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Issues relating to the Fuel and Energy Industry

CHAIR —Welcome. I invite you to make a brief opening statement and then the committee will ask you some questions.

Mr Canion —Thank you for the opportunity to speak today. CCI would like to note that our written submission, provided to the committee on 28 August 2008, continues to represent our views on many of the matters under consideration. Furthermore, CCI and I appeared before the committee on 17 November 2008—

Senator BUSHBY —In relation to the CPRS?

Mr Canion —That is correct, yes. The comments we made at that hearing remain our policy positions. On 16 June 2009, I understand, your terms of reference were expanded and I note that the key areas for focus today relate to government regulation, taxation of fuel and energy products, and the role that alternative energy may play. CCI understands that in WA the domestic energy market is quite tight in that the majority of supply is tied to bilateral contracts and there is little surplus supply available. Indeed, for investment in new supply to be undertaken it often requires a preceding contract to underwrite the new development. This can create possible domestic supply constraints. WA also has a significant export market for petroleum resources. In 2006-07, the state Department of Industry and Resources, as it was known then, put the value of this state’s exported petroleum products around $10.8 billion and clearly this sector represents a key economic driver for WA and the entire nation. It is critical that structures are established that ensure continued private sector participation, and that the petroleum sector is not discouraged.

Looking forward, it is highly likely that Australia, and possibly our global trading partners, will be focusing more clearly on operating within a carbon constrained economy. As we have informed the committee previously, we support the introduction of an emissions trading scheme as a means of managing the issue in the future. Carbon constraints—and government policy and regulation in response to them—are likely to have significant impacts on the fuel and energy sector. They may create new commercial opportunities for alternative energy sources and CCI supports the development of new energy streams where they would result in a positive net benefit to the market. Diversity in growth of energy supply is critical to the continued growth of WA and Australia. However, it is important to note that any new fuel source or energy supply is also likely to create new challenges to overcome. Renewable energy, for instance, may create transmission and stability issues for the electricity network and require significant capital investment to make it work. Biofuels, for the transport sector, can possibly compete and create a two-faced economy and can have perverse effects on the price of food commodities. Those are just a couple of examples.

CCI also continues to promote the need for the WA government to develop a state energy policy for Western Australia. We believe this would assist the private sector in terms of understanding the government’s long-term objectives and policy settings regarding energy exploration, production, transmission and taxation. The private sector seeks policy certainty to minimise its risk profile. CCI hopes that the work of this committee will encourage the WA government to consider the development of an energy policy for WA.

CHAIR —Has the chamber any views about what the Australian government should do about ensuring energy security moving forward?

Mr Canion —Yes. CCI’s predominant focus, as a WA based organisation, has been on the state, but we note that the government has produced an energy security white paper recently, or at least the beginnings of a discussion paper that will lead to that. We would support that—we think it is a good move.

CHAIR —Perhaps I can clarify my question. Western Australia is an energy island. Obviously any national consideration of an energy policy framework moving forward would have to recognise the particular circumstances in Western Australia and, as such, perhaps CCI in WA has got a role that other state chambers would not have to the same degree in representing its members’ interests in that context. Are you satisfied that there is a sufficient focus on the particular circumstances in Western Australia?

Mr Canion —We tend to always feel like we are somewhat forgotten, being so far away and remote from the decision makers in the eastern states. As I mentioned, with the value of the petroleum products, $10.8 billion a couple of years ago, and, looking forward, potential new projects coming on stream—obviously Gorgon being the massive one, and Wheatstone going forward as well—there are a number of investments of national importance that will be occurring in Western Australia. We think it is critical that those are viewed with the significance that they deserve. They will be contributing significant value not just to the WA economy but that will flow through to the national accounts as well. What we would be concerned about is that a lot of the value is extracted from WA. We would seek a fair and equitable proportion to be put back into our economy as the originator of the resource.

CHAIR —So, at this stage, you do not necessarily see that that is happening spontaneously?

Mr Canion —I think there is still some work to be done. Any project of that scale has to deal with state issues and it has to deal with federal issues, and there is sometimes some overlap and some inefficiencies that are created from that. That creates confusion.

CHAIR —Are there any issues from a state and federal regulatory taxation framework point of view that you think have a particular impact in Western Australia compared to perhaps the other states, given our different structure of the energy market?

Mr Canion —Yes. Obviously, it depends on where the resource is located whether you fall under the state royalty scheme or in national waters and so on.

CHAIR —That is in terms of production and everything. Is there anything that you think ought to be changed in the state or federal regulatory taxation framework to ensure that we have—we have energy security nationally—energy security in Western Australia?

Mr Canion —CCI has a policy principle that we seek simplification of the tax structures. We look forward to seeing the results of the Henry review to see whether there are any outcomes that point us in a direction there. But overall we would be looking for simplification. If that means that the federal government can provide a single overarching solution and it creates efficiencies for business, that is certainly something we would be interested in. But if it results in poorer outcomes for WA then we would have obvious concerns about that as well. I am not sure if I am still answering your question very well there.

