September 16, 2015
Australia’s gas industry is a vital part of our economy. Gas is an indispensable feedstock for manufacturers and an essential energy source for industry and millions of households.
Over the last five years, the industry has embarked on a $200 billion expansion. This will see Australia become the world’s leading exporter of liquefied natural gas by 2018.
No other Australian industry has leapt to global prominence so quickly.
Fourteen new LNG processing trains will start production between 2015 and 2018. LNG output will triple over three years.
The first of Australia’s eight new projects is already producing. In January, Queensland Curtis LNG shipped its first cargo.
In 2013-14, Australia shipped 24 million tonnes of LNG, earning $16.4 billion in export revenue.
The growth dividend for Australians is huge and long-term. LNG investments will generate billions in export income and tax revenue over two generations.
The oil and gas industry already contributes $8 billion a year to government revenue.
Developing our gas resources will create high-paying jobs in regional areas and across a diverse, world-class supply chain.
By pioneering technologies such as floating LNG and LNG production from coal seam gas, Australia is putting itself at the forefront of the global industry.
So, in many ways, it is the best of times for the LNG industry.
However, there is more to the LNG story than the construction boom.
Expansion of LNG exports is occurring at difficult times for the Australian economy, with growth sluggish and our commodity exports hammered by low prices and global oversupply.
LNG faces the same headwinds as other commodities.
Five years ago, it was reasonable to forecast an oil price of US$100 a barrel in 2015. A year ago, the price was US$100. Today, it is less than $45.
The LNG industry is not for the faint hearted or the short sighted. Building assets which last for 30 years means riding commodity cycles.
The immediate returns to investors and Australia from the LNG boom are, for now, less than once predicted. The future is not what it used to be.
It is important not to exaggerate the depth of the problem. The regional demand for LNG will continue to be solid, with the International Energy Agency forecasting average annual growth of 2 per cent of the rest of the decade.
The agency predicts the world gas market could grow by around 30 per cent by 2030.
The challenge for Australia is to stay competitive in a global market of multiple competitors and oversupply. New LNG developers are emerging in Papua New Guinea, East Africa and North America.
Compared to some of our competitors, Australia is a high-cost destination for investment. Canada, for example, can supply LNG to the Japanese market at significantly lower cost than many Australian projects.
The industry is quickly changing to meet this competitive challenge. It is a painful process of containing costs, focusing on the strongest projects and deferring lesser priorities.
Our political and regulatory cultures should also change.
The World Economic Forum ranks Australia:
- 124 out of 144 countries in terms of the burden of government regulations;
- 132 in terms of flexibility of wage determination; and
- 109 for overall employer-employee relations.
A recent Accenture survey of key LNG developers also found little confidence in Australia’s regulatory framework and industrial relations system.
By embracing reform in these areas, governments can show that Australia is ready for new investment.
A good start would be to amend the Fair Work Act to reduce the cost of building major projects.
Restrictive workplace laws entrench low productivity and the continual ratcheting up of costs.
Another important reform is before the Senate that, if passed, would greatly reduce unnecessary, time-wasting duplication in approvals.
The proposed “one-stop shop” amendments to the Environment Protection and Biodiversity Conservation (EPBC) Act would remove the duplication of Commonwealth and State approval assessments. Duplicating regulation does not mean better environmental protection.
The Commonwealth Department of the Environment reports that Australia’s average time for project approvals is 37 months – poor by international standards.
Long and costly delays to project approvals damage Australia’s international competitiveness. Duplication of Commonwealth and State processes hurts a broad range of industries – oil and gas, agriculture, minerals, property and construction sectors. All these industries are supporting reform.
The Department of the Environment has found that implementing a one-stop shop environmental approvals would benefit Australian business by about $426 million every year.
Australia’s continued prosperity will rely on reforms that promote productivity and can attract investment.
The political debate in the country has been focused on polls for a long time. A stronger focus on economic reform as the path to sustainable, long-term prosperity is now essential.
This blog post was first published as an opinion piece in The Australian Financial Review on 17 September.