Competing for growth – APPEA Industry Address
Jun 06, 2016
Andrew Smith, Chairman of Shell Australia, speaks about competing for growth as the Lead Industry Address at APPEA Conference and Exhibition 2016.
Minister Frydenberg, Minister Lynham, ladies and gentlemen.
I would like to begin by acknowledging the traditional owners of the land on which we meet, and pay my respects to their elders - both past and present.
Against the backdrop of a federal election, we meet here in Brisbane to discuss the issues facing our industry. Today I would like to concentrate on some areas of leadership where we must all put our heads above the parapet and contribute to the national debate. Issues so important that our advocacy needs to transcend the interests of our businesses and industry, and make a greater contribution to the debate about our national prosperity. Policy areas such as meaningful industrial relations reform, and our industry’s role in providing reliable and affordable energy in a carbon constrained market.
For the Australian petroleum industry the opportunity set has historically been strong. Demand from domestic consumers and the neighbouring region, was coupled with ample reserves, and saw investment grow steadily from the 1950s into the new millennium.
These formative decades saw the broad bipartisan support needed to attract the cross-generational foreign investment required to build an LNG export sector. There was investment in industries such as the Queensland coal seam gas to LNG sector because of the support from successive ministers Macfarlane, Ferguson, Gray and now Frydenberg - along with the bipartisan support from Labor and the Coalition in Queensland’s state parliament. This bipartisan approach to energy policy assured investors in Europe and America - and led to the creation of thousands of well-paid long term jobs in regional Queensland.
On the back of a resilient agricultural sector, a growing resources sector and a seemingly endless boom in the services sector - Australia has transformed itself from a protected colonial economy into one of the most prosperous and well educated nations on earth.
But as with all seismic shifts in economies, there have been some unintended consequences. As we grew, we became expensive. As we became prosperous, we also became complacent. And more recently we have faced a well-coordinated, well-funded, misleading and often dishonest political campaign against the natural gas industry - leading to an erosion of public sentiment and cracks in the bipartisan political support we historically have enjoyed.
Managing these unintended consequences is not something that can be achieved by concentrating our efforts in Canberra. As an industry, these challenges are just as significant as those that faced our predecessors, and overcoming them will be as important as the seminal investment decisions of the fifties, eighties and two-thousands. But to be successful we must bring the electorate along with us, a task that can only be achieved by demonstrating the sustainable value we bring to society.
For me it is our industry’s potential to make a significant contribution outside our capital cities that excites me most. I was particularly pleased to see Minister Frydenberg’s portfolio include both resources and northern Australia.
Like the minister I am from Victoria, and so many of the institutions that enriched our childhoods were the legacy of the resource industry - in this case the Victorian gold rush. From the museums I visited to the trains I caught to school, much of Melbourne’s existing infrastructure was paid for by the proceeds of this past resource boom. Nowhere is this more obvious than outside of Melbourne in the regional gold rush town of Bendigo, where the resource industry complimented agriculture to create a thriving economy with a century long legacy.
It is now the turn of cities like Gladstone, Darwin and Broome to feel the long term benefits of resource sector investment. But not gold rush investment. Rather it is investment driven by supplying natural gas to neighbouring nations that must grow energy imports to satisfy the rising demands of increasingly urbanised populations.
But just as the remote locations of our projects provides an opportunity for our nation to bridge the opportunity gap that exists between a child born in Sydney and a child born in the expanses of northern Australia, it also creates a significant set of challenges. Put simply the further we go from the doorsteps of our largest capitals, with their huge work forces and manufacturing facilities, the more expensive work becomes.
While I won’t dwell too long on the issue of Australia’s escalating costs, particularly in the charged environment of an election campaign, there is no doubt they have hurt the next wave of investment in Australian projects. In the last decade increased labour rates, coupled with lagging productivity, have hit projects that already faced higher cost structures due to the remote locations of Australian resources. Costs that are not only borne by investors, but also the Australian community through lost revenues.
