Australia’s world-leading energy and resources sector: riding the waves of volatility and embracing a post-COP21 world
26 February 2016
Ladies and gentlemen, it's a great honour to be here with our Ambassador at the wonderful Brookings Institute in its centenary year.
It's also special for me as the member for Kooyong to be back in the US as two of my predecessors in that constituency, Sir Robert Menzies and Andrew Peacock, have also visited the Institute.
Sir Robert Menzies was the longest serving Australian Prime Minister who helped establish the ANZUS Treaty with President Truman in 1951. He was held in high regard by many American leaders, with Richard Nixon saying ‘If I was to rate one post-war leader… It would be Robert Menzies’ and ‘Had he been Prime Minister of Britain rather than Australia… [he] would have ranked with Gladstone and Disraeli.’
Andrew Peacock was leader of the opposition, a distinguished Foreign Minister and subsequently the Australian Ambassador to the US.
It’s also a great time to be in the US as your presidential election campaign ramps up, rating high on prime time TV in Australia – higher than Dancing with the Stars, Keeping up with the Kardashians, and endless re-runs of the Brady Bunch.
At 3am this morning, struggling with jet lag, I couldn’t help but be entertained by watching a replay of the Republican candidate debate from Houston. It was a verbal boxing match that made The Apprentice boardroom look tame.
But this is obviously not the real reason why I'm here, which was to lead an Australian delegation to CERAweek in Houston – getting an update on developments in global energy markets and encouraging further investment in Australia.
It was terrific to catch up again with US Energy Secretary Moniz and to participate on a panel with my distinguished colleagues from Canada, Israel and Mexico as well as undertaking bilateral discussions with many of the major companies investing in Australia – like ExxonMobil, Chevron, Hess and GE.
Here in Washington it is also a good opportunity to reaffirm the strength of our bilateral ties. The US and Australia partnership is indispensable. You are the biggest investor in Australia, our most important ally and a country with whom our bond is shaped by shared values and an unshakable commitment to the pursuit of freedom and democracy.
Today I want to make three key points.
First, the resources and energy sectors are at the heart of the Australian economy and our leadership position is crucial to global energy security and alleviating energy poverty.
Second, despite current volatility in international markets and heightened pessimism about the global economy, we in Australia are optimistic about the future and our capacity to innovate and seize the opportunities.
And, last, I want to discuss the coordinated global effort to meet the challenge of climate change reshaping the energy mix, with new technologies seeing the emergence of new business models. Australia takes its international obligations to reduce emissions very seriously and is effectively integrating climate and energy policy. We do not see effective action on climate change as mutually exclusive to our dominant position in global energy and resources markets.
Australia as a resources and energy global power
Australia has a remarkable economic story to tell. Our economy is the 12th largest in the world. This with a population of just 24 million, 52nd in the world, spread across the sixth biggest land mass in the world.
We are in our 25th year of consecutive economic growth having survived and prospered through the Asian Financial Crisis (1997), The Dot Com Bust (2000) and the Global Financial Crisis (2007). This is a record only beaten in the developed world by the Netherlands with 26 years of consecutive growth ending in 2008 – a record we intend to break.
Our rich endowment of natural resources, combined with our strong and stable institutions and the drive of private enterprise, has been integral to this economic success story.
Today, the resources and energy sectors represent around a tenth of our GDP, is responsible for more than half of our exports and employs over 300,000 Australians.
As a sector, mining pays the highest wages, employs large numbers of skilled workers such as engineers, and has the highest proportion of Indigenous Australian employees.
But frankly it goes beyond that. The Australian resource sector has helped drive the transformation of East Asia, which is reshaping the world. Australia’s resource exports – particularly iron ore – were integral to Japan’s industrialisation after World War II, to South Korea’s industrialisation after the 1960s and more recently to the remarkable transformation of the Chinese economy.
