By 2050, Shell expects demand will more than double from its level in 2000, even with significant new efficiency. This change will be propelled by a rising global population and strong economic growth in developing countries. And this is a good thing.

Australia will be part of this long-term demand growth, both as a producer of energy to meet burgeoning demand in North East Asian markets and as a consumer with broad linkages to the deep international markets for liquid fuels.

Good morning Ladies and Gentlemen. I would like to begin by acknowledging the traditional owners and custodians of the land on which we meet today, the Ngunnawal people, and pay my respects to their Elders both past and present.

I’d like to thank CEDA for putting together a great couple of days of robust discussions.

This is no mean feat at the best of times, let alone during the last sitting week before an election!

We have heard a lot over these two days on the challenges facing Australian industry. Indeed ‘challenge’ is one of the constant themes I have experienced over my business career.

For my predecessor Ann Pickard – the next challenge lies in the Arctic. I am sure we all wish her well on the next chapter of her career.

For me the next challenge lies in leading Shell’s broad and diverse business in our country.

We’ve just heard from Minister Gray and Shadow Minister Macfarlane on Australia’s energy options and security – and their respective policies for addressing the challenges in securing Australia’s energy future.

I am going to outline the Shell view of the future of energy – both in terms of energy trends here and globally, and the opportunities and challenges facing Australia’s energy development.

Shell in Australia

Shell’s story in Australia started 113 years ago, in the same year that our nation was born.

It is a story born of innovation – which is one of the key ways to overcome hurdles and barriers.

Shell’s journey to becoming one of Australia’s largest investors began 30 days and nine kilometres from the first meeting of the Australian Parliament – when a vessel called the ‘Turbo’ moored in Hobson’s Bay.

The ‘Turbo’ was the first ship to import bulk kerosene into the Australian market.

Up until that point kerosene, which was the dominant hydrocarbon energy source of its day, was imported in ‘kero tins’.

This was the first example of how Shell used innovation to help Australians meet the energy challenge – by improving efficiency and reducing costs.

As the nation has grown, Shell has continued to help Australians overcome challenges. It has helped:

  • people and supplies travel across the land;
  • crops to be grown and moved to market;
  • resources to be uncovered and value added; and
  • people to be connected and educated.

Shell has prospered in Australia because it has helped people meet challenges, and along the way, enriched trade and powered economic development.

Today Shell’s business in Australia is an important part of the company’s global portfolio.

It is a business that includes oil and gas exploration and production, with a focus on liquefied natural gas – along with the sale, marketing, refining and distribution of 25 per cent of Australia’s oil products.

We count some of Australia’s largest companies as our partners and customers, but we also understand that our nation’s prosperity is not simply a result of big enterprise. Shell’s presence in many regional communities is through a retail network of 250, often family owned, dealers.

Shell expects Australia to underpin the next phase of growth in our LNG portfolio, contributing to our leadership position among international oil companies as the world’s largest producer of LNG.

This investment will generate considerable employment, national income and tax revenues – through interests including the world-leading Prelude FLNG project.

Global Energy Trends

As a business, we spend a lot of time analysing global trends in the hope of making better decisions, both for our business and for the future of energy.

Globally, Shell expects energy demand will surge in coming decades. Despite the current context of persistent international economic volatility, there remain two major challenges in reshaping the energy landscape:

  • surging long-term demand; and
  • global efforts to build a sustainable energy system.

By 2050, Shell expects demand will more than double from its level in 2000, even with significant new efficiency. This change will be propelled by a rising global population and strong economic growth in developing countries. And this is a good thing.

Australia will be part of this long-term demand growth, both as a producer of energy to meet burgeoning demand in North East Asian markets and as a consumer with broad linkages to the deep international markets for liquid fuels.

With the maintenance of appropriate energy policy settings over the long-term, Australia will be well placed to maximise the benefit from its endowment of natural resources by substantially increasing exports in energy - while maintaining affordable supplies of energy for domestic markets.

Australia’s Natural Gas Potential

In casting its eye to the future Shell expects strong demand growth for LNG, particularly in the period 2015 to 2025 – with most of this growth coming from markets east of Suez.

Shell expects that Australian natural gas will be a significant source of supply to meet this demand – with both traditional LNG and coal seam gas to LNG projects being part of this growth picture.