On wages, allow me to be clear, Australia should always aspire to have the best paid workers in the world. But as a nation we must understand that this will only be sustainable if we are the world’s most productive workforce. As an industry we should be proud of the standard of living that our sector has delivered to Australian workers - particularly outside our prosperous capital cities. But we must address the challenges that come with high wages if we want to see the ongoing investment in remote regions across our north.
Against this backdrop it is essential that investors understand what work will cost across the life of a project, and what productivity will be achieved. Put simply, where industry is disadvantaged by geography, it needs certainty in labour costs.
To illustrate my point, a recent study by McKinsey found Australian resource projects were 30% more expensive than similar ventures in Canada. For this reason it is critical that investors have access to life of project workplace agreements for projects of national significance. It is imperative that wages and conditions be agreed at the start of a project, with wage growth pre-agreed across the five, six or seven years it takes to complete construction.
Our projects are wealth generating for Australian workers, local communities and shareholders. But international capital will recoil and seek more attractive destinations unless they are competitive and we have certainty in costs. In this environment community leaders across business and politics should work together to ensure our industrial settings enable Australian workers to be as productive as they can be.
That said, today’s theme of ‘competing for growth’ prompted me to ask, how do we as leaders rebuild acceptance of our industry - so that it can grow? It strikes me that:
- Despite the petroleum industry, both in the upstream and the downstream, being a significant driver of Australian growth for more than a century - our place in Australia’s future prosperity is questioned.
- And despite bringing billions of dollars of capital to monetise Australian resources, create jobs and revitalise our regions - our investments are increasingly less welcomed.
Allow me to be clear. I am not suggesting the oil and gas industry is being run out of towns across the country. Far from it. There are excellent examples of long term coexistence in parts of Australia stretching from Gippsland to Gladstone and across to the north of Western Australia. But there is no doubt our industry is the subject of an orchestrated, organised and well-funded campaign to hem in its further development.
For me complacency, and also manipulation, sits at the centre of this increasingly concerning situation. Complacency from our industry that in too many cases believed it could simply woo communities with new investments and well paid jobs - and when that didn’t work believed governments would simply sort things out. Complacency from communities that thought their prosperity was guaranteed regardless of whether industry invested in their regions or not. And manipulation from activists that have unfairly demonised both investors and workers that have contributed to the economic success of our nation.
Today as the Australian LNG industry completes construction of 15 new LNG trains across the north of our country, stretching from Curtis Island to Barrow Island, it is more important than ever that our industry clearly articulates to the Australian people the benefits that these investments will have in the decades to come. We should unashamedly describe that while Sydney and Melbourne are on an economic growth trajectory fuelled by the desirability of property investments and a booming service sector, the same cannot be said for the rest of the nation. The resource reliant economies of Western Australia and Queensland, along with regional economies across the nation, require more investment and new projects to complement traditional industries such as agriculture.
During construction the Queensland gas industry created more than 40,000 jobs, and even today after construction has been completed it employs 13,000 people. The multiplier effect across the state economy remains much larger, and is tangible in towns such as Miles and Chinchilla, that have had a dramatic reversal in their economic fortunes.
But despite this obvious benefit to many of our most remote and often disadvantaged communities, we still face significant social challenge in entering frontier regions. In areas such as the Hunter Valley, Gippsland and the Great Australian Bight our industry could make a substantial contribution to regional economies. We could bring capital to bear, complementing existing industries, and provide young Australians with well paid jobs.
This challenge is one that we must face head on, through open dialogue. If we fail to tackle this challenge growth opportunities for these regions will not be realised.
I have now spoken for some time without mentioning what many, including myself, believe is the greatest challenge we face as an industry - how we continue to prosper in a carbon constrained future. This too is a challenge that will require the leaders of our industry to stand up and show real leadership, and perhaps more importantly, honesty.