Australia is the world’s largest exporter of both iron ore and coal. By the end of this decade we expect to overtake Qatar to be the largest exporter of Liquefied Natural Gas. Australia is also the second largest exporter of gold and zinc, the third largest exporter of nickel and the fourth largest exporter of copper.
These Australian resource exports have been essential for infrastructure and economic development in emerging economies, lifting millions out of poverty in the process.
This is not a recent development. The resources story is synonymous with Australia’s national identity.
By tracing the history of mining development in Australia one can see how we turned from a series of struggling, underpopulated British colonies in the early 19th century to a prosperous, cohesive nation.
Given the close relationship our two countries share, it is perhaps unsurprising that the US has played a major role in the history of Australia’s mining sector.
At times we have been competitors. The Californian gold rush was underway in the mid-19th century while the Australian colonies were struggling to get a foothold.
Fortunately, the discovery of gold in Australia in 1851 triggered our own gold rush and marked the beginning of our mining industry. The gold rush precipitated a doubling of Australia’s population in less than ten years, and a fivefold increase in my home state of Victoria’s population over the same period.
Since then our two countries have been partners in many resource projects:
- Rio Tinto is now the world’s second largest iron ore producer. Rio’s first Australian iron ore mine in the 1960s was 40 per cent owned by US firm Kaiser Steel and US banks contributed two-thirds of the required capital.
- Chevron is building our largest single ever private investment project – the US$54 billion Gorgon LNG plant, and is also constructing the US$29 billion Wheatstone project.
- Newmont owns some of Australia’s largest gold mines.
One of the most fascinating examples of how our histories are intertwined is the story of the 31st President of the United State, Herbert Hoover.
Hoover came to Australia in 1897 as a 23 year old engineer looking for gold in the state of Western Australia. Interestingly, it was only two years after Mark Twain wooed audiences in Australia. Hoover successfully led a major expansion of a significant gold mine in that state and then went onto found, in New South Wales, a company which developed a new process to extract zinc. This company went on to form part of Rio Tinto, now one of the largest mining companies in the world.
And the resources and energy relationship between our two countries goes both ways. In particular, Australia’s largest mining company, BHP Billiton, has significant investment in US shale gas and the Gulf of Mexico.
A bright future will be driven by increasing demand
Australia has been among the greatest beneficiaries of what is often called the commodity super-cycle. This was driven by Chinese growth and the continued demand from our longstanding customers in Japan, Korea and the rest of East Asia.
But now we have reached the end of a decade-long super cycle, whose record prices led to around $400 billion of investment in Australia’s energy since 2003.
This week I spoke at CERAWeek in Houston, where there was great concern about the volatility in oil prices. In a short period of time, we have seen the oil price fall from around $140 at the peak of the boom to the current price of around $30 a barrel. Why is this so? The answer is a complex combination of supply and demand dynamics, with the emphasis being on changes to the supply side.
In the last five years, more than 4.2 million barrels a day have come on stream from shale oil in the United States. Saudi Arabia, which produces on average 10 million barrels of oil a day, has lifted their production by five per cent in January alone. Iran, no longer the subject of sanctions, is producing nearly three million barrels a day with the expectation of lifting production by at least another one million barrels a day.
Nevertheless, with the resulting lower prices, we have also seen, according to the International Energy Agency, for the first time on record, two years of consecutive negative growth in oil exploration.
This underinvestment will result in demand eventually catching up with supply and prices rising.
When it comes to resources markets more broadly, the end of the super cycle is seeing a return to more normalised, cyclical patterns of demand, particularly in China, as its economic growth moves from double digits to settle around six to seven per cent and its economy transitions from investment to consumption and a greater focus on services.
China remains central to the global resources story. It is the world’s largest producer and consumer of coal, the largest consumer of iron ore and producer of steel, the second largest consumer of oil, and the third largest consumer of gas.
China importantly is also increasing its reliance on renewables, becoming the largest investor in renewables in the world, bigger according to the International Energy Agency than the EU and the US combined.
