Energy Conference 1

I would like to begin by acknowledging the traditional custodians of the land on which we meet –the Gadigal of the Eora Nation – and pay my respects to their elders both past, present and future.

Distinguished guests,

Ladies and Gentlemen,

Let me start by saying, as I try to summarise the challenging discussions from the room this morning, there is no simple answer.

And can I add, there is no single answer.

What am I talking about?

Energy.

The reality of the situation Australia and the world finds itself in today is that there is no simple way forward to meet the world’s growing demand for more energy whilst delivering on the ambitions to protect the climate and environment for future generations to enjoy.

At Shell, we spend a lot of our time thinking about this.

It occupies our strategic thinking, our finances and our scenario development.

If it were simple, or straightforward, we and others in the energy sector would be accomplishing it already and the newspapers would be full of other stories of interest.

You see, this tension between energy demand and supply drives the tensions between

  • development and conservation; and
  • consumption and emissions.

And it’s not just confined within our borders: it drives tensions between nationalism and globalisation, and tensions between jobs in Australia and emissions reduction abroad.

It drives the tensions between governments and oppositions, countries, industry sectors, communities, neighbours and families.

And clearly as we heard from this morning’s debate, it drives tensions in the Australian domestic gas market.

Right at the outset, I want to say, in the clearest possible terms, I know how important it is for commercial and industrial businesses in this country to have competitively priced energy supply.

Especially here on the east coast, the traditional heartland of our manufacturing companies.

We continue to support the Australian Government’s Domestic Gas Security Mechanism and I can reaffirm Shell Australia’s commitment to fulfill our contractual commitments to existing customers and offer any further gas we have as a first priority to the domestic market.

That’s why we signed the Heads of Agreement, because it ensures there will not be a supply shortfall in the domestic market.

It has always been our view that we cannot expect to have a thriving export industry unless there is a well-functioning domestic market.

A functioning domestic gas market is clearly not just good for Australia, it is good for business.

We will continue to offer enough gas into the domestic market at competitive pricing.

Our energy trading business, Shell Energy Australia, is marketing all gas supplies we have, after meeting our long-term LNG commitments, putting competitive offers to the local market.

Shell Energy Australia is making QGC gas available to the southern gas markets on a fixed price basis in line with our customer requirements, so Shell will manage the commodity price exposure to their contracts.

Let’s remember, this domestic supply is only available due to the LNG export projects that created the scale to make the coal seam gas resources viable to develop.

Energy Conference 2

Indeed, we will continue to be a net contributor to the domestic market and continue to create an increased level of competition on gas supplies – as noted by the ACCC.

Beyond the supply dimension, there is of course the matter of pricing.

For decades Australian consumers, both commercial and retail, became used to the cheap gas that was produced from oil fields of Australia’s oldest basins.

This cheap associated gas was viewed by many players in the Australian economy as the basis for investment in gas dependent industries.

But like so many good things in life, that cheap gas is indeed gone.

Coal seam gas, which is now the nation’s largest source of gas supply, is both more expensive than traditional gas development and is produced without any oil to help offset costs.

At the same time the cost of producing gas from traditional basins has also escalated.

Indeed, new supply from the Gippsland and Cooper basins is often deeper, smaller and contains less oil than the fields developed in years past. The result is a far higher marginal cost.

And since the advent of the east coast LNG sector, like every other commodity Australia produces, it is impacted by international price markers.

Grappling with internationally linked markets is not a new phenomenon for Australia.

In the years since successive governments – starting with Whitlam and Fraser, through to Hawke and Howard – have led to progress to reduce barriers to international trade, Australian customers have paid an export parity price for beef, wheat, coal and milk.

Rather than being something to resent, this liberalisation is the basis for our modern and prosperous Australia.

It has made us wealthier as a nation.

It has increased our standard of living.

And it has made our industries more competitive globally.

Perhaps the best example of this comes from the utilisation of pastoral land that surround our capital cities.

When farmers in regions like the Mornington Peninsula were protected by trade barriers, much of the land was used for lower value pursuits like growing onions and potatoes.