Legitimate concerns about the impacts of climate change are not only among the most vocal criticisms of our industry’s investments - but also are the inspirations behind many of the more tangible, albeit sometimes fanciful, points of protest. In my experience it is the same activists that express concern about carbon emissions, that take aim at the impact of potential spills, the impact of drilling on aquifers, the insistence that landholders be given a power of veto - or even that superannuation funds should divest their interests from natural gas companies.
It would be too easy to take a totally adversarial position on these claims, but in truth our own unwillingness to be involved in frank dialogue with people who oppose our industry has helped create momentum against new developments. There have been some excellent examples of industry leadership, arguing the virtues of well-regulated investment, but these have been too few and far between.
Thirty years in business has taught me that complex questions seldom have simple answers. And while we in the industry need to stand up and take tangible steps to help the world reduce carbon emissions, there are no silver bullets.
While many of our detractors will not admit this fundamental truth - our modern advanced society is reliant on an energy system that has been developed over the past 150 years. Through a reliable and affordable supply of energy, this system has enabled once remote communities around the world to participate in an integrated global community. It has facilitated commerce, provided the materials for modern medicine and allowed man to set foot on the moon.
Today our own oil and gas industry globally supplies around half of the world’s energy. We should all be proud that the products our companies manufacture provide 50% of the energy used by industry, and 90% of the energy used for transport.
The sheer size of this integrated energy system is mind boggling, with $55 trillion of infrastructure investments. A figure that places the two great challenges of our generation in context:
- Firstly, how do we help more than one billion people that currently live without electricity. Or put a different way, how do we alleviate their energy poverty, and provide them with access to basic services like refrigeration for food and internet access for education.
- And secondly, how do we do that in a carbon constrained environment.
The short answer is that our energy system must continue to evolve to meet growing demand. It is possible to meet the exponential growth in energy demand while also reaching net-zero CO2 emissions during the century - but getting there may require many of us to get out of our comfort zone. It is a seismic shift that will require collaboration from industry - something that does not come naturally - coupled with long term vision from political leaders.
Many in this room may not yet have accepted this, but renewable energy sources will play an increasingly critical role in the future energy mix both in Australia and abroad. But to be successful, lower-carbon oil and gas will need to partner with renewables to provide the full range of energy products.
But just as many have not accepted renewables, we have also failed to question the oft repeated assertion that a path to a completely renewable energy sector has been stifled by deliberate choices or a lack of political will. Despite the claims of activists that a path to a completely renewable energy sector is within reach, oil and gas will remain integral - especially where high energy density or very high temperatures are required in transport or industrial processes.
Most credible energy projections also see a vital role for coal into the future, and that is positive for our nation. As an energy source coal has had a profound impact on global economic advancement, and that will continue. But as we strive to minimise carbon emissions we need to rethink uses of coal outside of metallurgical applications and efficient new technology power generation using black coal.
Indeed it strikes me as absurd that a nation as rich in natural gas as Australia persists in burning brown coal for electricity generation. Surely investment in gas generated electricity provides a tangible and achievable path toward a reduction in carbon emissions - and an improvement in air quality. After all, gas produces half the carbon dioxide and just one-tenth of the air pollutants when burnt to produce electricity.
In Victoria where brown coal continues to be used to generate a vast majority of electricity, both the state government and state opposition have stifled access to onshore gas reserves. A well regulated onshore gas industry, like that in Queensland, is the only reliable way to displace the dirtiest power generation in the nation - as a partner with renewables. But neither Labor nor the Coalition has yet shown the political will to make this happen.
At the same time our industry could make an additional meaningful contribution to the economy of the Gippsland region. The much publicised plight of dairy farmers again highlights the need for diversification of regional economies, and natural gas extraction can play a role in this. Evidence comes from Queensland’s Surat Basin, where the revenue streams from coal seam gas projects is so highly valued that it is regularly highlighted as a selling point in real estate advertisements.
