UNISA CEO BUSINESS SYMPOSIUM: FUTURE OPPORTUNITIES & CHALLENGES FOR SOUTH AUSTRALIA ENERGY & MINING SESSION

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1 UNISA CEO BUSINESS SYMPOSIUM: FUTURE OPPORTUNITIES & CHALLENGES FOR SOUTH AUSTRALIA ENERGY & MINING SESSION DAVID KNOX CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR, SANTOS Thank you Milé for that introduction. 1 November 2012 Good morning, I m David Knox, CEO and Managing Director of Santos. Thank you to the University of South Australia for the opportunity to speak to you today on a topic that is important to us all the future of business in this fine state. I ll speak broadly on this topic. Although my industry the oil and gas industry is important to the South Australian economy, I don t want to limit myself to a single sector as there are many more with important roles to play as we move forward. I want to cover this topic in three parts. First, we have to recognise where our growth is going to come from. Big businesses and big projects are important, but they must be seen as the icing on the cake, not the holy grail. Big business can occupy a lot of people s thinking and can influence much of the opinion about overall business health, and the state of the economy. But I believe this state s future potential exists elsewhere. Second if not big business, then what? The vast majority of businesses in this state are small to medium-sized enterprises. It is within this bracket that I believe we must focus and where South Australia s strength and growth potential lie. Thirdly, what can we do to help these businesses thrive? How can we prepare ourselves for the opportunities that will come from sectors including but not exclusively mining and resources? There are roles here for both government and industry in 1

2 facilitating investment, encouraging innovation, and developing tomorrow s leaders. Before I get into it, let me give you a quick snapshot of my own background. I m a mechanical engineer by trade and have worked in the oil and gas industry for about 30 years. I started in the UK and spent time in the US, the Middle East and Europe before coming to Australia. I worked at BP managing the Australasian developments part of their business before moving to Adelaide to join Santos. I imagine most or all of you would have heard of Santos, but to give you a quick overview: we re an oil and gas company. Our business is to explore for oil and gas predominantly gas produce it, and supply it to customers in Australia and Asia. We were founded here in Adelaide in 1954 with just a handful of employees and a vision to bring energy security to South Australia. After several years of hard work in the state s remote north, and in the face of the widely held geological view that Australia possessed no hydrocarbons at all, Santos early pioneers found success. From those small beginnings we built up one of the most important resources projects in Australia s history the Cooper Basin and have grown to become Australia s largest producer of natural gas for the domestic market. We have over 3,000 employees and thousands more contractors working across our operations in Australia and six other countries in the Asia-Pacific. We are the largest company headquartered in South Australia, and a top 25 company on the ASX with a market cap. Santos success has come about because of a number of themes that I ll touch on today government support, investment in innovation and people, and an underlying pioneering spirit to seek out new opportunities far and wide. 1. Big isn t always better So, to my first point that big business isn t always better. Companies like Santos and the projects we operate do make an important contribution to the economy through employment, through supply chains, tax and royalty revenue, community investment and so on. Mega-projects like the Cooper Basin and Olympic Dam provide opportunities to the second tier of businesses through contracts, services, partnerships and supply chains. 2

3 Further, there s the slightly abstract notion of business confidence, to which the bigger, flagship companies and projects contribute significantly because of their prominence. In this regard, South Australia took a hit recently with the decision to not proceed with the expansion of Olympic Dam at this time. I think this was an example of too much stake being placed on one venture. Not by government, don t get me wrong, but by all of us, by the collective business community represented by many in this room today. There are and will continue to be many positives in South Australia. We have one of Australia s most important resources projects in the Cooper Basin still going strong with decades to run, and a strong wind energy and burgeoning renewables sector. And, don t forget, Olympic Dam is still there, it hasn t gone away. It remains a massive, world-class project. Resources projects run for decades and decisions are made for the long term. The expansion will go ahead just not right now. It s important to keep that in mind, and to prepare ourselves for when the time does come. So, big business has its place. But for all our size we are an anomaly in South Australia compared to the small to medium enterprises that make up the overwhelming majority of businesses in this state. Santos isn t going anywhere the future for the Cooper Basin is bright but the seeds of future growth need to be planted more broadly. The important thing is that we prepare ourselves and be ready to take future opportunities when they come along. I ll come to that shortly. 2. SMEs are South Australia's strength Which brings me to my second point: small to medium-sized enterprises are South Australia s strength. But why? Let me start with a comparison. Adelaide and South Australia s business community reminds me of Los Angeles, where I worked in LA for several years for the oil and gas engineering firm ARCO. For all its size and fame, LA was not a big business town. Its small to medium sized enterprises provided the city s vibrant business culture, etc This mid-market strength isn t confined to just businesses. Smaller projects, joint ventures and so on have their place in the mid-market as they do at the bigger end of town. There are plenty of resources that have been put in place by the government and its department to help 3

