Address to the AFR National Energy Summit
Oct. 09, 2017
By Zoe Yujnovich, Country Chair, Shell Australia
- E&OE -
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.
I would also like to acknowledge government representatives, event organisers, ladies and gentlemen.
Can I congratulate the organisers of today’s event on their fortuitous timing.
As we have all witnessed, recent weeks have seen the Australian energy system under intense of scrutiny.
Both the gas and electricity sectors have been the focus of government, front page stories and the general public.
Today I want to outline why I believe Australia needs both a thriving export industry and well-functioning east coast domestic gas market.
And, fundamentally, why Australia cannot have one without the other.
Among the various narratives that has arisen in the current debate is one that I have found particularly concerning - the re-emergence of protectionist voices and anti-trade sentiment.
In the twenty-sixth year of continuous economic growth in the Australian economy, today we meet in the location of one of the major drivers of Australian prosperity.
Sydney, like most other Australian colonies, was built on exports.
As a port city, Sydney was the international gateway for the agricultural commodities produced on its out skirts.
It was a legacy built from the inception of the colonies that would eventually join to create our commonwealth.
From the wheat and wool produced in New South Wales, the gold exported from the soils of Ballarat and Bendigo, sugar from the Queensland tropics through to coal from the Hunter and iron ore from the Pilbara - this is a nation that owes its prosperity to exports.
Today this legacy continues to grow and emerge, but there is one constant - it is the willingness of Australian industry to look abroad to create and build new markets that is the key to our national prosperity.
In recent years our export revenues have increasingly come from new export industries.
Professional services and education exports dominate the economies of Melbourne and Sydney, wines and produce destined for restaurants abroad have become a driver of the South Australian and Tasmanian economies, and across the nation’s north technical innovation has unlocked the export potential of Australian gas.
The creation of a new and lucrative export industry, that like agriculture and mining, is a great achievement which will create well paid jobs outside our already prosperous capital cities. Yet there are voices calling to cruel its growth.
Make no mistake - blame in part lies at the feet of the industry itself.
As I have said repeatedly in recent months - unless the Australian people have access to a reliable and affordable supply of gas, there will be no social license for an LNG export industry.
But blaming the LNG industry alone for recent issues with the supply and price of gas is in itself a selective and intentionally misleading reading of the gas market.
After a decade of attracting huge amounts of capital from investors in Europe, Asia and the US to build an unprecedented amount of liquefaction capacity, the industry now faces intense focus on its trading activities at a time when ongoing investment is needed to continue the upstream investment required to both supply local customers and keep those trains full.
At Shell we understand that unless we are seen as a force for good we won’t have continued support from the resource holder - or the Australian government on behalf of the Australian people.
And we also understand that public support is important if we are going to see regulatory settings that encourage ongoing investment in the gas industry - something we have seen in Queensland over the last decade.
What should not be forgotten is where we have regulatory settings, like those in Queensland, is the impact they can have on a state economy and on the lives of people living in its communities.
During construction the Queensland LNG industry created more than 40,000 jobs.
And now that the industry is in a steady production phase still employs 13,000 people.
These are not capital city jobs in Sydney and Melbourne, but jobs that act as an economic stimulus in regional towns like Miles and Chinchilla - where previously agricultural commodity indicators were the only accurate gauge of community prosperity.
In the case of Chinchilla, where Shell’s activities alone over the next quarter of century will add $1.2 billion to the local economy, our spending will act as a powerful hedge in what were previously agricultural dependent local economies.
When Shell’s investments are extrapolated across the Queensland economy, the company’s capital will add $112 billion to gross state product by 2033.
That is real money that will change the opportunities available to young Australians.
Yet it in Victoria and New South Wales this type of economic stimulus remains unwelcomed.
Although, as Minister Frydenberg mentioned this morning there is a glimmer of hope in Victoria with the welcomed announcement from the Victorian opposition that they would lift the moratorium on onshore conventional gas exploration and production.
Of course the irony with onshore gas bans is that the regional jobs the LNG industry is creating in Queensland are positions that share skills with the manufacturing industries.
At a time when the industry is needing to advocate more than ever for its own growth opportunities it has been concerning that two claims have emerged, which in some quarters have become gospel.
The first is that LNG companies have a preference for exports over domestic customers.
In the case of Shell’s QGC project this is quite simply not true - more on this in a moment.
The second is the claim that Japanese customers are paying less for Australian gas than Aussies.
This assertion ignores the basic truth that no successful business anywhere in the world has flourished by ignoring a large percentage of its potential customer base.
Gas producers in Queensland are businesses that need to deliver a return to both the resource holder and the shareholder.
For both of these groups it is important that gas is sent to its highest value - whether that is exported with the added costs such as liquefaction, or sold locally at a market rate, netted back from export value.
Ignoring local customers at the expense of exports would have a detrimental impact on the community’s support of a gas industry, in the same way as a steak shortage would erode support for the export of beef.
It is for this reason that Shell’s QGC project took the much publicised decision last winter to divert one cargo in eight from Curtis Island to the domestic market in the months of July and August 2016.
The decision for Shell was a simple one - market tightness provided a clear signal through price, and the company understood shortages would lead to an erosion of public support.
These two factors combined to provide a clear signal.
Since the squeeze of last winter, Shell has continued to make sure its activities in Queensland were socially sustainable.
The company has continued to divert gas into the local market, and since the meeting with the Prime Minister in March this year has not sold a single LNG cargo on the spot market.
All volumes in excess of the contracted levels at QCLNG have been sold in Australia to local customers.
