It’s time for a reconsideration of restrictions on shale and coal seam gas development. With Victoria and New South Wales facing an uncertain energy future, the vast potential of unconventional gas reserves should be explored as part of any long term energy security plan.
Coal seam gas and shale gas development in Victoria and New South Wales has been held back by moratoriums on hydraulic fracturing (or “fracking”) – the controversial practice used to extract the gas. Although New South Wales recently lifted its moratorium, the proposed limitations on CSG exploration and development near residential and certain farming, horse-breeding and wine-producing areas could constrain any significant development of the unconventional gas industry.
Fracking involves water, chemicals and sand being pumped underground to release gas trapped in rock formations. Some landowners and environmentalists claim the process can pollute water supplies and pose threats to public health.
However, fracking has been increasingly taken up in the United States, making available huge reserves of gas and setting in motion an energy revolution.
Queensland too has made a strong commitment to developing its unconventional gas sector. While environmental concerns may remain, public and private sector parties in Queensland have shown that fracking can be undertaken responsibly and safely by companies using best operating practice.
The Victorian State Government endorsed the National Harmonised Regulatory Framework for Natural Gas from Coal Seams (National Framework) in early June, but is still in the process of deciding whether additional regulation is required at the State level.
In the meantime the moratorium continues, implemented with the State refusing to issue new licences for CSG exploration or approve fracking activities under current licenses. It is unclear precisely when the Victorian Government will finalise its position, although a decision is expected within the next few months.
At one level, New South Wales has made better progress with the Department of Resources & Energy releasing a Code of Practice for Coal Seam Gas – Fracture stimulation activities (NSW Code) to coincide with the lifting of the moratorium on granting new approvals for the use of fracking during CSG drilling.
However, the New South Wales government has also proposed amendments to the State Environmental Planning Policy (Mining, Petroleum Production and Extractive Industries) 2007 (SEPP) which would prohibit CSG development:
Currently, two CICs have been identified, namely the Upper Hunter equine CIC and the viticulture CIC. For a detailed analysis of the proposed amendments to the SEPP see our thinking here.
The New South Wales government’s Strategic Regional Land Use Policy also provides that all CSG proposals on land identified or verified as Strategic Agricultural Land will be considered under an independent Gateway assessment process which investigates the impact of such proposals on that land. Click here for further information on the Strategic Regional Land Use Policy.
But as the resources boom recedes, the opportunity cost of restrictions like these on energy security and economic growth is mounting.
The need for more state-level regulation is highly questionable given both the National Framework and the recent amendments to the Environment Protection and Biodiversity Conservation Act 1999 (Cth), which allow the Commonwealth to directly assess and regulate impacts of CSG projects on water resources.
While the value of increased Commonwealth involvement in such projects is arguable, imposing overlapping layers of regulation at both State and Commonwealth levels is even less desirable.
Stakeholders in Victoria and New South Wales must move beyond the rhetoric and have an informed debate about unconventional gas development. This should include an analysis of the way in which other states like Queensland, Western Australia and South Australia and other countries, such as the United States, have been able to mitigate environmental and land use incompatibility concerns.
While other Australian states produce enough energy for their own needs as well as the domestic and international export markets, Victoria and New South Wales are disproportionately reliant on imported energy to sustain their demand, with New South Wales importing 95% of its gas consumption.
This exposes Victoria and New South Wales to unnecessary levels of vulnerability and uncertainty for their energy supplies.
On days of high demand, maximum production and import levels are expected to soon be insufficient to cover New South Wales’ energy needs, leaving the state exposed to shortages and price hikes.
Further, once Queensland’s LNG plants start exporting gas in 2015-16, New South Wales will face a 30% reduction in the availability of gas imported from South Australia and Queensland.
This reduction in supply may be further compounded by the fact that key contracts with gas producers in the Cooper Basin and Bass Strait will expire within the next three years.
Companies across a vast array of manufacturing industries that depend on cheap, reliable energy supplies have a choice of states (and countries) in which to undertake capital investment.
