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28th Annual Convention of the Australian Gas Association



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*** EMBARGOED UNTIL MIDNIGHT, 6 OCTOBER 1991

K eynote A ddress and O fficial O pening

by

The Hon A lan G riffiths, M P M inister for R esources

at the

28th Annual Convention of the Australian Gas Association

Melbourne 7 October 1991

UO WEALTH

PARLIAMENTARY LIBRARY MiCAH ,, ■ x. _ . . : ι λ . -. , . · . - : · · ‘ ·

I am pleased to have been invited to present this keynote address and to officially open the Australian G as Association’s 1991 Annual

Convention.

As many delegates would be aware, I am currently involved in the consideration of the essential elements of a national strategy for gas which will have important implications for the future of the Australian gas industry. Later in this address, I shall cover some of the more

important elements of that strategy as I see them at this stage.

The theme of this convention: “Gas-Caring for the Community" is as close to the heart of the gas industry as it is to the wider community.

The natural gas industry is to be congratulated on the way it has

developed over the last 20 years. The industry is today an efficient and reliable supplier of large quantities of energy to the residential,

mining, commercial and manufacturing sectors and for exports.

The fact that natural gas has grown to account for more than 17 per cent of our primary energy demand, speaks for itself. In energy

equivalent terms, the amount of gas supplied to Australian markets represents more than 300,000 barrels per day of oil, equivalent to nearly half the actual domestic consumption of petroleum. So its importance is both marked and growing.

The Australian Gas Association has been at the forefront in promoting greater use of natural gas - not least in assisting in the technical basis for new market opportunities. For example, the AGA with assistance from the National Energy R&D Corporation, is promoting natural gas for vehicles - an area in which natural gas has the potential to become

more important to Australia as a transport fuel in the 1990s and

beyond.

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I do not need to dwell on the advantages of natural gas at a meeting such as today’s gathering, other than to observe that the clean burning and environmental advantages of this fuel have in no small way

contributed to its present market position.

I could, however, observe the incongruity of certain elements of the environment movement promoting gas as a more benign environmental fuel, while at the sam e time opposing the offshore exploration and development which will provide more of it. '

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The desirable characteristics of this fuel - supported by the high

technical and quality standards which characterise the industry - will ensure the continued use of natural gas in domestic markets in a period when high priority is being placed on overall environmental

considerations in our use of energy.

On supply and environmental grounds, therefore, it is little wonder that natural gas is being viewed as the “versatile” energy resource of the 1990s.

The interest in our natural gas is by no means restricted to Australia. The importance of natural gas is growing internationally as shown by the fact' that world production of natural gas increased by 35 per cent in the 10 years to 1990 - and more than doubled in our own region over the same period.

The trend towards increased international natural gas demand is set to continue in the 1990s and Australia is well placed to supply some of the strong growth forecast for Asian LNG markets.

Growing demand for LNG in Asian markets has led to strong interest in Australia as a major LNG supplier well into next century. These Asian developments are particularly relevant to Australia given the success of the NW Shelf project in demonstrating Australia’s capacity to be

internationally competitive in the largest export market for LNG - Japan.

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LNG exports from the NW Shelf project to Japan were worth $825 million in 1990/91 and production is projected to increase by 1993 to 6 million tonnes per annum worth an estimated $1.5 billion. Further expansions in excess of 6 Mtpa are reported to be planned. A recent study by the University of Western Australia estimates that at full production the NW Shelf project will boost Australian exports by around 5 per cent. .

All this exemplifies the fact that Australia has an excellent gas

resource base to meet future dorpestic and export demand. Our

substantial proven economic reserves are currently assessed by the Bureau of Mineral Resources at 34 Trillion Cubic Feet - with additional reserves of another 41 TCF in the sub economic category.

While these are healthy figures, equivalent to at least 50 years supply at current consumption rates, it is generally recognised that Australia is underexplored for both oil and conventional gas reserves. And there

are also huge potential reserves of “non conventional" gas in the form of coal bed methane now being evaluated in Queensland and NSW.

One disadvantage with our proven reserves to date is that our existing uncommitted reserves are largely located offshore north west

Australia, far removed from the major domestic demand centres in south eastern Australia.