CHAIR —Perhaps you might take that on notice and see if there is anything you can add on reflection. It might be a bit of an unfair question without proper notice.

Senator HUTCHINS —In your submission you say that the chamber does not support the policy of reservation of gas reserves for domestic use. Would you outline to the committee why that is.

—CCI obviously supports market based outcomes for issues such as these. We have a view that where government imposes regulation on top of industry it reduces the efficiency of the market and also potentially distorts the price signals within the marketplace. I think we are at a point now in WA where we have perhaps been the beneficiary of cheap energy prices for too long, and now those are being raised gradually to cost reflectivity, and that is creating significant concern through the economy and the community. Our concern is that putting in a reservation policy such as that only encourages non-market based pricing, so you are just creating a difficult situation for the future. Also, it means that the private sector are less likely to seek to invest in and undertake new projects because they know that for a certain percentage of their product they may not be getting market value prices or be able to sell at the best price.

Senator HUTCHINS —Are we looking at part of the opposition being non-market based pricing—that is, the government still has control over the price of the unit available to households?

Mr Canion —That is right. Obviously we think an open economy is the best and most efficient economy. By hiving off a percentage of that you are still creating a protectionist environment for a certain percentage of the product whereas, if you are able to have it at open prices, if the domestic market seeks that product then people will pay the price and it will still be delivered.

Senator McEWEN —It did not work in the finance sector.

Senator BUSHBY —In your submission I note that you advocate the reduction in the overall tax impost on petroleum products. I presume that that is to enable business to better compete and get on, and basically to help foster growth in the economy. We heard from the previous witness, who is still here at the back of the room, a contrary view that, for the purposes of basically maintaining energy security in the longer term, we should be looking at actually increasing the taxes on petroleum products and that would actually have a long-term benefit for Australia. What do you think, from the perspective of the chamber, is more important? Is it the access to cheaper energy for longer, which I guess is really what the previous witness was arguing, or what you can do with the economy by having cheaper energy now?

Mr Canion —I guess our concern now would be if the government imposes a further tax impost to constrict demand. Without the rest of the world’s economies doing the same we would be handicapping ourselves. That would create a more difficult situation for Australia, which is globally not a huge energy consumer, and so reduce our competitive ability on the global stage. Getting back to my earlier point, we think that the market will find the price balance that matches supply and demand. If supplies are limited and become more limited in the future then the price will reflect that anyway. You do not need a government with imperfect information setting those parameters.

Senator BUSHBY —The price will reflect that but obviously it will come with other consequences. If, as is predicted by peak oil organisations, we do end up with the situation where production does not match demand and that occurs in the next decade or sooner then how will the market deal with that if the price does go up significantly, and what impact will it have on business?

Mr Canion —Obviously that would change the circumstances for both supply and demand sides. Initially you would see prices begin to rise and you would expect demand-side management principles to take place. Consumers would look to reduce their consumption and save costs at their end. On the supply side it would create opportunities for projects that would otherwise be uneconomic to go forward, whether that is alternative energy sources, renewables—

Senator BUSHBY —Maybe LNG being used more widely in trucks or something like that.

Mr Canion —Yes, there is a wide range. It depends on the scale and the speed of the price changes but obviously that would be one. You need a certain price to be met to be able to make those projects achievable. We think the market could respond.

Senator McEWEN —Mr Canion, I am interested in what your members are doing about preparing themselves for fuel constraints in the future, I suppose, and I am assuming they acknowledge that fuel and energy sources will be either more expensive, less available or both. Can you give us any examples of what the people that you represent are actually doing to prepare for this future—or are they waiting for the market signals to force them to do something?

Mr Canion —In the last 12 months, probably, fuel has been less of a concern than the global economic situation. I preface my answer with that. I think overall, yes, there is an acknowledgment that fuel is going to be more expensive going forward. We are seeing that now in WA with both electricity and gas prices increasing. It is a necessary increase but nonetheless it is impacting businesses. What we are looking at, as I mentioned before, is that demand side management is becoming a lot more prevalent. Companies are just becoming more intelligent about the way they do their business. They are consolidating operations. They are assessing whether there is a wastage through their processes and so on. That goes right down to the low level, with turning off your computer at night, to high-level supply chain processes being re-engineered. I guess I cannot give any exact examples from our members at this stage. I would have to go away and think about that to protect those individuals involved.

Senator HUTCHINS —But, say, in transport, you have the transport companies now doing a lot more training of their drivers to drive more efficiently so they do not consume as much fuel over the same distance, and to do things like, say, not go as fast—those sorts of initiatives they do just in that area there.

Mr Canion —That is right. To take your example, I am aware of a company that is actually developing a training program that they are rolling out and selling as a product to companies to help them train drivers to do exactly that. There is another company that is in the process of converting its vehicle fleet to a gas-based fuel supply. I guess we are at the early stages at this point but there is certainly an awareness which I think is growing. If the CPRS is put in place, and there is a further price put on carbon which will affect fuel, then I think you will see that accelerate again.

Senator McEWEN —As an organisation are you doing anything to foster that sort of activity amongst your membership?