Those exposed to fluctuations and uncertainties in energy supplies and prices may decide, as a direct consequence, not to invest in Victoria or New South Wales.
Energy and resources projects create new jobs right through the subcontract chain from the principal contractor to civil works contractors, energy services providers, technicians, seismologists ... and on to bus drivers and cooks.
Energy developments also bring with them an array of public infrastructure in the way of road and rail upgrades, new or upgraded pipelines, and water treatment facilities.
In time, major developments generate profitable revenue that can be taxed by State and Federal governments and then invested in government programs and social services.
The advantage of developments in Victoria and New South Wales is that they would be less remote than the CSG acreage in Queensland, Western Australia and the offshore gasfields, mitigating the adverse impacts of a “fly in-fly out” labour force.
Any re-assessment of the moratoriums and restrictions will need to occur in the context of the concerns about public safety, health and water contamination that led to their implementation in the first place.
Many concerns surrounding the use of water and chemicals in the fracking process can be eased through better understanding the process involved and a more responsible approach by companies extracting unconventional gas reserves.
Fracking does require a lot of water, but innovations in the United States are reducing the volume of water used and improving the manner in which fracking fluid is treated and re-used. Water and “proppants” (mud and sand used to reinforce the fractures in the shale or other geological formations) account for about 99.5% of the materials used in the fracking process with the 0.5% balance being chemicals.
One key approach to mitigating any associated risks would be to adequately regulate and supervise the unconventional gas industry. The National Framework identified the requirement for “process monitoring and quality control during hydraulic fracturing activity” as one of 18 leading practices which mitigate the potential impacts associated with the development of CSG.
Risk mitigation might also involve restrictions on particular types of fracking chemicals being permitted, with disclosure requirements in place in relation to the type and volume of chemicals used, and prohibitions on chemicals deemed to pose too great a risk to public health or the environment. By way of example, legislative amendments and/or policy changes by the NSW, Queensland, Victorian, and Northern Territory governments have already prohibited the addition of BTEX compounds to drilling and hydraulic fracturing fluids.
Strict environmental conditions could also be applied to environmental approvals and/or mining licences, especially in relation to water treatment and chemical disposal, with clear adaptive management processes in order to protect against potential contamination of water supplies. Clear conditions around negotiating land access, minimising surface footprints and land rehabilitation are also important from both an environmental perspective and to help develop public confidence in the unconventional gas industry.
The NSW Code provides a useful example of the sorts of regulations that might mitigate the environmental risks associated with fracking. However, the operation of the NSW Code may be constrained at the practical level by the proposed amendments to the SEPP.
While opponents will always be concerned about those operators who might flout their environmental obligations , it is a fact of life (and business) that careless or negligent operators always pose risks regardless of the industry in which they operate. However, the national and international oil companies that will be at the forefront of unconventional gas development in this country generally work hard to earn and maintain their social licence to operate, and by acting in compliance with all relevant laws and policies, would ensure that such development occurs with reduced risks for public health and the environment.
We read with regular monotony the positive impact that the shale gas revolution is having in the United States. Canada won’t be far behind. China and India have vast, untapped unconventional gas resources and have already started to auction off blocks of acreage for exploration.
While environmental and public health risks should not be understated, there would be significant benefit in an open and transparent assessment of the risks and benefits of fostering the development of an Australian unconventional gas industry without imposing so many “green tape” limitations and conditions that they effectively scupper the industry in its infancy.
This is supported by the Productivity Commission’s draft recommendations, based on its ongoing inquiry into non-financial barriers to resource exploration in Australia, that:
As the iron ore, gold and copper boom passes us by, there is still time to try (in a safe and responsible way) to harness the golden goose that is the unconventional gas industry.
Jeremy King is a partner in the Banking & Finance team of Corrs Chambers Westgarth, and also the author of the Project Finance chapter in the LexisNexis text Australian Corporate Finance Law.
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