I want to dispel the notion that because the Chinese economy is transitioning that suddenly the demand for hard commodities and the subsequent export income earned from their sale will dry up.
To paraphrase Mark Twain: the rumours of the death of the global resources sector are greatly exaggerated.
International demand for Australian resources remains strong, our companies remain resilient and the depreciation of our dollar has acted as “an automatic stabiliser”, increasing our competitiveness.
The reality is that over the decades ahead hundreds of billions of dollars will flow to Australia as both demand and supply increases.
A good illustration of this dynamic is Australia’s export earnings from coal and iron ore between 2011-12 and 2014-15. Despite price falls of between 43 per cent and 57 per cent, export earnings from these commodities fell only 16 per cent. This reflects a lower Australian dollar, a 30 per cent increase in coal export volumes and a 60 per cent increase in iron ore export volumes.
When it comes to LNG, there is an even more powerful story to tell. Export earnings between 2011-12 and 2014-15 have increased by more than 40 per cent. Driven by increased volumes and a lower Australian dollar, export earnings are expected by 2019-20 to almost triple to $49 billion.
Where is this demand coming from and why is the Australian sector so resilient?
Let’s look at the Chinese economy first. At US$11.4 trillion, it’s two and a half times bigger than it was in 2008. This means that a 6.8 per cent annualised growth in 2015 is equivalent to 14.2 per cent growth in 2007. It emphasises how important it is to avoid drawing conclusions from simplistic comparisons of annualised growth rates.
Remarkably, each year the Chinese are adding an economy the size of Turkey.
In December 2015 China imported more iron ore than ever before. Some is used for the production of steel for export, the rest for domestic use.
Chinese steel exports to the emerging economies are growing, with steel exports in 2015 increasing by 26 per cent to India and 55 per cent to Vietnam.
While China has seen rapid rates of industrialisation in recent years, leading to more than 200 million people moving to the cities, 37 thousand kilometres of rail track and 63 million flats completed in the last decade, there is still a long way to go.
For a country with such a large land mass and population, its rail system is just one third the size of that in the US and one sixth of that in the EU. Demand will continue to grow, providing a lot of scope for Australia's iron ore and metallurgical coal.
When it comes to energy demand, China’s per capita consumption is still a third of that in the United States, an equation that the International Energy Agency (IEA) predicts will change dramatically as Chinese per capita energy use increases in the years ahead.
But I want to emphasise that the China story is not the only game in town.
Economic growth in India and South-East Asia is driving increased demand for Australia’s resource exports.
In 2015, India’s economy grew by 7.4 per cent and is forecast to grow by 6.5 per cent a year from now to 2020.
On the numbers the Indian economy will be five times bigger in 2040 than it is today and as a result, demand for coal, gas, iron ore and renewables is taking off.
Consider this: today India has 18 per cent of the world’s population but represents only six per cent of global energy use. Astonishingly, on a per capita basis, it is lower than that in Africa.
Around 300 million Indians have little access to electricity or no access at all. But by 2022 Prime Minister Modi wants every Indian to be connected to the grid.
India’s consumption of steel is also comparatively low. On a per capita basis it’s a quarter of the global average and around one eighth of that in China. With over 300 million Indians expected to move to the cities by 2040, demand is soon to escalate.
By 2020, India is forecast to overtake China, Japan and the EU to become the largest coal importer in the world as it seeks to almost treble coal fired power generation between now and 2040.
All this is good news for Australia. Contracts for LNG from our Gorgon project to Petronet LNG have been signed and are soon to flow and our coal exports to India, already sizeable, are set to increase.
The reality is that there will be significant demand for our energy and minerals going forward and this forms the basis for long term optimism for these sectors of Australian industry.
It’s the consequence of simple arithmetic. Between 2010 and 2030 there will be major increases in the world’s population by 23 per cent, the world’s urban population by 42 per cent and the world’s middle class by more than 100 per cent, all of which fuels demand for hard commodities.