This is just one of the factors which have led me, the industry and the State governments to realise that the time is right to develop a

national strategy for the efficient, economic development of our natural gas resources.

There are other important factors which make a compelling case for developing a national strategy for gas. A major element in such a strategy would be the future role of State Governments.

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Traditionally, the States have strongly defended their independence in a number of areas of energy policy. One outcome has been a variety of energy pricing and taxation regimes, with differing outcomes on economic and energy efficiency. Nevertheless there is a growing trend to greater co-operation among the States and the Commonwealth, and I

am hopeful that in the spirit of new Federalism the States will

voluntarily open their boundaries to gas as an important step to

encouraging free and fair trade in gas and further exploration and development in areas closer to major markets.

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In my view this is the key to unrestricted interstate gas flows and the development of an open and competitive market driven gas industry. This view has been strongly endorsed over the recent months as I have sought to encourage debate about a national gas strategy.

There has been a number of steps which I have undertaken to date to develop that debate since I first publicly broached the subject back in May, when I opened the natural gas R&D facility at Murdoch University. In July at the South East Asia Offshore Conference in Darwin, I issued the discussion paper : "A National Strategy for the Natural Gas

Industry". That paper has been favourably received and brought forward very positive submissions from around 30 respondents, including most of the main industry participants and all the major associations.

The discussion paper, and a report commissioned from a working group of Federal and State officials by the Australian Minerals and Energy Council on "Regulation of Interstate Gas Pipelines", were considered by AMEC Ministers on 6 September. Subsequently, my State counterparts agreed to give me their views formally on the role of gas as they see it from a State perspective.

As a follow up to those submissions, I invited the major gas industry associations and user representatives to Canberra on 11 September to put to me their main concerns. State and Territory Governments

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attended as observers. It was a very fruitful exercise, and I am

enthusiastic about the industry's responses and the fact that there is broad industry agreement that the time is right to develop a national gas strategy. .

The time is right for several reasons.

First, interstate pipelines are starting to become more important in the development of domestic gas markets. Second, gas developers are looking to the Federal Government in\a number of areas to give guidance and long term assurances as to future policy - on LNG exports, land access, taxation, foreign investment and so on - because lead times are

long, particularly for LNG projects.

In addition, we n e e d , to clarify the future role of the States and

Territories and the extent or "reach" of their responsibilities for the regulation of infra State development, transmission and reticulation of natural gas. This includes the allocation of franchises, licences or

authorisations, the business operations of State gas utilities, and environmental and safety standards.

These regulations have the potential to create barriers to interstate trade in gas, particularly when they are imposed non-uniformly between States, or are used de facto or de jure to ensure gas reserves are only

available to one State.

Of serious concern from the national perspective is the attitude of State and Northern Territory Governments to interstate movements of gas both now and in the past. This is particularly apparent where States or Territories have acted to block the flow of gas reserves to another State, or acted to set aside or reserve for their own use, a

particular tranche of gas reserves.

Whilst such actions could be inconsistent with Section 92 of the Constitution, in practice they have been used, and the resultant sub- optimal use of Australia's gas resources has been acknowledged by most observers, including the Industry Commission (1C) and the AGA.

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I'll provide just one example to illustrate the point about the

distortions. South Australia is currently seeking extra gas supplies to meet future markets. A number of analysts have observed that one way to obtain this gas would be to complete the Albury-Wagga linkup, allowing Gippsland gas to reach New South Wales. Supplies currently coming from the Cooper Basin would then be "backed out" for South Australia's use.

In the absence of State boundaries, this could be an economic solution, but the multiplicity of jurisdictions ^nd States' vested interests mean that such an integrated solution may not be considered adequately - in other words a rational outcome from the national perspective might not eventuate.

This is not to say that the sale of Queensland gas to South Australia should not proceed. Indeed, that development represents another important step in interstate gas trade, and a clear reversal of previous policy by one of the State Governments concerned, Queensland.

As to the talked about likelihood of a trans-national pipeline system, that will be very much driven by market forces. Geography alone dictates that a trans-national grid cannot happen without the

involvement of Western Australia, South Australia and probably the Northern Territory. This highlights the importance of avoiding barriers between States, and preferably achieving a uniform national approach.