4 facilitate cooperation and collaboration. Responsible business leaders will explore all those avenues to establish beneficial partnerships and alliances. As I said earlier, it s important to plan well for the future and invest now to ensure we are prepared for the opportunities when they arise. I ll take the resources sector as an example here. Current and future projects in this state and across the country require significant input from contractors and service providers, and have huge knock-on effects to communities around the country. The service industries in this state have the opportunity to become global leaders supplying world-class projects and not just those in South Australia. We have an excellent opportunity to establish ourselves as a services hub to the Australian resources industry and, as the Asia-Pacific gets ever-more hungry for resources from their own shores as well as Australia there will be more and more opportunities to work establish cross-border linkages and provide our expertise, knowledge and technology to others. There was an excellent example of this in last week s Advertiser. A local firm, Nobles, a 100-year-old business servicing the resources sector, had moved into new Adelaide headquarters to support its nationwide expansion to supply the Australian resources boom. They ve taken on new staff and have branches across the country, including new ones in Gladstone in Queensland and Newman in WA. Importantly, they said they were confident about South Australia s potential. 3. How do we help SME's thrive? That s one example. But, to answer the third question: what else can we do to help ourselves succeed? The past few years have been tough. Understandably, business confidence has been low in recent times due to economic uncertainty and the high Australian dollar among other things. In the financial year, South Australia was one of the few states to actually decrease its total number of businesses. But things are turning around. A CBA business survey for the June 2012 quarter found that business confidence increased significantly in South Australia, with a 19% rise in sentiment exceeding the national increase of about 14%. 4

5 This positivity can persist if we continue to recognise that the opportunities are still there, provided we encourage our small to medium-sized businesses to invest, innovate, and develop. As I said earlier, there are roles here for both government and industry. Support from government is vitally important. This state s resources industry is a prime example of success facilitated by government support. The South Australian government has been a long-time promoter of the South Australian resources industry within and beyond our borders. Santos would not be in the position it is today without a government that has an interest in working for the betterment of the state as a whole, and strong and sound regulators that seek to work with industry rather than simply govern it. For example, in 1981 Santos announced its intention to build a crude oil and liquids processing and export facility near Whyalla. Quick and decisive government policy gave international financiers the confidence to lend Santos US$600 million to fund the project. It was one of the one of the largest loans raised by an Australian company for Australia's largest onshore resource project at the time. It was exporting within three years. Let me be clear in saying that there is a lot of good work being done right now by the state government and its departments, as well as business groups, to encourage business development generally in this state. They are working to help create links and facilitate trade opportunities, supply chains, partnerships, and cooperation between companies within South Australia, across the country and into the Asia- Pacific region. Our neighbours in the Asia-Pacific offer plenty of opportunity to execute and grow our businesses in whatever industry we work. Notably, small businesses represent more than a third of all of South Australia s exporting businesses. Fundamentally, the challenge is to help generate and attract new investment. Setting taxes at a suitable level that will encourage businesses to invest in innovation and development is important. Smaller businesses often face higher costs from banks when accessing the necessary credit to grow their business. Anything that can be done to lessen those impacts would be a good thing. Fiscal settings that make South Australia more attractive to outside investors will help grow our businesses and bring in new businesses from elsewhere. 5