Opening our economy to international competition forced the market to innovate on high value land, and today this land is home to vineyards and olive groves.

This higher value land use also spurred the next wave of Australian manufacturing.

Today the wines and olive oils made in these regions find their way to the restaurants and dining rooms of Europe and Asia.

These are the success stories of markets without intervention.

But at the same time, we need to remember the most basic rule of business – any investment must provide a return.

Where this fails, investment dries up.

Herein lies the danger of any intervention either based on price, or with the ambition to reduce price.

If the realised price of gas does not provide an adequate return, investment in gas development will disappear.

And the perverse will occur.

The price of gas will in fact increase because of reduced supply.

Let me give you a sense of our Australian gas investment (on the east coast alone).

We have invested tens of billions of dollars in QGC, and billions of dollars in Arrow.

 

 

Energy Conference 3

Over two years we are investing 1.7 billion dollars in our QGC infill project, Project Charlie, which is currently underway, that consists of about three to four hundred more wells. Creating, along the way, about 1600 jobs in construction in this project alone, and more to come in operation.

So…and I’m going to take a deep breath here…and please stay with me…

…we have invested substantial sums of money…

…we have abided to the spirit and the letter of the Heads of Agreement we signed with the Federal Government over the ADGSM…

…the price of gas is pegging back now to more closely reflect LNG netback levels…

…and we have done everything we can for the domestic market.

Yet we observe that several C&I customers who are continuing to agitate for government intervention.

Indeed, the term-sheet that accompanies their supply negotiations these days seems to have an inked-in tactic to use Government pressure to leverage a better deal!

It’s worth taking pause to consider what’s actually occurring commercially in the market.

We have already sold significant volumes to customers in Victoria, South Australia and NSW domestic markets and we continue to do so.

For example, in May, the Shell Energy Australia team executed transactions to meet gas supply requirements for two of the east coast’s largest commercial and industrial gas consumers.

The deals will deliver up to 7.6 petajoules of gas across 2020 and 2021 utilising transport and hedging services provided by Shell Energy Australia to meet domestic gas requirements at a time of tight supply outlook.

And on a short-term basis, just last Friday Shell Energy Australia was approached by a local manufacturer seeking to meet a supply short fall of around 400 terajoules.

A deal was signed on Monday that saw the gas secured for early July. A good example of how a large-scale LNG producer was able to respond quickly to customer requests, ensuring a well-functioning market.

We have competed for other large deals, and while we might not have been successful, we note that multi-year deals with our competitors have been struck.

So even if we have missed out on some contracts, it means competition is giving the customer choice and ensuring we are sharpening our pencil to ensure the market is competitively priced.

It shows that deals are being done.

The market is functioning. Australian Energy Market Operator reports indicate there will be no domestic shortfall.

In fact, there is a case to be made it’s working almost too well in the favour of some manufacturers who still hold legacy contracts for gas supply well below market rates; contracts that have cost us dearly for years.

We didn’t go to Government and ask for them to subsidise us.

It is not our style to approach government to ‘save’ us: we understand the sanctity of contracts but we still find some are out there lobbying against us.

I’m pleased to say that some industry observers have spotted the gamesmanship being played here and called it out.

While I recognise every effort to leverage benefit for one’s own business, it should not be for suppliers in one industry to cross-subsidise buyers in another industry.

Energy included.

An alternative procurement strategy could be backward integration – but I don’t get many calls from large C&I customers wanting to invest in upstream projects to participate across the value chain.

I suspect that’s because they know the truth of the matter that the ‘risk-versus-return’ profile of coal seam gas, and capital intensity set against price and production volatility, may not be to their liking.

That’s okay because we see it as our core business – but don’t ask for subsidies.

We at Shell are doing what we do best: we are striving to maximise the efficiency of our operations.

For example, we are maximising use of QGC infrastructure through infill projects.

New wells continue to be developed.

Shell is grateful of the encouragement it has received from state and federal governments to develop this resource in Queensland.