The meeting I held with industry participants on 11 Septem ber

reinforced the need for a uniform national approach and it was clear that all sectors of the gas industry believe that governments have a role to play in removing any barriers which may exist to trade in gas, including its interstate transportation.

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It is important to note that the industry sees this as the key to the

development of market opportunities which will stimulate additional exploration, development and production - particularly in areas close to markets. Let me say that I am very attracted to this approach and that

the issue of "free and fair” trade is one that I will pursue with my

State counterparts.

But, as I said, in the spirit of new Federalism that has attended recent Special Premiers' Conferences, I believe we can approach these issues with a greater deal of optimism than yvould have been the case even one year ago.

The export approvals system for LNG is another area which will be examined closely in developing the gas strategy.

From their submissions to me on the discussion paper, it is apparent that explorers, producers and transporter/distributors believe that what they call export "controls" on LNG should be dropped. Others, especially major consumers, believe that their interests would be best served by a system which considers the impact of export projects on future domestic gas requirements.

I have been somewhat surprised by the comments of some

explorer/developers who continue to emphasise "controls" as the focus for the LNG export approvals system. The system has been applied to only one project - the North West Shelf Project - and has been used primarily to monitor the price of agreed contracted export volumes - volumes which we are likely to see expanded considerably in the next few years.

I would certainly not ascribe to the assertion reported recently in the press and attributed to the head of a major oil company that the export approvals system adds “another level of uncertainty in pursuit of overseas markets”.

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Indeed, I would stress that the export approvals system has never been used to withhold or restrain LNG exports, nor is it likely to be under my adm inistration. '

I can, however, appreciate the position adopted by explorer/developers seeking to develop future LNG projects. It could be at least 10-15 years before domestic markets have a potential need for reserves currently being talked about as being more economic for development for export. In the meantime - as the industry correctly points out - there is every potential for the discovery of more gas closer to markets

in the south eastern States.

All I can say about the future of the export approvals system for LNG is that I am considering all the views that have been put to me. I will put to Cabinet the best approach to meet the overall needs of the industry and at the sam e time, caring for the community's future needs -

addressing natural gas use in both the domestic and export markets.

Many of you will be familiar with the various views on pipeline

regulation that have been discussed over recent years. The possible approaches raised in the discussion paper range from a purpose built regulatory authority; through to a national gas planning advisory council or use of the Australia/New Zealand Minerals and Energy Council; to the

“light handed” approach based on the Trade Practices Act, as

recommended by the Industry Commission. .

Not surprisingly gas producers, transporters and distributor/marketers have put forward arguments in favour of the “light handed” approach to gas regulation. They seek governments assistance and involvement as facilitators but not government intervention. Gas users see greater competition as the key to greater efficiency in the supply of gas and believe that an appropriate level of regulation will be necessary in order to foster development of this competition.

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Let me say that I am intuitively attracted towards the “light handed" approach where possible - provided that it can be demonstrated that such an approach optimises community benefit and addresses industry specific objectives such as open access to pipelines and avoidance of

monopolistic leverage situations. I am considering all these options with a view to putting recommendations to Cabinet in the near future.

You will appreciate that I can’t show my hand today, but I am indicating some of the main issues that Cabinet will want to address.

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The Government's objective will be to facilitate the availability of natural gas to enhance our quality of life through both the domestic market, including as an input to the manufacturing sector in developing value added export markets for our manufactured products; and directly, as exports of LNG and the major benefits this will bring to the

community through the balance of payments.

I hope there are no misconceptions that a national gas strategy is an attempted “grab for power” by the Federal Government in respect of infrastructure and energy development issues. Let me emphasise that I am not attracted towards a prescriptive approach to development of the gas industry. As has already been emphasised - in the context of the discussion paper - the Government believes that commercial

negotiations are the most effective mechanism for encouraging resource development in response to the future needs of markets.

However, it is clear from submissions to the discussion paper that a number of key, industry specific issues need to be clarified and that there is a need for more detailed consultations between industry and governments in a number of areas.

Let me touch briefly on some of those.

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First, land access. Any interstate pipeline will require easements and that m eans support from the States and Territories to access their land. For pipeline developers, they may need to be assisted to enable them to cope with heritage, aboriginal and parks type barriers. The

Federal Government's Pipeline Authority has had experience here which is worth keeping in relation to the development of the Moomba/Sydney pipeline system . But essentially, S tates' licencing and land

procurement systems are fundamental to obtaining easements.

