Cover Slide Reliable and Affordable Energy for Australians

Transcription

1 CEO AMCHAM Speech Cover Slide Reliable and Affordable Energy for Australians Thank you Mike. Let me start by thanking all the folks from Amcham for the opportunity to speak with you all today. Santos has been in the spotlight throughout the apparent domestic gas crisis debate, so I welcome this opportunity to speak and share my thoughts something that is fundamental to the wellbeing of all Australians reliable and affordable energy. You would think that reliable and affordable energy in Australia is a given. For the last 50 years we have witnessed the extraordinary growth in our natural resources particularly gas. Gas is Australia s third largest natural resource. Back in 2012 the Chief Economist issued a Gas Resource Assessment that identified a combined gas resource in Australia of 392 trillion cubic feet, which was equal to 184 years of gas production. There was no question that Australia had sufficient gas resources to enable the expansion of domestic and export production capacity. Indeed the Chief Economist predicted that gas would be the fastest growing nonrenewable energy source until 2035 with domestic consumption being driven by new gas fired power generation and by policy initiatives supporting gas uptake as a clean energy source. Page 1 of 22

2 Here we are only 5 years later. Instead of a thriving domestic gas market with new sources of supply coming on-stream and abundant gas fired power, we are now talking about a so-called crisis. So what went wrong? Today s energy challenges are characterised by high electricity and gas prices resulting from falling domestic supply. Over $200 billion has been invested in a thriving LNG export sector, while investment in domestic gas projects has stalled. Gas prices have increased because all the cheap gas has been developed, so it is costing more to get gas out fo the ground and we need the scale of LNG projects to make the new unconventional gas commercial. This therefore is a pricing problem, not a gas shortage problem. This fact has been confirmed by the Australian Energy Market Operator (or AEMO), who announced today that the latest industry projections of domestic gas production are sufficient to meet current projections of gas demand. In other words, there is no gas shortage. Page 2 of 22

3 Unfortunately the politics of the situation have now taken over. The Federal Government has dramatically intervened and announced the Australian Domestic Gas Security Mechanism known as the ADGSM. The mechanism has been specifically designed to restrict the export of gas via LNG in favour of domestic supply in order to drive down domestic gas prices. This is in response to manufacturers claiming that they could not contract gas and/or that the prices quoted for new gas supply contracts were too high. The Government decision to intervene has distracted attention away from the underlying causes of the problem. We are being asked to believe that high prices and shortages in supply are the fault of the LNG exporters whilst at the same time State and Territory governments have either banned or restricted gas exploration and production. Today s situation is a national issue that requires Federal and State Governments to develop a National Energy Plan. That plan needs to address the production of gas for domestic consumption and export. It also needs to address structural issues regarding the transport of gas to market. To that end we support the push by the Finkel Report for a national strategic energy plan to ensure the reliable supply of electricity. The ADGSM intervention must not be seen as a substitute for policy. We have a gas pricing problem and Government intervention to force prices down without addressing the underlying causes can have long lasting, adverse consequences for Australia s economy. Page 3 of 22

4 Slide 2: Why develop natural gas? Natural gas can play a significant role in Australia s move to a clean economy. The environmental, economic and energy security benefits of natural gas cannot be ignored. Gas is good for the environment When used for power generation, natural gas is 50% less emissions intensive than coal. Gas is also the cleanest and most reliable fuel to back up intermittent renewable power. Modern gas-fired power plants take less than a third of the time a coal plant needs to ramp up to full operation, making them better at responding to changes in the grid. Importantly Australian natural gas is also doing its part in cleaning up Asian air quality. If Australia s forecast 85 million tonnes of LNG production was used to replace coal-fired power, it would reduce carbon emissions by over 300 million tonnes per year. This is more than 50% of Australia s total annual greenhouse gas emissions o 8 million tonnes! Gas is also good for the economy Australia s oil, gas and energy industry creates over 100,000 Australian jobs and has contributed more than $250 billion to the Australian economy. Natural gas also powers 40% of Australia s manufacturing industry which is why reliable and affordable natural gas is critical to the success of this sector Page 4 of 22