This failure to effectively advocate for our industry’s growth may soon impact existing customers. Despite Australia’s vast gas reserves, the nation’s east coast market finds itself in a regrettable and avoidable position, with many analysts predicting a looming gas shortage in the nation’s southeast. In more sensational reports, we have heard predictions of gas supply falling off a cliff as soon as eight years from now. Some commentators have blamed this on the construction of six LNG trains on Curtis Island - a perspective that shows a serious misunderstanding of gas market dynamics. Supply will continue to match demand, and the mechanism to achieve this outcome will be price.
Any gas shortage in southeast Australia, with its resulting price increases, will not be the result of the Queensland LNG sector. Australia is a nation blessed with ample gas reserves. Government reports have suggested we have enough gas for 180 years based on current usage rates. The issue here is a failure in our advocacy, coupled with a lack of political will to responsibly turn Australia’s vast reserves of gas into much needed energy, jobs, tax and revenues.
So perhaps the time has come to think creatively about how we best serve our domestic customers, and ensure we have adequate and reliable gas supply. If governments in Victoria and New South Wales persist with moratoriums that stifle the development of additional reserves what else can we do to continue heating our homes and powering our industries?
I for one have mused about importing LNG to our nation’s largest city. If we choose not to act on declining gas fields, the idea of constructing a re-gas terminal in Port Botany may fast become a viable alternative for the industry.
In the short term LNG imports would introduce new supply and competition into the New South Wales gas market. In the current climate, I could see the rationale for such a suggestion - as LNG prices are historically low and pricing structures for pipeline capacity limit gas flow. However, the overall benefits are unlikely to outweigh the costs and there are impacts for the effective operation of the east coast gas market.
Of course importing gas from Curtis Island or PNG LNG would come at a cost to customers - particularly if LNG prices recovered to anywhere near 2013 levels.
On the face of it, you may think my company would be pleased with the atrophy in the onshore gas debate in both Victoria and New South Wales - given its position as a major resource holder in Queensland. But as a company that has invested in Australia for over 115 years, and has employed tens of thousands of Australians, we understand the best interests of the nation are in growing the economy. And in the long term a growing economy is good for jobs and investment.
Finding a path forward for onshore gas developments will not be an easy task. Our projects will continue to be attacked by activist groups that will not accept any investment in fossil fuels. Groups that will continue to demand an unrealistic path to energy transition simply to gain political mileage - demonising gas despite its obvious environmental benefits.
If we are to be successful in facing the challenges I have articulated today, we will need to respond in the old fashioned Australian way - by demonstrating a ‘can do’ attitude. Casting aside the complacency we have developed through our economic success, we can reinvent the entrepreneurial Australian attitude that dominated our business and political environment in the post war era. The period in our history when we welcomed a flood of new migrants, and created a vibrant industrial base - led by courageous business leaders, community leaders and political leaders who saw opportunities beyond their own direct interests.
Indeed Australia is always at its best when it is open. The great building blocks of our recent economic success came from open immigration through the fifties, sixties and seventies - a time when we recognised welcoming new migrants made finding a good job easier because of the economic stimulus of population growth. It came from the eighties and nineties - when we were open to major economic reforms like floating the dollar and tearing down tariff barriers. And the next wave of growth in our regions will come when we are open to the benefits a sustainable energy sector that will provide jobs to hard working Australians, and energy export revenues for government.
But just as Australian communities that have enjoyed almost three decades of consecutive grow have grown complacent, I fear we as an industry have also grown complacent. We cannot afford to continue losing the positive sentiment required for our social licence to operate. And herein lies the greatest challenge we face in ‘competing for growth’.
The voice of Australian industry has been loud in the last week. If we grow our economy we can create additional well paid jobs in the places where they are most needed. Business is not an abstract, it provides jobs and pays taxes. Positioning business as the enemy is not acceptable, and ignores the fact that without business there are no workers - and without workers there is no business.
This conference will provide our industry an opportunity to build stronger relationships, so we can tackle these difficult issues facing our sector.
I look forward to meeting many of you in coming days.