Some vehicle or forum for discussing and overcoming these potential barriers may be necessary. For example, the Minerals and Energy Council or some related working party may be a useful forum for dealing with issues of land access for pipelines and to pursue a common approach on this and other matter where States rights are involved.

Then there is the future role of States' gas utilities. In the debate on a gas strategy and in considering the role of State utilities generally, the question has been raised - for example, by the Industry Commission in its report on Energy Generation and Distribution - of how to improve the

performance of Government owned public utilities; and in the gas area, we are speaking here of mainly State owned utilities, though I do not exclude the Federal Government's Pipeline Authority.

The Industry Commission report discussed the benefits to be gained from corporatisation of such utilities, in particular creating incentives for more efficient management, and a neutral operating environment

between public utilities and privately owned enterprises.

The 1C put forward a comprehensive menu for reform of public utilities, including restricting governments' role to formulation of strategic objectives. The 1C also advocated that the major financial target of utilities should be a rate of return determined on a commercial basis related to that which a comparable private firm would seek to achieve.

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However, the 1C also acknowledged that progress in this area was certain to be uneven, both between different utilities in the same State, and between States. In practice, differences between utilities can lead to distortions in production and investment decisions. For example, it could favour gas use within a given State, as opposed to

interstate movement. Such differences could also work in the reverse manner, but in any event, it is relatively easy to imagine situations where different approaches to reform of utilities distort efficient gas development from a national perspective.

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Active participation by the Commonwealth in the domestic gas industry is chiefly through the activities of The Pipeline Authority, a Federal statutory authority that owns and operates the Moomba to Sydney gas pipeline system, supplying natural gas to Sydney, the ACT and regional centres in New South Wales.

One of the main reasons for the Commonwealth taking over the

construction and ownership of the pipeline in 1973 was the perception of its strategic position in a trans-national grid. The same perception is alive and well today, but whether it means a trans-national pipeline will ever be required or come to fruition is, I believe, a question some

years away from being answered.

Let me dispose briefly of the other major matter which is always a burning issue for your industry: taxation. I say briefly, because the resource rent tax is not "up for grabs". It is set. The good news is, the Federal Government has no proposals at this stage to tax gas in any of its uses, including as compressed natural gas (or CNG) for vehicles.

I note only in passing that Esso, who had strongly opposed the ART regime for Bass Strait, has now been reported as proposing a $650 million development program for their Bass Strait fields. No doubt there will be some gas in that, as several fields targetted for

development, including Tuna, Bream and Turrum (close to the Marlin gas fields) are already associated with gas production or gas reservoirs.

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John Schubert, Esso Chairman, is reported to have said in relation to the program : ".... with the RRT the law of the land, it pays us to go ahead and optimise our activities under that tax regime".

Finally, let me address briefly the possible future role of gas in

electricity generation. Of course, it already fills this role in some regions, notably in South Australia and Northern Territory. Future power needs and the growth of co-generation facilities suggest that there should be no restrictions on gas use for electricity, nor should it be treated as a "premium fuel", reserved for certain perceived premium

uses, such as transport.

I do not believe that development of a national gas strategy would be helped at this stage by trying to meld gas reticulation with electricity grids, even though there are some similarities, including the roles of the States in these areas. The gas strategy itself must be developed

and the national pipeline system must become more "mature" before any linking with development of the electricity grid is considered or attem pted.

Meanwhile gas should be treated largely as just another fuel, which should be priced according to open market forces, and as an increasingly important part of our current and future energy mix which, in terms of returns to the community, has big dividends to deliver in the years ahead.

The opportunities for natural gas development in Australia are

considerable; they must not be wasted.

The time has come for governments - Commonwealth, State and Territory - and the gas industry, to play their role in developing a

rational, consistent and stable policy framework in which the industry can develop in the best interests of all sectors of the community; so we can all demonstrate that we are "caring for the community".

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I look forward to working with the industry and the States/Territories in the development and implementation of that policy framework.

On that note, I now have much pleasure in declaring the 28th Annual Convention of the Australian Gas Association officially open - may you all have an enjoyable and rewarding convention.

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