The Future of Energy Security

First, what do we mean by Energy Security?

For me, at its simplest level, energy security relates to the aspirations of both nations and individuals to a sustainable supply of affordable energy. And I mean sustainable in more than one way. It means having a reliable and ongoing supply of energy but it also means being acceptable in its impacts on our environment.

We can’t see these two issues separately. That’s not where the world is going. In the future an environmentally unacceptable energy supply will not be a secure energy supply.

Today meeting this need for energy security is becoming more and more difficult due to a combination of global forces that together make up the energy challenge. I refer to these global forces as ‘three hard truths’:

The first hard truth is that, in the future, energy demand will resume a rapid pace of growth. Deep trends underpin this and they will reassert themselves as we emerge from the current global economic downturn.

Today there are six billion people in the world. By the middle of this century there will be nine billion. That's three billion more people, mainly in the developing world, who will mostly be getting richer. And as their prosperity increases they will use more energy.  As a result, the hard truth is that in the future there will be far more demand for energy than there is today.

The second hard truth is that energy supplies will struggle to keep up. Today, we meet our energy needs overwhelmingly with fossil fuels: coal, oil and gas. Globally about 6% is met with nuclear power and 4% with renewables. Each of those sources will need to grow to meet all that extra demand – we will need it all.

The third hard truth is that the stresses on our environment are increasing, and the environmental impacts of growing energy use are not sustainable. We’re all familiar with the debate, in Australia and beyond, around climate change policy. In fact, environmental stresses go well beyond greenhouse gases; they include water issues, and local pollution as well.

Taken together these challenges represent one of the defining issues of our times. And nowhere are the challenges better illustrated than here in the Asia Pacific region.  In countries such as China and India, strong trend economic growth and increasing standards of living are resulting in rapidly growing energy demand. The scale of this is brought home when one considers that China is commissioning a new power station roughly every week.

Although these challenges for the region are profound, they present great opportunities for Australia.  Australia is blessed with a huge endowment of gas, coal and uranium. This provides us with the opportunity not only to meet our own energy needs, but also to help fuel the economic growth and rising living standards of our Asian neighbours, and profit as a nation by doing so.

So what is needed to find solutions to these challenges, and what measures can we take in Australia to contribute to success.

Firstly we need a broad anticipation across societies of these challenges; only with this will we find the understanding and appetite needed for action.

Secondly we need to integrate our responses to these interlinked supply, demand and environmental needs. Tackling one or even two of these without adequate reference to the others will not create the lasting answers required.

And we will need a truly massive scale of investment, a remarkable degree of purposeful innovation, and high degree of co-operation between all those with a stake in success.

So, what then, here in Australia is our role. As I said a moment ago, Australia with its vast endowment of resources, many of them here in Western Australia, is well positioned to contribute to the sustainable energy security of the region. There are some who argue that by exporting our energy resources, Australia diminishes its own energy security. This is a short-sighted position in my view.

The North West Shelf Venture provides a prime example of a project that can enhance both domestic and regional energy security. In addition to supplying around 15% of Asia’s demand for Liquefied Natural Gas, The North West Shelf Venture supplies around two thirds of Western Australia’s natural gas and accounts for around half of Australia’s crude oil production.  Domestic gas and LNG exports support each other, they do not compete.

Currently, Australia has two operating LNG facilities, producing around 20 million tons of LNG per year.  Over the next 10 to 15 years, the Australian LNG industry has the potential to increase massively, and in doing so, increase our share of the Asian market.

Such growth would position Australia as a world class LNG hub, rivalling any on the globe. This would be a great outcome for Australia and for our customers. It would create jobs, wealth and tax revenue and provide a reliable supply of energy that, compared to the alternatives, has lower CO2 emissions and is part of a bridge from our current energy system to one that in the future becomes truly sustainable.

The development of new LNG projects such as Gorgon will also result in new sources of domestic gas supply. This will make a very practical contribution to increasing Western Australia’s energy security. And in supplying LNG to our neighbours we can lead in enhancing Asia’s energy security and stability, and that’s good for Australia as well.

Of course, achieving this vision will not be easy. The scope of the LNG projects I’m talking about is enormous. We already hear Gorgon being described as a single project fiscal stimulus package for Australia, and we need more like it. Projects that will last for forty, fifty, sixty years.

We know we have world-class gas reserves in Australia, and yet only two operating LNG facilities. This reflects the difficulty of pursuing these mega projects. Mega projects are not called mega for nothing. The scope, complexity and cost of these projects cannot be underestimated. They need to address technical, social, environmental and economic challenges against a backdrop of commercial drivers from a range of companies. It is normal for different views to be expressed and for different interests to need reconciliation.

The bottom line is that our need for energy security and the scale of these opportunities demands of us a responsible and cooperative approach, recognising the realities of the situation and our competing commercial imperatives.

The industry is continually innovating to develop more efficient and environmentally benign techniques to help meet this energy challenge.   One example is Floating LNG. This exciting technology is particularly well suited to tap into remote and difficult deposits.  By its nature, it has a significantly smaller environmental footprint than a conventional onshore LNG plant because it processes the gas entirely offshore, and doesn’t require gas compression, a pipeline to shore, onshore construction or shipping channel dredging. Just last week, Shell signed an agreement for the design, construction and installation of multiple floating LNG facilities.