The biggest movements are occurring in emerging economies right on our doorstep, putting Australia in an ideal position to capitalise.
Innovation and reform will help Australia seize these opportunities
Australia has never rested on its laurels and the ongoing supply and demand dynamic emphasises the need for a country like Australia to focus on what we can control – decreasing the cost of doing business as a means of boosting our nation’s competitiveness. Streamlined regulatory processes, greater labour market flexibility, and productivity-enhancing infrastructure projects are key.
We also know that we have to be innovative to seize future opportunities.
Australian iron ore miners like BHP, Rio Tinto and Fortescue have pioneered the adoption of automation, operating drilling equipment, trucks and trains at their mines in the Pilbara remotely from their Perth operations, some 1,500 kilometres away. This is the equivalent of operating mining equipment in New Orleans from right here in Washington DC.
As a result of these types of innovation, mining productivity is taking off. According to the Chief Economist of my Department, output per hour grew by 22 per cent in 2014-15, helping ensure that three quarters of Australia's iron ore production is in the bottom half of the global cost curve.
Our comparative advantage in resources is maintained by very high levels of investment by companies in R&D, then captured in patents. A study by IP Australia found there were more than 6,500 inventions in the mining sector between 1994 and 2011. This has resulted in Australia writing more than 60 per cent of the world’s mining software.
In coming years it will be sophisticated use of digital technology and data analytics that drive productivity gains. Last year Rio Tinto launched its Analytics Excellence Centre, which uses predictive mathematics, machine learning and advanced modelling to process the huge amount of data captured by sensors, reducing maintenance costs and the incidence of unplanned breakdowns.
On the energy side, we are also making huge advances through technology. For example, Santos, a leading oil and gas producer in the Asia-Pacific region, has partnered with IBM to develop predictive models that can provide them with early warning of potential failures and opportunities to improve efficiency. This is helping to reduce asset down times, cut travel times, and resolve problems faster, thereby increasing productivity.
Identifying similar opportunities, GE has established its technology and learning complex just outside of Perth to act as a regional support centre for the development of skills and technology.
Further, the Australian Government and industry have co-invested in around 230 renewable energy projects in Australia to the tune of a combined $2.7 billion. Recently, we were proud to sign on to Mission Innovation with the US and become part of global efforts to reinvigorate and accelerate global clean energy innovation.
Innovative energy service companies, like Tesla, are eyeing Australia as a potential test market for the rollout of residential battery storage products.
We are also investing in hybrid solutions for some large off grid users in remote Australia, to move them off diesel and onto micro grids with renewable energy.
While important progress has been made in cost reduction and deployment of clean energy technologies, the pace of innovation must continue – whether it’s in large scale carbon capture and storage or household battery rollout.
Last year’s United Nations Climate Change Conference in Paris (COP21) saw a historic commitment of 187 countries to pursue efforts to limit the global average temperature to “well below” two degrees Celsius above pre-industrial levels.
Further, with Mission Innovation, we have seen 20 leading countries, such as the United States and Australia, come together to agree to double clean energy research and development expenditure over five years to 2020.
However, it must be recognised that countries have different energy mixes, and face different economic challenges, and therefore their responses to energy supply and climate change action will necessarily be different.
We do know that the global energy supply dynamic is transitioning to lower emission energy sources. Notably, the International Energy Agency forecasts that, as a percentage of global electricity generation, coal-fired power will decrease from around 40 per cent to around 30 per cent by 2040. Meanwhile, renewables will increase from 22 per cent today to 34 per cent of global electricity generation in 2040, and gas demand is forecast to increase by around 50 per cent over the same period.
When we look at individual countries, we see that in China, renewables will grow from 20 per cent to 35 per cent of electricity generation by 2040. During this period, China’s gas-fired generation share will quadruple.