5 Finally gas is good for energy security. More than 50% of Australian homes rely on natural gas for heating, cooking or hot water. Australia has enough gas resources to power our nation for hundreds of years. Yet most of these resources remain in the ground. In these difficult and uncertain economic times, Australia can t afford to say no to a clean, reliable and cost-effective source of power. If we are going to successfully transition to a clean economy, natural gas must be part of the solution Slide 3: East Coast Gas Market There is no doubt that natural gas is an important resource, and in the past Australia has enjoyed low domestic gas prices. However, gas prices on the East Coast have been steadily rising in response to a number of factors, including: An increase in domestic consumption and export demand at a higher netback prices increasing exploration and development costs for new sources of supply, particularly CSG, and Increased transport costs for moving gas through privately owned pipelines Page 5 of 22

6 The fall in global oil prices has also impacted the pace of new development through constrained balance sheets, with more marginal projects being uneconomic at lower oil prices. It is important to also note the role of global oil prices on long term investment decisions and the impact on domestic gas prices. Global LNG is priced by reference to the global oil price. Natural gas from coal seams like our Queensland CSG fields is expensive to extract and requires a high oil price to compete with conventional sources of supply. These projects would have never been developed at legacy domestic gas pricing of $3 - $4 per gigajoule, and without the scale of an LNG export project. Compared to conventional gas, CSG developments need more wells and additional compression to deliver the same amount of gas, which increases unit costs and means ongoing, sustaining capital investment. Approximately $70 billion in capital investment was required to develop the Queensland LNG projects, which was underpinned by secure long term offtake agreements. In the case of GLNG all of the LNG is sold to Malaysia and Korea under long term agreements and importantly, there is no excess production. Page 6 of 22

7 Domestic gas prices have increased to international LNG levels as a result of the higher development costs for these projects. The LNG projects have therefore set a new price level which poses a major challenge to our manufacturing sector as they adjust to this new pricng structure. However, despite the impact of global pricing, there are structural reforms that can be undertaken to relieve the pressure on domestic gas prices. Two primary levers are increased supply and reduced transport costs. Slide 4: New Supply Let me start by talking about new supply. At the heart of the current issue is the failure by previous governments at all levels to encourage and stimulate the development of gas supply. Activism against gas development is strong in Australia and governments have demonstrated a marked reluctance to expose themselves to the backlash associated with fracking or coal seam gas. This is despite scientific research consistently proving that this type of development can go ahead safely with appropriate regulation. We welcome the transition to a low carbon economy, though if Australia is to have reliable and affordable energy we need national coordination around the integration of renewable energy. The recommendations in the Finkel Review including the move from a Renewable Energy Target to Page 7 of 22

8 Clean Energy Target at first glance appears to be a step in the right direction, and pave the way for gas to displace coal fired generators as they exit the market. We see the Clean Energy Target being able to provide a level playing field required to meet the triple challenge of providing reliable and affordable energy while meeting Australia s emissions targets. Finkel promotes the role of gas and the essential role it plays in Australia s energy mix. It also clearly stated that effective government policy and regulatory settings should facilitate new investment and enable the development of Australia s gas resources, while addressing community concern about the environmental and social impacts associated with unconventional gas extraction We couldn t agree more but the merits of gas having a greater role in the energy mix is worthy of further consideration For gas to play its part on the East Coast and in our low carbon future, new supply is needed. Currently 95% of New South Wales gas supply is imported from other states. The Narrabri Gas Project is an opportunity to supply a substantial share of this state s gas needs. Santos has spent nearly 10 years and over a billion dollars trying to develop Narrabri. This is an important project for New South Wales and the East Coast. Page 8 of 22