6 A recent report by ING indicated that a third of Australians would move interstate for a better wage. This is particularly relevant to the resources industry, where Western Australia and Queensland are attractive destinations for those with skilled labour or technical backgrounds. For those seeking careers in the corporate sector, Sydney and Melbourne remain the top picks. As I ve been seeking to explain today, Adelaide and South Australia does not need to aim to match the bigger players. We should instead focus on our strength in numbers in the smaller to mid-market range, and work to make this state an attractive place to do business in that sector. Government can only do so much. Ultimately, it s up to the businesses themselves to set their path forward. Innovation is the key here. Businesses of all sizes must continuously innovate if they want to survive. It is the key to increasing productivity, enhancing competitiveness, and operating more efficiently. Always ask yourself: is there a better way of doing things? The beauty of small to medium-sized businesses is their ability to move quickly, take risks, and be bold. Their ability to adapt to changing conditions is of even greater importance amid current economic uncertainty. However, many firms don t appear to be using that advantage. Figures from the Federal Department of Innovation, Industry, Science and Research show that smaller firms innovate much less than larger firms. Likewise they invest less on research and development. There are good reasons for this for example lack of access to additional funds or the necessary expertise which takes us back to the role of government in facilitating further investment and business links. Technological innovation provides many opportunities for us to improve the way we work together. There is a constant stream of new ways to communicate, share information, find new business, supply and trade, analyse, conceptualise and create. The opportunities offered by the digital revolution are particularly valuable to small to medium-sized businesses for their cost-efficiency and flexibility. I ve seen first-hand the positive impact that well-applied technology can have. There are many examples within Santos of innovative technology helping us improve safety, increase efficiency and productivity, reduce costs, and ultimately unlock new energy resources. 6

7 Good communication is fundamental to any successful venture. Santos workforce is spread widely we operate in all mainland states and the Northern Territory, and in six countries in Asia, onshore and offshore. Technology that brings us closer together has improved significantly our ability to talk to each other, share information and data, and work with our business partners to design and develop large projects. While technology is often the first thing that comes to mind when talking about innovation, this concept can also apply to things like social policy and business management. Which brings me to leadership, a point especially relevant to today s audience. Many of the people with the power to realise this state s business potential are in this room today. It s vital that you put the time and resources into developing the next generation. Give them the skills, the knowledge and the experience that they will need to take your business forward. To give you an example, Santos has partnered with the University of South Australia and the University College London which set up an Adelaide campus two years ago with financial support from Santos to develop an MBA with a particular focus on the energy and resources industry. As part of this, we re sending a number of our employees back to school. To date, six Santos employees have graduated and another 50 are currently enrolled. Beyond that we ve also invested in the Australian School of Petroleum at the University of Adelaide, we have strong graduate programs, apprenticeship and traineeship programs, indigenous training and employment initiatives, high school mentoring programs, plus our internal development systems. Some of these investments do count as broader community investment, but by targeting our funds towards education particularly in relevant areas such as engineering and geosciences we are helping teach and encourage the next generation of leaders for our business and our industry. A recent success of ours brings all of these ideas together identifying opportunity, government support, technological innovation, and leadership. 7

8 Last week, with the South Australian Premier and the Energy Minister, we marked the first ever commercial production of natural gas from a shale well. This was a significant milestone not just for us, but for the Australian natural gas industry as a whole. This particular milestone was achieved because of a number of factors: Santos leaders began an exploration program 10 years ago and committed the capital required; they acquired and developed the innovative technology and expertise needed to make shale gas production economic; and along the way we had supportive government and regulators. We are on the cusp of an exciting new era, which means the opportunities for all are still to come. Let me finish by recapping. South Australia doesn t need big business to ensure a bright future. Santos and others have an important place as providers of opportunity and figureheads of industry, but the underlying potential of this state lies within the huge proportion of our small to medium-sized businesses. What we need to further develop our business community is continued support from government and the willingness of industry to make use of the resources available to them. Seek out the expertise, explore avenues for trade and business partners, look ahead for opportunities on the horizon and get yourselves ready. There are opportunities there just waiting to be taken. We have to prepare for those opportunities so we don t miss them. That means helping businesses access the capital they need to invest and grow. It then means the businesses themselves planning for and executing that investment. It means creating an environment that makes Adelaide a good place for small to medium enterprises to operate. It means innovating. It means investing in our people and our future leaders. The potential is there. It s up to all of us to realise it. Thank you. 8