The United States has announced a number of its own initiatives. There is the Clean Power Plan debate which could accelerate the shift away from coal-fired electricity generation. This change will be enhanced by the rapid development of gas resources as a result of the shale boom. Here, gas-fired electricity generation will increase its share from 27 per cent to 31 per cent. Meanwhile, nuclear power, fuelled in part by Australian uranium, will play an increased role with five reactors currently under construction and another five planned.
Other countries like India, are delicately balancing their climate and development goals. In doing so, they are seeking to provide electricity, by 2022, to around 300 million people who currently have little or no access. India will increase its coal-fired generation capacity threefold while quadrupling its renewable capacity.
In Australia, we are taking our COP21 commitment very seriously.
The Australian Government has adopted a strong target to reduce greenhouse gas emissions by 26 to 28 per cent below 2005 levels by 2030. On a per capita basis, this is the second highest reduction in the world.
We have implemented a suite of measures to address our carbon footprint:
- Our $2.5 billion Emissions Reduction Fund has been very successful. It provides a market-based mechanism whereby participants bid for the lowest cost method of abatement.
- The Renewable Energy Target, an integral part of our framework, will raise the share of renewable generation in the electricity sector from 15 per cent to over 23 per cent by 2020.
- We have set a target of increasing our energy productivity by 40 per cent by 2030 through the National Energy Productivity Plan, which will include new vehicle, building and appliance efficiency standards. This will deliver at least one quarter of Australia’s 2030 emissions reduction target, while worldwide, the International Energy Agency forecasts that increased energy productivity will make the largest contribution to CO2 emission reductions by 2040.
- We have invested $1 billion in renewable technologies through the Australian Renewable Energy Agency (ARENA), which has seen nearly $2 billion additionally leveraged from the private sector. We also have a $10 billion Clean Energy Finance Corporation, which undertakes commercial investments into renewable energy, energy efficiency, and low emissions technology.
Significant progress towards less carbon intensive energy generation is being made. Australia has already reduced the percentage of its electricity generated from coal from 77 per cent in 2004 to around 60 per cent today. This will continue to fall. Renewable energy now makes up 100 per cent of all new investment in grid-connected, electricity generation and Australia already has the highest proportion of households with solar panels in the world at 15 per cent - this is almost double the second highest country which is Belgium.
What these country comparisons show is that lowering emissions from the energy sector cannot be one dimensional as countries are starting from different positions and face different challenges.
One such challenge will be the need to question traditional energy supply. Such a discussion is currently taking place in Australia. Although Australia does not generate any electricity from nuclear sources, one Australian state, South Australia, is currently undertaking a Royal Commission into the Nuclear Fuel Cycle, which has revived the discussion about the role nuclear power could play in a low carbon economy. Given South Australia has 78 per cent of Australia’s uranium reserves, and the stable geology to store high level waste, this debate is shifting community attitudes and has some way to run.
Regardless of the chosen generation method, a cornerstone of each country’s plan will be the development and use of clean energy technology and innovation. Indeed, technology will be the swing factor to achieving the world’s climate goals. Home batteries, carbon capture and storage, High-Efficiency, Low-Emissions coal-fired plants, large scale solar, are all likely to feature going forward.
These new technologies will bring enormous opportunities – including the ability to align energy and climate policy. Going forward, these two policies should not be seen as mutually exclusive. I’m confident that with such an alignment in policies, Australia, and indeed the world, will be able to balance the need to create economic and social change while meeting our climate commitments.
The resources and energy sector has been here before.
Peaks and troughs are part of a cycle reflecting complex supply and demand dynamics. This is a long term business and I am proud of the role Australia plays.
The good news is that Australia has the economies of scale, innovative practices, highly skilled workforce and proximity and access to markets that give us the resilience we need at this time.
There is no room, however, for complacency. We are operating in a fiercely competitive global market. At the same time, we are working effectively to address the problem of climate change and reduce our carbon footprint. I am confident this approach will see Australia’s role as a global resources and energy player in a sustainable future assured.