Floating LNG production will not replace traditional onshore LNG developments, and it is not designed to. It is complementary to onshore options, and is one example of how industry can use technology and innovation to help provide energy security.

Another example of this capacity for innovation is the fledgling coal seam gas to LNG activity in Queensland. It’s not too long ago that coal seam gas was seen as a problem for coal miners. Now it is making a significant contribution to the energy mix in the Eastern States. The scope of these resources is so large, that a number of companies are actively investigating the opportunity to establish a new gas export industry based in Queensland.

One more important example is the effort Australia is leading to speed the deployment of carbon capture and storage technology. As with gas CCS will be a vital part of the cleaner but still secure energy future we need to create.

I said earlier that we need a huge scale of investment to meet growing demand and, in the process, changing the way we produce, and use energy. Individually these investments are counted in the billions and collectively in the trillions of dollars. This is the nature and scale of our modern energy system.

To invest on this scale requires access to capital and sufficiently stable market conditions that allow reasonable assumptions about returns over the very long lives of these expensive energy-creating assets. Recently the global crisis has disrupted both. And there’s a danger that if we don’t make enough large investments soon, the world will face an energy supply crunch around the middle of the next decade.

Fortunately one of Australia’s advantages in attracting the massive capital investment required to underpin these mega projects is its stable political and regulatory regime. This is critical for projects that may have a lifespan of decades and require tens of billions of dollars of upfront commitment.

To their credit, Governments at both State and Federal levels clearly recognise the potential of this industry and its importance for the economy and the environment. They are consulting on a range of initiatives to further streamline the regulatory environment of projects and increase investment stability. This kind of consultation is part of the co-operation among stakeholders we need. I would like to touch on a few examples.

The Government is currently considering the recent report by the Productivity Commission into regulation of the upstream oil and gas industry. This report made a number of practical recommendations, which the Commission suggested, could halve the average time taken to approve major projects. They estimated that achieving this would deliver an efficiency dividend to Australia of billions of dollars. Obviously the need for streamlining should not discount the need for rigorous checks and balances, but the quicker we can peel off some of the excess layers, the better.

To promote the exploration and development of oil and gas resources and the energy security these bring, security of tenure is critical. Australia’s track record in this area is very good, but this does not mean we should ignore potential improvements. The Government’s discussion paper on retention lease policy should be welcomed as it canvasses options for greater transparency, greater certainty and more rigorous application of the commerciality test.

Again a key requirement for industry is investment certainty and incentive to explore and to invest the huge amounts of money necessary to commercialise gas. Having invested millions of dollars in an exploration campaign, industry has a natural incentive to develop these resources as quickly as possible.

However, as I have already discussed this can be a complex, expensive and time consuming exercise. Where genuine efforts are being made to understand and find a way to develop these resources, it is vital that leases are not taken away. Security of tenure is an absolute pre-requisite for a successful LNG industry in Australia.

A fiscal framework that is conducive to investment also needs to be on the Energy Security agenda. It is clear that a stable, internationally competitive fiscal regime is needed to encourage private investment in infrastructure. This is particularly important in the context of expensive long life LNG projects that have lives of over 40 years, and contractual commitments for over 20 years.

Changes to fiscal arrangements after the upfront investment in an LNG project has taken place can fundamentally alter the economic viability of assets. They can also alter the perceptions of risk associated with future investments – which potentially means the loss of new investment opportunities to Australia. If investors don’t have long-term confidence in the stability of the tax regime, potential investments in major projects will be severely compromised. A tax regime that supports investment in LNG projects will lead to more jobs, more export income, and more tax revenue.

Finally I would like to come back to the environmental aspects of energy security, and particularly to CO2 emissions. It is clear that to have the energy the world needs, and at the same time to cut CO2 concentrations, we are going to need exceptional leadership. The sort of leadership that will bring about change in behaviour across the whole supply and consumption chain.

It is my belief that the Australian Government should continue to be a positive voice in the international CO2 debate. There is an urgent need for national and international policy implementation to combat climate change, and it is vital that all Governments develop market-based policies and supporting legislation that recognise both the world’s need to meet growing energy demand, whilst constraining CO2 emissions.

By being an early mover on emissions trading, Australian trade-exposed industries, including LNG and petroleum refining will be exposed to some risks. These risks can be reduced through appropriate transitional arrangements. While recognising the different views on this subject we believe a far greater risk is that Australia misses the opportunity to put a policy framework in place to deal with this issue.

This would create a climate of continuing uncertainty for industry and potentially delay the massive investments that are required to underpin our future energy security. For these reasons we hope that the Government and Opposition can find the political consensus required to implement the CPRS.

Energy Security is not something we can take for granted. To achieve it requires the co-operation of industry, government, customers and communities. Although the scale of this challenge is great I do believe we have the capacity to meet it.

In the energy industry almost every day remarkable things are achieved. Although the path forward may not necessarily be an easy one, we look forward to doing our part to help address the challenges of Energy Security into the future.