9 Had Santos been able to develop this project in a suitable timeframe, we would not be talking about an East Coast Gas Crisis today. Following our recent lodgement of the State Significant Development Application, including our Environmental Impact Statement; the Department of Planning has received more than 23,000 submissions which need to be reviewed and responded to. Santos welcomes the opportunity for the community to have their say on the Narrabri Gas Project and we recognise the important role this part of the assessment process will play in ensuring a robust and thorough assessment. However, 98 percent of the submissions are from people who live outside of the Narrabri community, who have no experience with Santos operations or the project. Their objections highlighted general opposition to coal seam gas and fossil fuels, including concerns about climate change and the need to transition to renewable energy. Only 500 submissions were from local Narrabri residents, and importantly the majority of these were in support of the project. Santos is now required to prepare a response to these submissions. Can you imagine the time and resources, not to mention the cost it will take to review and respond to 23,000 submissions? Despite these challenges we are still committed to the project and although we are the last company standing in NSW we believe that Page 9 of 22

10 Santos has the track record and expertise required to safely and sustainably develop the Narrabri project and deliver clean energy to NSW for many years to come. In this regard we were very pleased to see the New South Wales Government last week reiterate that the Santos Narrabri Project is a strategic project in its gas plan. <PAUSE. The Northern Territory contains highly prospective shale gas resources that could be a game changer for East Coast gas supply while bringing significant economic benefits to the NT. Several hundred trillion cubic feet of natural gas has been identified in the NT, and while more exploration and appraisal is required, the McArthur, Amadeus and Greater Beetaloo Basins are looking very positive as future development sites. It is pleasing to hear government support for a proposed pipeline from the NT to existing facilities in Moomba, which will make this gas accessible to the east coast market. However NT gas appraisal and development activities are currently being stifled by the Territory s moratorium on gas exploration and development. Page 10 of 22

11 Slide 5: Development and Transport Costs Now let s look at the costs of Gas Development. As I have stated previously the easy gas has been developed and therefore it simply costs more to get the gas out of the ground than it used to. Gippsland Basin in Victoria and Cooper Basin in South Australia are mature fields that are key to the East Coast gas market. As gas fields mature and start to decline, operators need to drill more wells, driving up the costs and making these fields uncommercial at legacy domestic gas prices of A$3-4 per gigajoule. The industry is continuing to work hard to drive down costs, improve productivity and implement innovations that improve gas extraction in mature fields, though Governments have a role to play too by incentivising innovation and technology development in the sector. Onshore shale in the Northern Territory will be similarly challenged but will have the additional challenge of distance to add to the cost woes. This means that execution excellence will be necessary to make the most of these tough to develop resources. However with the best will in the world it will be imperative to ensure that we can transport gas across the vast distances that our unique markets require. Page 11 of 22

12 Access to reasonably priced pipeline services will therefore be key to increasing the supply and efficiency to the East Coast Gas Market. The recent ACCC inquiry into East Coast Gas found that the majority of Australia s gas transmission pipelines operate under a monopoly pricing regime. The cost of transporting gas on the East Coast, even short distances, is excessive and is a significant component of high priced gas. Unbelievably, it costs more to transport gas from Bass Strait to Queensland than to ship gas to China. We need to open up our pipeline networks to allow the flexibility for gas to flow where it is most needed. The current pipeline access regime is not providing effective access to number of unregulated pipelines.. In this regard, Santos supports the recommendation to look at market power as a criteria for regulating pipelines. Page 12 of 22

13 Slide 6: The ADGSM Moving on to a topic that has received a lot of media and political attention over the past couple of months the Government s proposed Australian Domestic Gas Security Mechanism or ADGSM. Let me be clear Santos has a keen interest in a strong and functioning domestic gas market. This has been integral to our past and it is critical to our future. We are also committed to working alongside the federal and state governments to achieve the desired outcome of a stable and robust domestic gas market that coexists alongside a thriving gas export industry. However we have a number of concerns about the ADGSM. Firstly we believe this mechanism will not solve the problem. In fact we believe the net contributor trigger could have the opposite effect and drive up gas prices by targeting the most expensive gas. The mechanism does not fix the underlying problem of bringing on new domestic development, instead it may make states that ban gas development believe they can rely on government intervention to fix their supply problems. Finally retrospectively targeting LNG projects creates sovereign risk for Australia.. Let me explain Page 13 of 22

