Energy White Paper 2012: Will Australia’s high cost disease prove terminal?

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12 November 2012

There’s a distinct sense of déjà vu around the Government’s energy white paper. The paper confirms the tremendous opportunity Australia has as an energy economy while also conceding that high project costs are affecting Australia’s global competitiveness. The paper’s findings have merit, but they are certainly not new. Australia’s energy problems have been well-known for a long time. What is missing is an agreed set of actions from both the states and the Federal Government to fix them.

When it comes to energy it’s too easy to assume Australia is sitting pretty.

We are resource rich and already supply 2.5 percent of global energy. By 2035 the world will demand 40% more energy than it does today, with our regional neighbours, particularly China and India, accounting for most of that extra consumption.  In response, Australia’s energy production is expected to double in the next two and half decades.

Diversity is also on our side. Australia has almost half the world’s uranium resources, 6 per cent of coal resources, and 2 per cent of natural gas[1].

We are the world’s largest exporter of coal and the energy white paper forecasts exports of thermal and metallurgical coal will grow by up to 689 million tonnes a year by the middle of next decade.

Seventy per cent of the world’s liquefied natural gas capacity is under construction in Australia which will underpin a tripling of gas production by 2020. The paper predicts Australia will potentially be the word’s largest LNG exporter by 2021.

The future looks rosy but it’s far from assured and the white paper concedes there are significant challenges ahead.

While we are a major supplier of energy to world markets, Australia is by no means a monopoly. Other competitors are emerging with lower costs and perceived better exploration opportunities than Australia.

Indonesia is predicted to overtake Australia as the world’s largest producer of thermal coal in coming years and new LNG capacities are emerging in the Middle-East, the Caribbean, North America and possibly East Africa.

Australia has its work cut out to remain competitive. It costs more to produce energy here than almost anywhere else in the world.

Earlier this year analysts from the Commonwealth Bank found that it costs three times as much to develop a thermal coal mine in Australia than in China, two and a half times more than in Indonesia, and 40% more than in South Africa. 

It means Australia’s projects are less attractive than projects in other coal-producing countries and a much higher coal price is needed to make it worthwhile to develop mines here.

With commodity prices actually on the way down, this doesn’t bode well for attracting investment into the sector.

Gas developments are similarly challenged with Australia increasingly seen as a high-cost location to pursue LNG projects.

The government expects Australia’s production levels to double in the next 25 years. This level of expansion requires significant investment in resource development projects with as much as $290 billion worth of projects currently in planning or under development.  A large portion of investment will need to be sourced from overseas investors.

But investors won’t come if projects are not economically viable. Energy is a globally competitive game and Australia needs a tangible strategy to deal with its weaknesses.

The energy white paper acknowledges that attracting new investment requires action to reduce regulatory costs (both time and financial) and boost productivity.  The Government’s roadmap to achieve these reforms includes streamlining approvals of major projects, removing duplication in environmental regulation and ensuring there is sufficient supporting infrastructure and a skilled workforce.

While this is welcome, it is hardly innovative. Regulation and productivity issues are chronic malaises of Australia’s economy and not confined to the energy sector. Manufacturing has been on the same slippery slope for some time.

What’s needed now is cooperation between government and industry to tackle Australia’s diminishing resource competitiveness.  But it requires hard decisions and a level of collaboration between state and Commonwealth governments that seems to be politically unpalatable.

Greg Boyce, the head of the world’s largest private coal company, Peabody Energy, has called for a national commission to evaluate the impact of government policies on mining and develop a clear action plan.  It’s a good idea and a logical next step after the white paper. A national summit could gather the right minds from industry and government all focused on securing Australia’s future as a global energy leader.

Let’s hope this happens before Australia’s high cost disease proves terminal.


  [1] http://www.ga.gov.au/energy/basics.html




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