Mr Canion —A recent focus for CCI has probably been more in line with the CPRS. We hosted a number of training courses for small and medium enterprises, particularly because they constitute a large proportion of our membership and would not be directly impacted by the trading side of the CPRS but would be affected by the price impacts predominantly on fuel and electricity. We have had some training courses in-house that helped them understand the impact and what they can do to minimise it. Again it focuses on demand-side management as being the key way that they can reduce their costs.

Senator McEWEN —So the potential or the implementation of the CPRS has given an impetus for your members to address issues of sustainability and energy efficiency.

Mr Canion —That is correct. Some of those training courses were held prior to the government announcing fuel price increases—or I should say energy and electricity, not necessarily fuel—and that is something we will now have to look at. We will look at that and see whether our members seek some guidance and support in that area.

Senator McEWEN —If you do have any examples of things that your members are doing, I think that would be useful for the committee.

CHAIR —I would like to go back to the specific energy security issues in Western Australia. Clearly the CCI was quite involved in the context of what happened a year-and-a-half ago, roughly—was it June—

Mr Canion —Last year.

CHAIR —June last year or the year before—June 2008?

Mr Canion —Yes, that is correct.

CHAIR —Can you just talk us through some of the issues that arose at the time and some of the policy issues that you might have identified at the time—what has happened since then, and what has not happened yet and, you think, should happen?

Mr Canion —It was a critical situation for WA—a 30 per cent cut in gas with no immediate solution to it—that impacted a lot of business and community sectors. The good thing that we saw was that the government and industry took a cooperative role in managing the crisis. I understand there were some questions raised as to whether the government should invoke emergency powers. We were strongly of the view that that should not be the direction taken and we were glad to see it was not. In any crisis like that there are going to be some losers, if you like—again, we had to acknowledge that—but I think industry worked well to make sure that the impacts were minimised and that the areas of most critical need were supplied with sufficient gas. That was in the initial crisis response period. As it went forward we looked at and promoted the idea of a gas bulletin board—which was adopted. That did not see a lot of direct trades occurring through the bulletin board process, but, as we understand it, it provided a means by which people in need of gas were finding the suppliers that had it and then were going offline from the bulletin board and making deals. That was a positive outcome.

CHAIR —What should happen, moving forward, to ensure that something like this does not happen again?

Mr Canion —WA is always going to be at some risk because our supplies of energy are so far away from our key demand areas and it is difficult to protect against that without spending millions or billions of dollars. We acknowledge that there is always going to be a level of risk in the system, but we would look to diversity of supply as best as possible and that would be helped by new gas projects coming on stream—Gorgon and so forth will help considerably with that. An area of potential weakness will always be the pipeline network, but we do not see it as being economic to work around. I think the pipeline from the north-west down to Perth is sufficient for supplying enough resources, and to duplicate that would be an expensive and probably unjustifiable decision.

Going forward, as I mentioned earlier with the state energy policy, each proponent is going forth on the basis of its understanding of where state energy should be and what is best for it individually without understanding the policy context for the future. We think that the role of alternative energies, security of supply and diversity would all be covered in those policy areas, stated by government, which would help private sector make relevant decisions to minimise risk.

CHAIR —When you talk about diversity of supply and bringing new gas supplies on stream, are you aware of the government’s discussion paper on the review of the granting and renewal of retention leases?

Mr Canion —I am aware of it; I have not studied in great detail.

CHAIR —So you would not be able to share a view with us about the draft conclusions that are set out in the discussion paper?

Mr Canion —No, not with regard to the paper. I can give you—

CHAIR —Have you a general view about the granting and renewing of retention leases?

Mr Canion —Yes. Our concern is that retention leases can potentially constrict supply; so, while they are necessary to a degree, the time for which they remain valid needs to be offset against the potential risks that may come from nondevelopment of those.

CHAIR —That is essentially a high-level view?

Mr Canion —Yes.

CHAIR —In terms of diversity of supply, have you a view on nuclear energy as one of the energy options to at least keep on the table for consideration moving forward?

Mr Canion —We do not have a problem with nuclear energy per se. If it is economically viable and can be done safely—and it can be assumed that that would be the case—we do not have a problem with it. We think that for WA it is not really a relevant energy option at this point in time, simply because our market is too small and the amount of energy that it would generate would overwhelm our system, given that it is not connected to the national grid. For the eastern states it might be a more viable option but not for WA at this stage.

CHAIR —Do you have any views on how the renewable energy targets would impact on energy security moving forward?

Mr Canion —Yes. CCI’s broad principle with regard to the renewable energy target is that, in light of a CPRS coming on stream and assuming that is the case, we do not think there is a need for a supplementary or a complementary target as well as that. If we put that to one side, the 20 per cent target could create a significant impost on the industry, not so much from the point of view of the generator but more for the transmission network required to support the 20 per cent target. We think there could be some cost imposts there.

Senator McEWEN —Does the CCI have a position on the establishment of a nuclear waste facility in Western Australia?

Mr Canion —We do not have a stated position, no.

CHAIR —Thank you for your contribution to the committee.

Proceedings suspended from 10.16 am to 10.30 am