Melbourne Mining Club Address
Aug. 04, 2016
Andrew Smith, Chairman of Shell Australia, talks to the Melbourne Mining Club on two topical policy debates that have emerged in the period since the federal election - the debate surrounding the Australia immigration program and discussion on energy pricing.
Thank you Lorraine.
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.
To Sir Arvi Parbo, Richard Morrow, Hugh Morgan, former Shell chairman Russell Caplan, members of the Melbourne Mining Club executive, ladies and gentlemen – thank you for this opportunity.
If I could first address the elephant in this magnificent room, I am not a miner. That said, the mining and petroleum sectors have both made enormous contributions to Australian prosperity over the decades, and today both face common issues. We are both importers of foreign capital, exporters of Australian energy, we both face structurally high costs and in an increasingly volatile democracy – we both face significant public questioning of our place in a rapidly evolving economy.
Today I would like to address two topical policy debates that have emerged in the period since the federal election. Both are somewhat emotive, and both have a significant impact on the ability of everyone in this room to either run their businesses – or invest their capital in the resource sector. The first is the often hysterical debate that has surrounded Australian immigration in the new millennium. In particular the failure of industry to advocate for an immigration program that will provide economic stimulus to a sluggish economy. The second is the topical discussion on energy pricing, with particular reference to the record high gas prices we saw emerge in early July this year.
As a Melbournian that now lives in Perth, returning home always makes me feel somewhat nostalgic. So I seek your indulgence to frame today’s conversation with a recent experience. During a recent stay, I decided to go for a walk through the area where I grew up.
The walk commenced in Burwood, in an area constructed in the years either side of the second world war. A landscape of simple weatherboard homes, that were originally constructed with corrugated iron roofs. Further east, I walked into an area constructed in late 1940s and 1950s. This was a period of increasing Australian prosperity fuelled by post war migration, and simple house designs made way to homes with higher levels of architectural interest. Weatherboards remained the dominant construction material for a recovering economy, but simple roof lines were replaced with gables and corrugated iron made way for terra cotta. Here I noticed timber garages that in their day would have stored Australian manufactured motor cars built by migrants that flocked to our cities in search of a better life.
Crossing Warragul Road I walked into an estate constructed in the early 1960s, and here a step change in Australian wealth was obvious. These homes were constructed in the great prosperity that followed reconstruction, and for the first time in many decades these homes were built of brick. It struck me that brick is a construction method that is both more expensive and energy intensive. Among these were the first homes built as new with access to a natural gas network, that made cooking easier and space heating more affordable for families.
Further along were increasingly large two storey houses built in the 1980s. Homes that took advantage of an abundance of building materials, and in a potent symbol of the average Australian’s purchasing power – these homes had multi car garages.
It would be easy for us to dismiss these changes in homes and improvements in our standards of living – or explain these changes as the result of passing time. But time changes nothing when it comes to our standard of living. The reasons our homes improved, and we enjoyed access to more affordable energy, was because of the choices we took as a nation.
It was the economic boost provided by post war reconstruction, mass immigration and expansion of our trading base that made it possible for Australians to afford better homes. At the same time Australia took some brave decisions in the construction of a new economy – through building a vibrant manufacturing sector, expanding the mineral export industry and the construction of both coal fired electricity generation and oil refining capacity near our major cities.
It was only through establishing these new industries and welcoming new Australians that we were able to pay for improved housing.
Today, our next economic transition is imminent and perhaps more than ever, we need to have a mature conversation about the most fundamental pillars of our economy. And what is more fundamental to a nation than who lives in it, and the ability of the community to access affordable and reliable energy.
Each of the step changes in Australian prosperity that were evident in my walk, corresponded to a wave of Australian migration. From Curtin’s ‘populate or perish’ mantra of the 1940s – to Fraser’s brave decision to welcome Vietnamese immigrants in the late 1970s – there was broad acceptance that to ensure growth across the continent we needed more people.
These decades were typified by the acknowledgement that welcoming new Australians actually made finding a good job easier, because of the economic stimulus of population growth.
Today there is no mistake that the two most economically vibrant regions of the Australian economy, are the two with the fastest growing populations. In stark contrast to the last decade – where Australian growth was driven by increasing exports of iron ore along with expansions of coal and LNG projects – today Australia’s economic growth is being driven by Melbourne and Sydney with their diverse economies. These two cities are home to more than half of the nation’s population growth – a trend that will catapult both cities to in excess of 8.5 million residents by 2060.
