Powering into the future

Sunday Times Sunday
20/7/2008 Page: 4

THE global energy squeeze - which, in recent months, has fast-forwarded from threat to reality for most of the industrialised world - will present significant challenges for WA's resources sector. With oil and gas prices claiming record highs on an almost daily basis, and with carbon trading schemes poised for introduction throughout most of the western world, energy costs have nowhere to go but up. The current WA gas crisis, caused by a June 3 explosion at the Apache Energy installation on Varanus Island, may be a taste of what's to come as the world's energy users scramble for a share of the globe's rapidly diminishing supplies of fossil fuels.

Soaring energy prices will represent a windfall for WA's oil and gas sector, but for others that require competitively priced energy to maintain international market share, the outlook is not so rosy. Most industry representative groups believe the answer for WA is to simply ramp up exploration and development of our domestic natural gas reserves. But all agree such a ramp-up must start now and must be given government support.

Association of Mining and Exploration Companies chief executive Justin Walawski agrees that while there is no doubt energy prices are headed skyward, it's not all gloom and doom. 'If energy supplies tighten up, then clearly we're going to see increased prices.

But if there are mechanisms to increase the domestic gas supply, it's not an automatic conclusion that we are going to be faced with searching for alternative sources of energy in the short-term future," Dr Walawski said. "There are some opportunities that haven't yet been exhausted that would increase dramatically the supply of gas into the market in WA."

Dr Walawski said making sure those supplies were available to meet the challenges in a timely fashion would require the co-operation of all stakeholders, including the State Government. "The early development of some of these known reserves will be heavily reliant on technology and we need to create the right policy environment and incentives for companies to develop these reservoirs rather than go to other regions of the world where it's easier to both explore and produce," he said.

'Also, the licensing system in WA does not encourage companies working in the oil and gas sector to actively develop projects as it does in the minerals sector. In the minerals sector the policies and legislation are designed to provide incentives for companies to develop their prospects and if they don't, they lose that opportunity and lose that tenement. That's not the case in the oil and gas sector, where companies can hold on to their prospects without very much cost at all. "If we have circumstances where companies are holding on to reservoirs for very long periods of time and not developing them, then that's not in the best interests of the state."

John Nicolaou, chief economist with the WA Chamber of commerce and Industry, also believes greater exploration and development of domestic gas fields will keep WA's resources sector in energy for the foreseeable future. "Exploration activity in WA in oil and gas is increasing considerably and reached record highs in recent times, which highlights the fact that international conditions for this type of exploration in WA are very favourable," he said. Mr Nicolaou said he didn't believe rising energy prices would adversely affect the international competitiveness of WA's resources sector.

"We are in an era where the reality is that energy costs are rising and that impacts on miners throughout the world, so in terms of impact on our competitiveness as a state, it's all relative," he said. "We're in a global market and if prices are increasing, they're increasing across all countries. But we have a world-class resources sector, which is very efficient and has a great capacity to absorb cost increases."

Many have tipped that rising energy costs will cause a slowdown in China's manufacturing sector and hence a reduction in demand for Australia's raw materials. Mr Nicolaou is not so pessimistic. "China has had a competitive advantage for a long time in that labour costs have been very low and they are now grappling with rising wages and higher energy costs, which could impact on their capacity to produce unless they achieve productivity improvements which they have already started to do," he said. "I don't doubt

China's capacity to innovate and to take on more efficient production methods." At least one industry group is, however, warning against putting too much stock in WA's natural gas reserves. The DomGas Alliance, an organisation representing the majority of the state's current and prospective natural gas users and gas infrastructure investors, says unless the WA Government moves to quarantine more of our gas production, gas supplies for the domestic market could run out in as little as seven years.

The report says that contrary to claims by oil and gas exporters, Australia does not have abundant reserves of natural gas. "Despite having just 2.4 per cent of the world's gas resources, Australia continues to expand exports of natural gas while aspiring to be the world's second-largest LNG exporter," the report said. "Producers are aiming to increase WA's LNG production to 50 million tonnes per year by 2015. This represents a five-fold increase in LNG exports in less than a decade. If this target is realised, all gas which is accessible to the WA domestic market could be fully committed between 2015 and 2020." The alliance also warns that the bulk of Australia's undeveloped gas resources is located offshore and in deep water and many of the fields have gas quality issues that could make recovery uneconomic.