But while Australia has the potential of 100 million tonnes per annum of proposed projects in development, a range of challenges, including high infrastructure and labour costs and environmental constraints, pose direct risks to this pipeline of investment.

I know Ann spoke to some of those challenges at the start of the conference, and it is important to remember that Australia’s unique characteristics mean some challenges are fixed … but some are dependent on the policy choices we make.

One set of challenges that cannot be addressed is remoteness of many of Australia’s petroleum resources and their distance to existing infrastructure and population centres.

But if we can address that challenge with the right policy settings and investment climate, then Australia has the potential to be a natural gas superpower with reserves in place for hundreds of years.

A recent Government report found we have enough gas for domestic consumption for 184 years – not including future discoveries.

In terms of technically recoverable Shale gas resources, Australia is estimated to have 396 trillion cubic feet, putting us at sixth in the world.

If we include these potential resources there could be as much as 400 years worth of gas. So the opportunities are there, but we have to deal with the challenges in the short and long term.

Challenges for Australia’s Gas Development

Responsibility for overcoming these challenges rests at the feet of:

  • all political parties;
  • of companies like mine; and
  • of course the Australians people, that can turn opportunity into prosperity.

In the more competitive and volatile world, Australian governments will need to work harder to continue to develop Australia’s resource potential, getting policy settings right to assist in bringing energy project costs back to a competitive level.

If we fail to act the cost of monetising Australia’s gas resources will also continue to rise as we go up the cost curve accessing harder to develop resources – but in the long term, innovation and technology will see the market adjust as we have seen in North America.

In Shell’s view fiscal stability is paramount to ensure that Australia continues to benefit from the prosperity driven by investment in the energy sector.

Naturally Shell accepts that governments need appropriate returns from Australian resources – but governments also need to recognise that large, sudden changes to long standing fiscal regimes, especially when retrospective, significantly damage investor confidence.

Of course all governments realise that any policy outcomes that see Australian projects face costs their competitors do not, will not improve the situation for these projects.

If Australia is to realise the full potential of its large resource base, policies that add unjustified additional costs, delay or complexity to major energy projects must be avoided.

Productivity and IR

We are proud of what we have been able to do in Shell – but the more successful we have been in realising Australia’s opportunities, the harder it has become to realise the next one.

With seven LNG projects currently in construction, we have become the highest cost nation to build the next LNG plant.

In fact we are now 20 to 30% more expensive than the United States and Canada.

Competing demands for our workforce means that we are paying people as young as 20 around $200,000 a year. Their bosses can be as young as 25 and get paid even more.

We worry how sustainable that is. How much longer can we afford to do this and can we afford to miss the window of opportunity that Australia has for constructing new projects?

How much time do we have before our competitors in North America and East Africa catch up and start stealing our customers?

The industry may have been its own worst enemy. Where delays and time cost money, we paid whatever it took to get the people to build projects.

Australia is now building seven LNG plants at the same time as we are wanting to:

  • run our tourism sector;
  • grow our food; and
  • build our homes.

I’m not sure how many nation building projects that seven LNG plants equates to, but I do know this – the Snowy Hydro Scheme was not built by people that were Australian when we decided to build the project.

We encouraged people to come here, and in turn they helped build our nation. To help build these big projects and we need to be open minded that as a nation of 23 million people we need some help in building the projects of today.

We are a multicultural society, and from time to time we need to be more open minded about skilled migration.

The industry needs to urgently work with governments. We need to look at issues like immigration, productivity and industrial relations.

If we don’t come back to a more sustainable workplace relations footing, we need to accept that international capital may not flow into Australia.

The key here is not be alarmist, but instead realistic.

Reform doesn’t mean draconian laws, slave wages, or foreign labour rates … it does mean that we urgently need to address productivity if we want the next LNG plants to be built and operated here.

Domestic Gas

So what other policy challenges does the energy sector face?

One that clearly is playing out right now is the debate around domestic gas prices and supply.

We understand why the domestic gas debate is getting so much attention as the market adjusts to a change in pricing levels off the back of historic lows.

We are mindful of the debate around Australia’s energy security, but in general terms we do not foresee an issue with the long term supply of domestic gas – the issue here is price.