But as we strive for a more prosperous Australia, we must increase immigration levels and grow population in other areas of the nation. We must look to the economic potential of our regions and our regional centres. And this is where the mining and petroleum sectors can have a great contribution. As a leader in the resource sector, it is the ability of our industry to make a contribution outside the capitals that excites me most.
The legacy of commodity booms is a powerful tool in advocating for industrial expansion in the resource sector. It is evident in this hall, a legacy of the Victorian gold rush, and is tangible in towns like Bendigo, where mining complimented agriculture, and created a vibrant regional city with a sustainable population and excellent infrastructure. A legacy that continued long after mining declined.
When gold was discovered near Bendigo in 1851, the city was little more than a sheep station. Soon more than 40,000 miners flocked to the area, including large number of Asian and European immigrants. This period of the city’s history was typified by a desire to create a legacy for future generations, a movement that can still be witnessed in grand sandstone buildings – many of which have now been repurposed to house modern services.
Today the Bendigo economy is diverse, with construction, manufacturing and financial services – headlined by the national headquarters of the Bendigo Bank – contributing 40% of the city’s gross regional product. As with most diverse economies, we see sustained population growth. In fact the city is expected to grow by 38% in the next twenty years. Growth that will continue nearly 170 years after the discovery of gold.
The lesson from Bendigo is that from boom must come legacy – and legacy is only useful when it manifests itself through population growth, infrastructure and economic diversity.
Today’s challenge is to realise the potential of resource project investments in towns like Gladstone and Broome, to create a legacy for future generations. This will only happen when we grow the population with a mix of internal and international migration to the regions – creating opportunities for new Australians to find well paid jobs.
For investors in regional cities, the advantages are obvious. Access to a well-educated local workforce will make running our companies both simpler and more profitable. Local communities will benefit from a critical mass in population that will make investment in schools and hospitals irresistible for government. And sustainable population growth with its associated economic stimulus will help to silence the vocal critics of our industry.
But if we are ever see the benefits of population growth in our regions, we must first transcend the hysterical tone that now shrouds meaningful debate on immigration. Industry leaders, like so many of you in this room, need to both advocate for a balanced mix of skilled and humanitarian migration – then back up our advocacy with meaningful decisions that contribute to legacy.
These comments are not a call for more or less 457 visa intakes. Specialised tasks in highly technical sectors like ours will always require the temporary importation of specific skills. Nor are they a criticism of FIFO and DIDO arrangements – as individuals will always decide where they want to raise their families. But there are decisions we can all take to contribute to the north of Australia being dotted with prosperous resource towns like Bendigo.
One tangible example from my business comes from the QCLNG project on Curtis Island. Here we have seen an Australian project managed by a foreign multinational, utilising foreign capital, employing Australians – a situation that has been short sightedly demonised by some political leaders – having a positive impact on the local community.
The LNG plant on Curtis Island has three hundred Shell employees and permanent contractors, 98% of whom are locals. The deliberate strategy of the project was to recruit roles as local positions. If you were to visit the site today, you would see more than one hundred additional contractors on site completing maintenance tasks. Again the deliberate strategy was to procure services through contracting firms that employ local workers. This approach has a positive impact for my business, by reducing costs and safety risks – but applying an employment framework like this enables industry to make a meaningful contribution to the regions where it operates.
Resource sector workers are among the most valuable in our economy. And their spending on local services is a significant contribution to regional economies – put simply they bring capital raised in New York and London to the milk bars, shops and restaurants of the Darling Downs and the Pilbara.
But local resource employment is only half the equation. To further enrich these regions, they require economic diversity. And it is only through population growth that economic diversity will be delivered – unlocking the huge potential of Australia’s north.
Regions and cities that fail to grow beyond one dimensional resource reliant economies will always fail to withstand the cyclical nature of commodity prices – and in turn ebbs and flows in the prices of commodities become tsunamis that wipe out both job opportunities and living standards.
In most resource regions agriculture has long been the economic partner to the coal or oil industry. We see this in places like Gippsland, the Hunter Valley and the Surat Basin. In these economies the separate commodity cycle of agricultural produce acts a natural hedge to energy commodities.
In this context, it is puzzling that the gas industry is sometimes falsely represented as being at odds with agriculture. It is a perception that eulogises a 1950s image of “ma and pa” farmers that are suspicious of outsiders. In truth today’s agribusinesses utilise some of the most sophisticated science and technology deployed anywhere in the Australian economy, and welcome both water and revenue from gas projects as a hedge against weather and commodity cycles.