In order to facilitate this, Shell has established a trading business in Melbourne - Shell Energy Australia - that is selling predominantly Queensland gas to domestic wholesale customers in Victoria and New South Wales.
This business will introduce much needed competition into the domestic wholesale market, and should be viewed as a clear signal to the market that Shell intends to play a vital role between gas producers and wholesale customers for many years to come.
Hardly the actions of a business that wants to simply export gas to Asia while ignoring the needs of local customers.
This new business will also help Australia develop a more robust gas market for the modern economy - something that could be defined by a manufacturer receiving multiple competitive offers when they seek a new supply contract.
At the same time as that debate has raged, we have heard various assertions that have been made about pricing to domestic customers.
It is quite clear the industry has done a poor job of explaining pricing to its most important stakeholders, the Australian people.
Gas pricing at a wholesale level has been opaque at best, and often confused by complex contractual issues like volumes, flexibility, shape, contract length and netback.
Most Australians, including many that work at gas companies, find terms such as BCF, petajoule and terajoule incomprehensible.
Yet daily commentary in the news is dominated by these terms, a situation that has confused all but the most dedicated of gas industry economists.
The result is a total erosion of trust around pricing, which has proven fertile ground for the industry’s detractors.
Herein lie the origins of the myth around exported gas being cheaper than gas sold locally.
To manufacture this myth, detractors of the industry took the simplistic and intentionally misleading approach of comparing the price for Japanese utilities with long term contracts paid by local manufacturers.
Ignoring the fact the Japanese utility could buy fifty times greater volumes than the largest of Australia’s manufacturers, this price does not include the costs passed on to similar sized manufacturing customers in Japan - the figure that would give us a like for like comparison.
In this example the Japanese utility would then charge the manufacturer for re-gas of the LNG, storage, transport and a margin. The result is a price for Australian gas that is always higher than a comparable deal locally, except for a very few extraordinary circumstances.
Allow me to be absolutely clear on this point - Australian gas is never cheaper for manufacturers in Japan than it is for Australian factories.
To suggest otherwise is a classic example of a disingenuous comparison, or shenanigan, designed to diminish public support for an export industry.
The fact of the matter is the international LNG market is very different to the Australian domestic gas market.
On one hand the international market is linked to the value of crude oil.
The international gas price - like those of iron ore, wheat or wool - fluctuates wildly.
In 2013 when the Brent barrel was in the $100 USD range, customers in Japan for example were paying $25 AUD per gigajoule.
Today with oil trading between $50 and $60 USD the figure is just north of $17 AUD per gigajoule.
The local market on the other hand is linked to a very different set of dynamics.
Here we see more seasonal demand for gas.
The dynamic is linked to local factors - and in recent times the most impactful has been the lack of development opportunity in New South Wales and Victoria.
So just as the price of LNG in 2013 was front page news in Japan because of the impact on cost of living, today we have a much narrower gap between the two prices.
Analysis by independent analyst Energy Edge of the gas market from January 2016 sets a range for LNG netback, based on either long term or spot market indicators.
The analysis clearly shows that for a vast majority of this time the Queensland domestic gas price per gigajoule has been bounded by the netback range.
Based on this independent analysis, and in simple terms, local gas prices were well below those paid by importers of Australian gas abroad for 88 of the 90 weeks since January 2016.
By now the same price signal that led Shell to establish a new trading business in Melbourne selling mainly Queensland gas, should have provided an incentive to smaller nimble companies to drill new wells in the south east.
But populism from state political parties has seen opportunities, like local production, dry up.
In this context, and counter to popular commentary, it was some of the LNG exporters that came to the rescue of the market.
In the case of my own business, we have grown our domestic contributions from 20 petajoules a year from QGC before its LNG export plant was sanctioned, to around 100 petajoules a year at current forecasts.
Today QGC supplies around 40 per cent of Queensland’s gas, and 14 per cent of all the gas sold on the east coast domestic market.
Make no mistake, had it not been for the economics, particularly the scale, of the LNG business QGC would have struggled to grow beyond the 20 petajoule range.
And if you are not willing to take my word for this, let’s look at Shell’s other Queensland coal seam gas business the Arrow Energy joint venture with CNPC.
Here we have a business that operates on very similar tenure, in the same market with a common owner.
Without the scale associated with LNG, Shell and its partner have been unable to find an investible case to fully develop Arrow’s tenure.
The result is that Arrow produces less than half the domestic gas that QGC is able deliver to the marketplace, and it has been unable to meaningfully grow its production for almost a decade.
Obviously this is a situation we continue to work on, but the evidence is quite clear. By building an export facing business we have been able to sell far more gas on the domestic market at the same time.
If I could close on an observation from recent meetings in Canberra. From an industry perspective we appreciated the constructive dialogue with the government.
It is the kind of dialogue - devoid of posturing - that will continue to see Australia viewed as a world class investment destination by job creating capital.
As a business that has operated in Australia for more than a century, Shell stands behind that commitment to deliver gas to local customers.
Because delivering for customers is nothing new to us.
We started in Australia back in 1901 with a simple value proposition - to light Australian homes and streets with competitively priced kerosene.
We powered Australian transport for a century winning customers and growing business every year.
And when Australian’s looked to grow a new industry on the north west shelf in the 1970s, it was Shell that built the faith of customers in Asia about a project so remote it was called the “world’s loneliest gas”.
Only after we had convinced these new customers of our vision for the shelf was the JV able to attract the capital needed to unlock its potential.
Today we look forward to this new challenge - knowing that we have succeeded before.