Though I would say suddenly hiking royalties on resource projects will not help bring down the price of gas or stimulate investment.

Moreover, we require a stable regulatory environment for our multi-decade, multi-billion-dollar investments.

Beyond this, we would look to the mood of the people, as evidenced in the results of the federal election, to encourage other states to lift their bans and moratoria on gas developments.

Because basic economics dictate that the cheapest gas will be the gas developed closest to where it is consumed.

Yet where gas is needed most, in our manufacturing heartlands, state governments have put bans on new gas exploration and development project onshore, fearing voter backlash.

A colleague recently described going for a morning walk in a Melbourne suburb, and how the hiss of gas meters feeding ducted heating units was obvious with each property they passed.

In our coldest mainland capital, where gas reticulation is the highest in the nation and among the highest in the world, gas prices are applying pressure to families.

The task is made all the harder at a time when wages have stagnated and economists warn of headwinds on the horizon.

Yet this is where we find vocal opposition to opening any onshore gas basin in Victoria – conventional or otherwise.

There we see people who oppose the very development that could help reduce their household costs.

And here in New South Wales, where we are constantly reminded that electricity customers look more favourably on renewable generation we see a similar tension.

Wind farms face concerted local opposition, like the proposed 54-turbine Jupiter Wind Farm near Tarago that was withdrawn by the developer last year after it received 400 objections to the NSW Department of Planning and Environment and opposition from two local councils.

It seems to me society only really functions properly when we recognise our mutual obligations.

Business has an obligation to propose developments that align with the aspirations and needs of the community.

Communities have an obligation to consider the effect of their objections beyond their immediate footprint.

And governments have an obligation to resolve impasses when consensus or compromise can’t be reached.

For companies developing resource projects, maintaining a social licence to operate is imperative.

We don’t take this for granted.

We ensure the community, especially the ones in the vicinity of our operations, benefit directly from our presence.

We offer highly skilled, well-paid jobs with a career structure in areas of Australia that traditionally struggle to find meaningful futures for local people, especially young and Indigenous people.

We offer training opportunities, apprenticeships, traineeships, full and part-time employment and contracting opportunities.

We sponsor local social and sporting clubs.

We promote science education in regional Australia through partnerships with science organisations and educators.

We offer opportunities for local content in our projects through contracting and procurement.

Our presence is a catalyst for a vibrant town life in the regions. The effects are real.

It’s typical to see the customers at the tables of local bakeries, cafes, restaurants, hotels and motels wearing proudly the uniforms of our company and contractors.

Energy Conference 4

You can see the economic benefits flow on to family businesses that keep towns buzzing.

Yet for all of that, tensions in the energy debate are clearly real.

We know we need more energy to meet the demands of a growing world population.

And a growing urbanised world population, which uses more energy per person, at that.

And we need more energy to lift the billions of people out of poverty around the world so that they, too, can access basic resources such as electric lights, phones and the internet.

So this is the bind.

We all want blue skies, clean water and fresh air.

We all want the benefits that the energy system brings: healthcare, education, transportation, communications, and basics like lighting, heating, cooling and refrigeration.

And we all want meaningful work to earn a living from an industry that is vital to supplying jobs in the community and driving the economy.

Yet there are sections of the community that are clearly disengaged from democracy yet railing against the energy business.

Most of all, we need peace between the warring factions, whether it be on climate change or other debates.

We need governments around the world to encourage dialogue and devise strategies to deal with the issue.

The more we can work together, to harness the human innovation within our organisations, to come up with feasible ways to tackle emissions while supplying affordable energy to people.

And finally if we are to sustain our civilisation, let’s be civilised about it.

We need to have respectful and meaningful conversations.

Conversations like the ones you will have at this function you’re at today, where we can deeply understand dynamics at play.

We may have to accept there is no perfect answer to how we grow the energy system to cater for today’s and tomorrow’s populace.

But at least we should accept, and expect, a collective willingness to find the best way we can to repair the past and make the future the best it can be for all of us.

Thank you.

more in media

Contact us

Via this page you can find contact details for Shell Australia.