The primary producers that Shell coexists alongside are among the nation’s most entrepreneurial small and medium sized businesses, competing in a global market. Like the mining and petroleum sectors they face scrutiny over the sustainability of their activities from activists living in faraway cities, all while selling the food and fibres that feed and clothe millions of people throughout the region. Their activities show that despite the images perpetuated by urban activists – our regions are more than day spas and organic bakeries that are available to city dwellers when they seek some fresh air on a long weekend.
The contribution of coexistence was recognised by former minister Macfarlane, himself a prominent agripolitician who said “what we’ve seen in Queensland is an economic development of a region unsurpassed in my lifetime”. He went on to describe “the repopulation of towns that have been dying for last 50 years” with families moving back to the regions and their farms.
But the contributions of resources and agriculture can only take regional communities so far. The third pillar of regional economies, that must be fostered, is the services economy. But we will only see services grow when we are able to grow population – creating a market for service providers.
The challenge for our industry is to work with policy makers to grow Australia’s north. Here we have some the planet’s most desirable mineral deposits, lots of land and with some smart investing, lots of water. Further north there billions of people who are hungry for Australian minerals, Australian gas and Australian produce. But we will only unlock this potential, and its economic dividend, if we are able bypass populist protectionist voices on immigration policy, and grow our population.
But just as Bendigo’s growth was fuelled by an influx of Asian immigration in the 1850s, or nearby Geelong’s growth was fuelled by Italian and Greek migration in the 1950s – the north of our nation must welcome new Australians if it is to host the prosperous regional centres of the next century.
Of course emotive public dialogue is not limited to discussions on immigration. In recent months we have seen a lively debate about energy prices in the nation’s south east, following price spikes in both electricity and gas. In this case we have seen vested interests use the price spikes to peddle the virtues or evils of particular energy sources. Too often these have involved simplistic explanations of a complex set of market dynamics. And too often they have ignored the central issue – the price paid by families and businesses that rely on affordable energy.
The fact is that recent price spikes have been a symptom of a market in transition. Australia is undergoing a profound change in our energy system, driven by the necessary and irreversible trend toward a lower carbon future. But it would be wrong to suggest this situation was entirely a result of an increase in renewable energy – just as it would be equally disingenuous to blame the opening of Australia’s east coast gas market to international pricing through LNG exports. Here we have seen simplistic explanations peddled for political gain, at a high cost to both informed debate and consumer anxiety.
One thing that is not subject to debate is that during June and early July the domestic gas market experienced an uplift in wholesale spot prices across the east coast, a phenomenon that was not lost on either consumers or the media. So what actually happened?
There is no doubt the commencement of LNG exports from Curtis Island has shifted domestic pricing towards parity with LNG net back levels – that is the price of gas delivered to places like Tokyo Bay minus the costs of liquefaction and transport. But importantly this recent period of volatility has clearly demonstrated that any additional uplift, above the LNG netback price, is largely driven by domestic market factors.
In fact during early July spot prices approached $45 a gigajoule and this was driven by events in the domestic markets that coincided to lift gas demand above expected levels. These factors included prolonged colder weather across the eastern states, intermittent renewable production in South Australia and the unexpected restart of gas-fired electricity generation – all timed to coincide with the ramp-up of the second train at GLNG.
In this instance we observed the market responding to price through the movement in gas from the north to the south. In fact Queensland sustained gas exports to southern states despite having five LNG trains online. But in the longer-term this volatility signals that south eastern Australia needs new supply options to enter the market.
In early June, before this recent price spike, I used an address at the annual APPEA conference to cynically raise the idea of importing LNG to Sydney and Melbourne. The premise was that if we continue to ignore science and basic economic signals, like price volatility, and persist with moratoriums on the development of onshore gas – importing LNG from Curtis Island or Papua New Guinea may be the only way to meet market demand for gas in Victoria and New South Wales. I had hoped that this suggestion would trigger a more sensible tone in public dialogue, as state governments realised that access to additional gas resources was in the best interests of their constituencies. Not two weeks later we saw prices spike to historic levels, impacting consumers, and a deafening silence from state governments and state oppositions in Victoria and New South Wales.
As an industry we should all urge state leaders in Spring Street and Macquarie Street to address the energy challenges that face consumers if we continue to ignore the scientific data that unconventional gas development can beneficially coexist with agriculture, and the economic data that without additional gas production spikes in energy prices will continue to hurt consumers and manufacturers.