It remains our view that in the long run government intervention in domestic gas markets will be counter-productive for both supply and prices, as it will discourage innovation and investment.

East Coast Market

Let me explain by taking a long view of the east coast gas market.

We can expect tightness in the short to medium term and we are seeing long term gas prices pulled up from a low base.

There is more than one factor at work here. Drivers include:

  • a price on carbon;
  • the impact of the renewable energy target scheme; and
  • the upswing in energy prices that has occurred globally over the last decade

All combine with demand from an emerging CSG to LNG sector, to have an impact on pricing.

Such changes in energy markets often bring calls for government intervention.

The real question is whether a price signal, like a rise in domestic gas price, is usefully avoided by government intervention? Is it in the public interest to intervene? What would be the long term consequences of government intervention?

Shell believes market intervention is counter-productive in the long term, as a domestic gas reservation policy on LNG projects is likely to push prices up and decrease supply. So why is this the case?

The medium term impact of a forced gas reservation policy applied on LNG export projects is that you distort the market with large lumpy increments of domestic gas, putting off any investor in less capital intensive domestic gas only projects.

In the long run the story gets worse - with the ultimate result of intervention in domestic gas markets likely to be that the consumer and taxpayer has to pay the price for uncompetitive industries that were based on subsidised energy.

The impact of the development of tight/shale gas resources in the United States is illustrative and suggests that over time, coal seam gas and other tight gas plays will have a significant impact in both the expansion of known gas reserves and on domestic gas supply.

But to see this development of new gas plays occur, we must by necessity move up the cost curve, and you actually want and need a clear price signal to see that innovation and investment occur.

Any price movements reflecting dynamic supply and demand fluctuations characterise a healthy, functioning market, as is evident in the movement in prices of commodities such as crude oil, iron ore and gold.

We do not see a debate around the need to reserve iron ore, or coal, as a means of bolstering Australia’s steel industry, and I think it is important to keep that in mind when the national debate turns to domestic gas policy settings.

Liquid Fuels Security and Challenges

In the liquid fuels space, Australia has been the beneficiary of reliable supply at competitive prices for many decades.

This sector is an example of how competition and minimal regulation, in most jurisdictions, has brought value to consumers.

Shell does not see the liquid petroleum sector as a priority area for major market intervention or action by government.

Having said that – it is not a sector without challenges.

Indeed it is a sector in transition, as Australian refineries produce a lower proportion of fuel, from diminishing sources of indigenous crude oil stocks.

There are some key areas of reform that could strengthen the operations of the fuels market, and better facilitate the significant investment required to meet Australia’s growing liquid fuel needs. These include:

  • planning, approval and regulatory processes that are efficient, timely and nationally consistent to support investment in supply chain infrastructure;
  • avoiding the regulation of third party access to bulk fuel terminals and distribution infrastructure, which reduces incentives for supply chain investment; and
  • equality in the fiscal treatment of imported and domestically produced ethanol – ensuring that if fuels are taxed, then they are done so on a comprehensive and neutral basis according to energy content.

Shell supports a long-term framework for the development of alternative fuels and co-ordination of industry and government efforts where there is an identified market failure.

The company is concerned that many of the factors identified are more commercial barriers where we believe government should not intervene, thus avoiding the potential for significant and ongoing market distortions – such as in the ethanol industry.

If any incentives are introduced into the market, it should be in the context of creating a level playing field and should be temporary, in the early introduction phase of new fuel technologies such as LNG for transport.

Shell is pioneering LNG for transport in Australia, with a project being considered to supply indigenous gas as a fuel along Australia’s busiest trucking route between Sydney and Melbourne.

As I said earlier, Shell believes LNG will play an important role in Australia’s energy future, and this investment in a refuelling network bridges the gap between discovering, manufacturing and making Australian gas available to the transport industry.

More broadly Shell believes that Australia continues to enjoy a high level of liquid fuel security.

As I said earlier, Shell sees Australia as key contributor to our future growth strategy.

As a nation we are clearly in an enviable position with our abundant energy resources.

But we also face challenges in developing our resources in a cost competitive global environment.

The policy decisions made today will not only affect Australia’s energy innovation and investment future, but in turn our economic prosperity.

I look forward to our discussion now, and in the future.


Read Andrew Smith's bio.

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