14 The proposed ADGSM is underpinned by the Minister deciding there is a gas shortfall. The shortfall is then allocated to LNG exporters who are NOT net contributors. A net contributor is an LNG producer that sells more gas to the domestic market than it buys from fields which are not considered export compatible. This measurement unfairly targets the GLNG project as the only project that potentially fails the test. Whether or not there is a shortfall depends on accurate forecasts of gas supply and demand by the Australian Energy Market Operator (AEMO). We are working closely with government on how this mechanism will work in practice, however we believe it is targeting the wrong LNG producers for the wrong reasons. It has been widely publicised that Australian gas is sold in Japan cheaper than it can be purchased in Australia. The GLNG project does not sell gas to Japan. GLNG, in which Santos is a partner with 30% equity, was underwritten by long term export contracts with Korean and Malaysian buyers. The gas used to make the LNG is a combination of GLNG owned gas and gas that has been developed on the back of long term contracts with other Australian gas suppliers. Page 14 of 22

15 These suppliers required price certainty and long term supply contracts to underpin ongoing development of the gas. Given that ALL of GLNG s gas is contracted overseas, GLNG has no cheap, surplus gas - indeed it s all contracted at premium prices. Other Australian LNG projects that have surplus gas are selling surplus volumes on the spot market at prices around US$3 per gigajoule lower than their contracted gas. These projects are not impacted by the ADGSM mechanism as the gas is deemed to be their gas to sell. The ADGSM if it is triggered will therefore force the most expensive gas to be diverted back into the East Coast market. GLNG if required to do this will obviously seek an equitable commercial outcome from domestic customers as anyone who had made an $18 billion investment in a project would! Remember this crisis is about pricing not supply, which is why I have questioned the net contributor measure as not the right measure. It potentially distorts the market to make expensive gas available. It represents neither the lowest cost form of Government intervention nor delivers the greatest public benefit in terms of policy options available to the Government. And even more importantly, gas market intervention could have serious unintended consequences for the gas industry and the East Coast manufacturing industry It will not solve the long term problem of falling supply... Page 15 of 22

16 That is why we believe there are better ways to manage this situation than government intervention that might expose the taxpayer to compensation payments while not delivering any public benefit. Santos, and our GLNG partners are keen for an industry based solution in the event of any shortfall. Santos has already made gas available on competitive terms and continues to work on initiatives to deliver more into the domestic market. We believe that it is a better outcome all round for markets to be left to work as they are designed to do. The ADGSM creates sovereign risk for future investment in Australia. Retrospectively punishing LNG exporters squanders our natural advantage as a low risk country with a transparent rule of law for investors, with no nasty surprises. This reputation helped us attract over $200 billion in LNG investment over the past decade and secure premium prices for our gas, despite being an expensive country for development. With a further half-trillion dollars in new gas investment up for grabs globally as Asia grows, this is a real risk to take. Slide 7: Unintended Consequences - The Argentina Experience Argentina provides a sobering lesson of how market intervention can destroy a thriving gas industry Page 16 of 22

17 At the close of the 20 th century, Argentina was the biggest producer and consumer of gas in South America. It successfully exported gas to neighbouring countries in bigger volumes than any other producer. It was a very useful export income earner, with major customers in Chile, Uruguay and Brazil. In 2001, things changed. There was a non-energy economic crisis. To try to ease the burden on consumers, the Government instituted price caps on gas. Despite the fact that this was supposed to be a temporary measure, it had the effect of curtailing production investment. To avoid a shortfall in domestic supply, the Government introduced export restrictions which further undermined investment confidence, as well as customer confidence. The result was that by 2004, domestic demand was exceeding supply. A new crisis had emerged even though the economy had by now recovered from the earlier downturn. Gas investment was stalled because of the lack of confidence among producers and customers in neighbouring countries which had to make difficult adjustments to the new shortfall in supply. Exploration had dropped dramatically and producers were choosing to not proceed with higher risk projects. As a result of the two Government interventions, from 2005, Argentina was forced to import gas to make up its domestic shortfall. Page 17 of 22