Shell believes that we need to move to a net zero emission world this century. To achieve this renewables must play an increasingly critical role in an increasingly electrified energy system. So much so that wind and solar could grow to supply 40% of primary energy demand, up from around 1% today. But we must acknowledge that renewables are intermittent. Until we have some enormous step changes in storage technology we will only get so far with renewables in the energy mix. They need a backup, and gas is the most logical energy source to do that. Of course the challenge is not just about managing spikes in energy prices. It is a cold hard reality that as we move from brown coal generated electricity to renewables – base load electricity will move from circa $30 to $40 a megawatt hour to $80 to $100.
All of this points to the fact that gas has a fundamental part to play in the transition and in the end-game. Yet in Victoria and New South Wales, where existing gas fields will struggle to meet growing demand, we have a complete failure to transcend town hall politics and scare campaigns from activists in the coffee shops of Fitzroy and Balmain – to have an informed debate on onshore gas development.
There will need to be billions of dollars invested to change the energy system, and philanthropy or government subsidies are only going to achieve a fraction of this. We need an investible environment and that means good policy with bipartisan support.
Beyond access to onshore gas, which I believe is one of the most fundamental economic challenges facing south east Australia, there are other areas of reform that can help alleviate the price spikes and keep cost increases as low as possible.
Australia has good energy market regulators that have done thorough forensic reviews. Shell calls on governments to act to implement the reforms proposed by the ACCC and the Australian Energy Market Commission, including their call to lift the moratorium on onshore gas development. An immediate step to assist with the north south flow of gas molecules to their highest value would be the introduction of short-term capacity auctions that will address impediments and enable gas to flow to customers that need it most. At present barriers to market entry are limiting the level of potential trade, particularly from Queensland to southern markets.
For this reason Shell supports the introduction of a day-ahead capacity auction to be progressed as a matter of priority. On a longer timeframe the best interests of Australian consumers will be served by a road map of stable regulatory settings that encourage investment in new pipelines to minimise physical congestion as it emerges. I encourage all governments to use the upcoming COAG Energy Council meeting to act by implementing these important market reforms.
It would be remiss of me close this topic without addressing persistent calls to revert to protectionism in the Australian economy by, for example, introducing a domestic gas reservation policy. While price spikes often promote protectionist suggestions, we do well to remember the 25 years of continuous economic growth that have delivered unprecedented increases in Australian living standards were the result of opening up our economy and increasing trade with the rest of the world.
While we need to acknowledge the rising cost of gas, like that of electricity and petrol, has put pressure on Australian families – reverting to a protectionist mindset will only make it worse. The result would be less investment, and that in turn would result in higher energy prices, less reliability and fewer jobs for Australian workers.
Like its competitors, Shell derives its income from selling gas, and the company is seeking to grow its business in Australia both by supplying domestic customers and exporting gas. Any suggestion that we would provide preference to international customers while ignoring local demand is quite simply nonsensical.
Through our projects in Queensland, none of which would have been developed without the scale associated with LNG exports, Shell is part of the domestic market. And our calls for an improvement in pipeline access and infrastructure could rightly be interpreted as an intention to grow our domestic business.
While exporting gas does have an impact on pricing, we must remember that Australia has more than enough gas in the ground. Enough gas to meet local demand and also support an export industry. Like wool, beef, iron ore and coal – we can all enjoy the benefits of Australian gas while also exporting it across the globe, and in doing so creating additional export income for the nation.
If the Australian community is to be successful in addressing the challenges I have articulated here today, the resource industry must be a strong voice in public debate. Leaders in our industry must advocate for industrial settings that allow our businesses to grow – delivering value to shareholders, jobs for regional communities and improved living standards for the nation.
The challenge for us is to confront the detractors of our place in a modern Australia by participating in a constructive debate. The times have changed, and the recent federal election showed that more than ever in recent memory, a rift has emerged in the public’s trust of the corporate sector and its motives. We saw this lack of trust manifest itself in the language used during debate around corporate tax. We saw it reflected in the language used by some political leaders to describe big business, and we saw it in the campaign materials distributed by special interest groups at polling booths on election day.
But rather than withdraw, and take our conversations to the back room, this is when we need to stand up publically and advocate for a more open and competitive Australia.
Division of opinion is the genesis of debate, and debate is the genesis of good public policy. I challenge all of us to be part of that debate, so the next generation of Australians can enjoy the same opportunities that we were given.