,000 refuelling stations and demand
in 2013 accounted for 2% of total energy used in road transportation. Continued high oil
prices and the environmental advantages of gas over oil have led to increased use of
natural gas as transport fuel. There is also increasing interest in LNG as a fuel for heavy
goods vehicles and shipping. The IEA expects the growth in natural gas vehicles to
continue through barriers such as lack of refuelling infrastructure and inadequate policy
action will inhibit the rate.” The report also describes current and projected use of LNG
as marine bunkering fuel. If this is adopted worldwide and Australian infrastructure is not
up to standard, it could affect trade flows.
Different from Europe, Australia’s outback remoteness and large mining industry also
creates further opportunities for off-road transport fuel substitution, as well as remote
power station fuel substitution.
Given Australia’s large existing and potential gas resources, declining crude oil and
condensate production and the resulting trade deficit and security issues, potential
applications, as well as what seems to be trends in North America and Europe, long
term energy strategy has to include the development of natural gas as a significant
transport fuel.
It is recommended that assessment of opportunities for transport fuel substitution be
expanded and intensified for the White Paper, in order to more fully meet the terms of
reference, as well as, to ensure that future opportunities for the country are not lost.
Impact of resource management regulation on production, economic rent, and
government revenues
The Green Paper made a brief but important reference as follows, “The resource
management regulatory regime for oil and gas developments in Commonwealth
offshore waters has served Australia well for half a century. It has resulted in an efficient,
dynamic and internationally competitive offshore oil and gas industry that has attracted
a large amount of investment, particularly in recent years. However, the challenges of a
highly competitive environment for global investment dollars will test the robustness of
this regulatory regime. The offshore operating environment is rapidly changing, with
rising risks and costs associated with maturing oil and gas fields. There is more focus
on exploration and development of new frontier areas in very deep water and far from
land and support infrastructure.” And further that, “During 2014–15, the Australian
Government will review the offshore oil and gas resource management framework
applying in Commonwealth waters to ensure it continues to support efficient, innovative
4
Chris Le Fevre, The Oxford Institute for Energy Studies, The Prospects for Natural Gas as a
Transportation Fuel in Europe, March 2014.
and cost-effective commercial exploration and development consistent with the national
interest.”
Australians not only benefit from production of resources though indirect economic
benefits and supply of energy but also by collecting economic rents on non-renewable
resources through royalties and resource rents.
Oil and gas resources are unique in that the fluids are expandable and moveable. When
production starts, processes occur that are largely irreversible, thus the need for
Reservoir Engineering or resource management. These changes can significantly affect
production and recovery, in particular, from nearby deposits, which produce from the
same horizon. The issue can be exacerbated as the density of producing deposits
increases. Further, development methods can significantly impact recovery and thereby
economic rents.
Interests of industry and governments may be in conflict, particularly over longevity or
sustainability of production versus return on capital. In addition, cooperative or shared
development is not the norm. As a result there are many examples of multiple facility
developments in Australia, where shared or joint developments would have resulted in
more effective economics both for investors and governments.
Less than optimal resource management practices have in the past and will in the future
not only impact economic rents or government revenues but also our international
competitiveness.
Evolution of petroleum regulatory frameworks in Australia, both Commonwealth and
States/NT, recognized these issues by including requirements for resource
management, including effective resource recovery.
Hopefully, the review of the offshore oil and gas resource management framework
applying in Commonwealth waters as outlined in the Green Paper will be extended in
the White Paper to how the framework is applied and a recommendation that any
resulting changes to the Commonwealth framework and practices will ultimately extend
to State/NT areas.
Thank you for the opportunity to provide comments,
W. L. (Bill) Tinapple
Private Citizen and Former Western Australia Petroleum Regulator
4 November 2014