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Speech to the Australian National Conference on Resources and Energy, National Convention Centre, Canberra



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Minister for Resources and Energy, Minister for Tourism

Australian National Conference on Resources and Energy 18 September 2012

National Convention Centre, Canberra

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Introduction

Good morning.

I would like to thank the Bureau of Resources and Energy Economics for hosting this inaugural conference- one which I believe will become a leading annual event for Australia’s resources and energy industries.

BREE is a vital component of my department.

BREE provides important data, forecasts and research.

It helps policy makers and industry to understand phases of the commodity cycle and assist them to make more informed decisions.

BREE’s work is particularly valuable in dealing with the challenges we now face.

I imagine most of you would be aware of my comments that we have seen the end of the current cycle of high commodity prices.

This inescapable reality should not be a cause for great alarm or pessimism about Australia’s economy.

The fact is that Australia has captured the benefits of the boom in commodity prices by securing investment - some completed, much still underway - that will see more production come on line and commodities exported in higher quantities.

I will also use this presentation to address some of the current developments in Australia’s energy sector.

Market outlook

BREE has today released its Resources and Energy Quarterly for September 2012, which confirms that the phase of high prices associated with the mining boom is over.

We have seen this moderation in prices unfold gradually over the course of the year.

BREE reports that spot prices for Australia’s key mineral exports of coal and iron ore have dropped substantially in the last two months in particular.

These reductions in prices will affect Australia’s export earnings in the short-term, with revenue from minerals and energy exports forecast to decrease year-on-year by two per cent in 2012-13, to about $190 billion.

The recent announcements of job losses by Xstrata and BHP in Queensland provide the early indication of the potential impacts of this squeeze on margins - a squeeze not assisted by royalty changes that focus on price, not profitability.

Although this is not good news, it is by no means a death knell for the Australian resources industry.

If we take a longer-term view then the vital signs are strong.

It is useful to remember that the commodity prices experienced since last year were record-breakers.

And although it’s difficult to say when or if we might scale to those exceptional heights once more, BREE expects a rebound in some commodity prices in 2013, should global growth pick up as is expected by the International Monetary Fund.

While this recovery is in motion, forecast increases in volume are expected to see the continuation of resources activity in terms of both investment and volumes for some time to come.

Following many large investments made in recent years we can hopefully expect increases in exports to be sustained by the commencement of projects that are still under construction and expansions to existing operations.

A BREE report from April this year on mining industry major projects illustrated the record level for planned capital expenditure.

At the time, there were 98 projects at an advanced stage of development, to a value of more than $260 billion which is now estimated to be worth $270 billion, with a further 295 projects in the less advanced category.

This was a 12 per cent increase in value from October 2011 and a 34 per cent increase from April 2011.

There were also 25 projects completed in the six months to April 2012, to a combined capital cost of $23.6 billion.

This was another record achievement and double the previous record for the six months to April 2008.

In a final sign of industry confidence, exploration expenditure for Australian minerals and energy was worth $7.1 billion in 2011-12, or twelve per cent higher than the 2010-11 level.

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Capacity

In an environment of softening commodity prices, the ability for Australia to capture and realise the benefits of this exploration will depend on keeping our production costs down.

Recent actions by the Queensland Government will only exacerbate the impacts of lower commodity prices.

It is important that Australian governments act to facilitate ongoing growth and development.

This includes providing adequate infrastructure to ensure new projects can proceed as planned.

To that end, another important BREE report from this year estimated the export volumes of Australian coal, iron ore and LNG out to 2025 and assessed the adequacy of our infrastructure to support them.

The report found that Australia would become increasingly reliant on infrastructure projects that are planned but not yet under construction to provide the capacity required to meet those export volumes.

It also pointed to risks in both cost structures and schedule that must be effectively managed to minimise delays to the delivery of new developments.

The federal, state and territory governments must therefore collaborate with industry members across the country to ensure this infrastructure is built and adequate capacity is provided.

This includes working through programs like the Regional Infrastructure Fund, National Ports Strategy and National Land Freight Strategy.

An adequate supply of skilled labour must also accompany this infrastructure if we are to make the most of current and future opportunities.

Skills Australia estimated mining operations in 2016 will need 89,000 more workers than 2010.

This does not include replacing the estimated 21,000 employees who leave the industry each year, nor the demand for short-term construction workers, which is expected to peak at about 49,000 workers in 2014.

The Government has responded to this need through the National Resources Sector Workforce Strategy.

This strategy contains a range of actions including planning and information sharing, training more tradespeople and university graduates, and linking education within industry.

It also includes the Enterprise Migration Agreements and SkillsSelect skilled migration initiatives.

The EMA system is designed to ensure overseas workers meet peak workforce needs when the Australian labour market cannot.

The agreements apply only to major resources projects with more than $2 billion in capital expenditure and a peak workforce of more than 1500.

Project owners are also required to implement training commitments to address future Australian worker’s skills needs.

They will complement and support our primary objective of employing and training Australians, not undermine these objectives as some people would have you believe.