18 By 2009 the gas imports had to be supplemented by LNG imports in order to meet domestic demand. As of last year Argentina was still an importer of gas and LNG. What started as a short-term intervention in the market has escalated over a decade, causing many unintended consequences and destroying what was once a thriving gas sector. Page 18 of 22

19 Slide 8: US competitive advantage In stark contrast, in recent years the US has emerged as one of the top producers of oil and gas in the world, and will rival Russia as the world s largest oil and gas exporting region by This is a country that was reliant on oil imports from the Middle East just a few years ago, and only a decade ago approved a number of LNG import terminals. Pro oil and gas development policies and government support for technology development is aimed at unlocking America's $50 trillion in untapped shale oil, and natural gas reserves. Cheap natural gas is fuelling a resurgence in manufacturing with strong growth in output and employment. Allowing fracking to safely proceed has resulted in some of the lowest natural gas prices in the world. This gives energy-intensive industries in the US a global cost advantage. The Shale revolution has also helped the environment. While we wouldn t advocate moving away from the Paris Agreement like our US counterparts, the US has done more than any other nation to reduce carbon emissions. By switching from coal to natural gas and renewables for electricity generation, the US has cut carbon emissions 21% since The National Bureau of Economic Research has estimated $3.5 trillion of the increased equity in the US stock market has been the result of US oil & gas shale development. Page 19 of 22

20 Slide 9 Santos is part of the solution We believe Santos is part of the solution to the challenges faced today. Santos is an Australian company founded in South Australia more than 60 years ago. We have almost 150,000 Australian shareholders and we are a leading supplier of natural gas to the Australian domestic gas market. We have 32 direct supply contracts with customers across Australia, including major manufacturers, electricity generators and resources companies, supporting thousands of jobs In 2017, Santos expects to deliver nearly 100 petajoules of natural gas into the domestic market and ironically Santos alone is a net contributor. Despite this the proposed ADGSM will target Santos as part of the GLNG project, impacting an Australian company that supports many Australian businesses. This highlights another unintended consequence of the proposed ADGSM. Our domestic gas supply arrangements include a number of agreements below current market levels that help support Australian manufacturers that would struggle to survive at higher gas prices. Santos is in a unique position to make gas available and to work with government and industry to address short-term issues and provide longer term security through new projects such as Narrabri. Page 20 of 22

21 Over the next three years we will spend $2.5 billion in Australia alone, including drilling over 800 wells. We employ over 3000 people across our operations, and since 2007 we have spent more than $200 million on Australian community projects. On joining Santos I stated that it was imperative that we worked to become the lowest cost developer of onshore gas resources in Australia. This will be necessary to differentiate us from our competition and ensure that we have the expertise to develop resources economically. We believe Santos is part of the solution to building a strong domestic gas market. Our strategy is to develop the Narrabri Gas project, while building flexibility into our portfolio to free up Cooper Basin Gas for domestic use to assist with immediate demand. Page 21 of 22

22 Slide: Conclusion While there is no silver bullet for the issues faced by the East Coast today, I have a few alternative suggestions to market intervention, which could help relieve the tightness being experienced. First I believe East Coast LNG players can work together to make gas available by identifying surplus supply and diverting this to the East Coast market where required. Opening up private pipelines to enable this gas to be diverted to where it is most required will be critical to enabling this to work. Second we need to look at the cost of gas transmission and access to unregulated pipelines. In this regard, Santos supports the recommendation to look at market power as a criteria for regulating pipelines. Finally if we really want to make a difference to our economic and environmental future, then we must lift gas bans and moratoriums to allow gas development to safely proceed. Thank you and I will now take any questions. Page 22 of 22