Efficiency

Similarly, a focus on improved productivity and efficiency must go hand-in-hand with these capacity improvements if resources operations are to continue to thrive, especially as resource prices are now down from their historic highs.

There is no room for fat in the system if Australia is to be competitive.

This is once again an area in which government, industry and workers must share the load.

The Australian Government is currently working with the states and territories through COAG to look at ways of improving environmental approvals processes and lifting the regulatory burden on new developments.

The aim is to reduce complexity and duplication of regulation across the Federation and to increase transparency and accountability in decision-making.

Federal, state and territory treasury departments are now investigating the benchmarking of major development processes against international best practice.

This process will take into account timelines for approvals, the cost of administration and compliance and additional costs arising from project conditions.

COAG is also developing a National Productivity Compact that builds on reviews of environmental legislation such as the Environmental Protection and Biodiversity Act 1999.

This will attempt to strike a balance between protecting the environment and improving investor confidence in the pace and outcome of Government decision making.

Industry members’ own contributions to productivity will need to focus on the adoption of new technologies and efficient labour practices.

Australia has been at the forefront of developing techniques and practices that have enabled previously uneconomic resources to be profitably extracted.

If resource prices continue to fall and input costs continue to rise, increasing productivity in this manner will be the only way the industry will continue to prosper.

The equipment, technology and services field is also an increasingly lucrative sector in itself.

The most recent available data estimates it employed 31,300 people full-time in 2008-09.

Even on the most conservative definition, the market was worth $8.7 billion at the time, with domestic sales revenue of $6.2 billion and export sales of $2.5 billion.

The Government believes there is significant potential to export our resources expertise and technology.

It is with this in mind that we created the Resource Sector Supplier Advisory Forum, which provides high-level leadership in linking suppliers to business opportunities.

Energy

Research from BREE confirms it is also a time of great challenges and opportunities for Australia’s energy and electricity generation sector.

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The latest Australian Energy Update highlights some interesting trends in consumption, production and trade.

It found that Australia’s primary energy consumption increased by three per cent from 2009-10 to 2010-11.

In energy content terms, renewable energies excluding biomass recorded the strongest annual consumption growth of 20 per cent during this time.

Total energy production nonetheless declined by three per cent, with increases in natural gas and renewable energy production being offset by lower production of coal, crude oil and uranium oxide.

The increased natural gas and renewable energy capacity and reduced coal-fired power capacity also saw total electricity generation remain largely unchanged.

Meanwhile, BREE’s recent Australian Energy Technology Assessment found that the differences in cost of various electricity technologies are likely to diminish in the future.

By 2050 some renewable energy technologies, such as solar photovoltaic and wind onshore, could have the lowest levelised costs of the 40 technologies evaluated.

These trends point to an Australian energy future with a more diverse mix of established fossil fuels and emerging renewable energy technologies.

The Government encourages this diversity of supply as the best means of maintaining our competitive advantages while aiding the transition to a low carbon economy.

The upcoming Energy White Paper will address these issues in greater detail.

The final copy of this report is due later this year, following the release of a draft document in December 2011 and significant consultations throughout the year.

The end product is likely to retain the four broad policy priorities aimed at enhancing Australia’s energy potential that were contained in the draft, specifically:

• Strengthening the resilience of our energy policy framework; • Reinvigorating the energy market reform agenda; • Developing our critical energy resources, particularly gas; and • Accelerating clean energy outcomes.

It will also take into account the outcomes of the consultation phase and any outstanding policy issues.

This includes providing updated information on future energy reserves and development, electricity demand and fuel costs, as well as revised costs for electricity generation technologies.

The paper will ultimately outline Australia’s directions on key energy issues, including:

• Improving energy productivity and competitiveness; • Smoothing the transition to a clean energy future; • Managing expected changes in and impact on the gas market; and • Maintaining ongoing liquid fuel security.

It will thereby provide investors, consumers and planners a clear sense of direction and confidence in creating Australia’s energy future.

Conclusion

While we can’t escape the fact that some of the heat has gone out of the commodities market, I reiterate that there is still cause for Australian optimism at present.

The pipeline of more than $270 billion worth of advanced projects remains, and so does our impressive record of seeing these investments through to completion.

Yet if we are to capture the benefits of this pipeline then we need to ensure our cost structures remain competitive and our productivity rises.

Combined government and industry efforts to remove infrastructure bottlenecks and improve skilled labour development can help raise productivity, ensuring we make the most of whatever international conditions exist.

If we do not make progress on these fronts, Australia will not grab that second investment pipeline of up to an additional $230 billion.

The development of a diverse and low emissions supply of energy at a reasonable cost will be another key factor in ensuring Australia’s economic success into the future.

I also trust that reliable and authoritative data and analysis will continue to guide policy and economic development and, once again, thank BREE for the important role it performs in this area.

I would finally like to ask all of you here to remember that, despite the risks to the global economy, Australia remains a world leader in resources and energy production.

By taking the necessary steps to build infrastructure, train workers and improve our productivity we can sustain the benefits of the boom for many years to come.

Thank you.

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