Energy Policy Down Under: An Interview with Ian Macfarlane, Australian Minister for industry

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Australia and Canada are blessed with abundant resources and access to giant customers. Both have become energy superpowers. But they differ in some respect. Australia spends $140 million a year geo-mapping to provide free information to corporations. Canada, by contrast, is mostly unmapped and the budget for geo-mapping is $100 million spread over five years.

Australia has harnessed its resources and has pulled away from both Canada and the United States in terms of its per capita GDP: Australia in 2013 was at $64,863; the U.S. at $53,101 and Canada at $51,989, according to the IMF.

Also, Australia has dealt with, and devised a system, to provide clear title and terms to companies exploring and developing land, including Aboriginal territories. Canada has not and vast portions of the country are mired in land claims that often overlap, thus impeding economic development.

I interviewed Ian Macfarlane, Australia’s Minister of Industry, about a range of issues and strategies. He has had a long and distinguished public career and held various cabinet portfolios such as Small Business, Industry, Tourism and Resources and since 2013 as Minister of Industry. Originally a farmer and president of the Queensland Grain Growers Association, he has also variously served as the opposition critic for trade, infrastructure, water and energy sectors.

How does your government encourage exploration and production and distribution?
In terms of exploration, we offer pretty competitive geoscience so a lot of geodata is provided free of charge to companies. In terms of acreage in the offshore, we are offering some acreage at the moment on a cash-bidding basis. These are mature developed areas and the discovery of gas is very high. But generally we provide the acreage free of charge on the basis of who puts in the best exploration bid. So that’s the first thing. Australian Highway

“We offer pretty competitive geoscience so a lot of geodata is provided free of charge to companies.”

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The second thing is, obviously, we provide title to any discoveries. Along with Canada, we are one of the few countries in the world that don’t demand a government share in any development. And I guess the third thing we do is we (the federal government) don’t take a royalty on offshore acreage, but we take a profits tax.

So if you have a difficult [offshore] acreage to develop, and you are involved in any significant capital cost in terms of, let’s say, developing a LNG plant, the opportunity to pay those costs off before you pay any fee to the [government] Commonwealth is there. Some of these projects might go for 10 years before they actually pay anything back to the federal government. It will be as a super-profits tax not a royalty based on the extraction.

How much geo-mapping do you do? Is the whole country of Australia geo- mapped?
Yes, pretty much. It’s a pretty unforgiving country to geo-map because it’s a very old country and it doesn’t give up its secrets easily. But the Commonwealth government has a world-class agency called Geoscience Australia and they do some of that and they also correlate and collect double the data that companies do as part of their exploration exercises. We go back over it and we try and use seismic information and we re-map areas. Generally we know what’s where.

That’s amazing and the last figure I saw is that you allocated about $140 million a year towards GEO-mapping?
Yes that’s a combined figure with the States, but we do spend a lot of money on that and as I say that reaps its own rewards because one of the incentives for people to come here and explore, and particularly drill offshore for gas, is that we have a lot of data that’s available and it’s all free. We don’t charge for it.

The other thing that Australia has done is remove the uncertainty of the aboriginal land claims. This was the result of legislation that settled most claims and also provides a registry where companies can find out the terms and conditions of settlement or if there are unresolved claims.
Well, that is the case, not in every case, but in the majority of cases, we’ve made some significant advances. I wouldn’t say it’s not without its challenges from time to time, but certainly in terms of working through the process it is well understood and again when we’re dealing with offshore situations they obviously don’t have the same issues in terms of native title, but there are associated issues when gas comes ashore and you have to build a LNG plant. Again, there are [claims] processes that have basically been worked on since the early 1990’s so we are getting there. It can be painstaking at times but usually a result is forthcoming.
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In Canada, you can have lands with conflicting overlapping land claims on a property holding up development and costing money. I think you’ve mostly gotten past that. Am I correct?
Yes, we have to a degree. We still get those conflicting land claims but that’s sorted out well before production.

According to the International Energy Agency, Australia will overtake Qatar as the world’s largest LNG exporter by 2016. How many projects are currently finished and how many are underway? You have four LNG export projects now?
There are more onshore under construction. Two trains (LNG plants) are being constructed by Chevron and their partners; another by a company in the northwest and six under construction by British Gas and partners, all involving non-conventional gas or coal seam gas.

Offshore, Shell has under construction a floating LNG project, which is being built in South Korea on what some people called a barge, also known as a ship that is 495 meters long [300 meters wide]. That will be the first of what we call the `floaters’ and we are expecting after that probably three more. This is traditional natural gas offshore.

“Total export potential is about 60 million tons a year.”

What does all that add up to in terms of exports?
They are saying their total export potential is about 60 million tons a year [one million metric tons equals 48.7 billion cubic feet of natural gas] and the last of those will come on stream probably in 2018.

Are the floaters in difficult waters? These floaters will gather, and liquefy, and then ships will pull alongside with tanks and off it goes?
Exactly right. The lead Shell proposal is exactly that. It’s one ship. The waters are prone to cyclones or typhoons. You can imagine a ship of this size will basically ride that out. The personnel will leave in some cases but generally they will stay on board.

We have semi-submersibles offshore but we are way behind on LNG for export. Any advice? What were your biggest challenges?
It does take a long time. I wouldn’t dare offer advice to a country like Canada, but I can tell you what we have learned is to insure that the company has confidence in its title and in the taxation arrangements around their production. A stable business tax regime is a competitive advantage for us. But we have our disadvantages. Costs are extremely high. Wages are astronomical. Welders working in some of these offshore environments are earning in excess of $350,000 Australian a year. Costs are the biggest challenge we face.

“A stable business tax regime is a competitive advantage for us.”

What is the potential LNG market in Asia and who do you sell to? A mix of countries so that you don’t have all your eggs in one basket?
We do sell to a mix. There are our traditional markets like Japan and Korea. But we have in the last decade sold more LNG into China. That market had not grown as we expected, but on the flip side Japanese market is basically insatiable at the moment because of the nuclear shutdown. They are buying a lot of oil at the moment to fill the gaps in electricity. They are generating electricity with oil, which is a very expensive way to generate electricity. That will take as much LNG as we can basically ship. Prices are very high in excess of $15 to $16.
Panoramic view of the downtown Sydney skyline at twilight, Australia.

Now how much oil is Australia importing and what are you doing to reduce oil consumption by gasifying your vehicles?
We haven’t achieved what we had hoped in that regard.

In terms of gasification of vehicles, there has been limited success in running vehicles on gas. So far, I would have to say particularly in the heavy transport area it’s really not significant in terms of overall percentages. Distances that our trucking industry covers, so we are talking in terms of average haulages of over 1,000 kilometers (or 600 miles) and so you basically have to look at LNG and re-gasification points or liquefaction points. So that side of the industry hasn’t taken off like it has in the U.S. for instance where they have a much better natural gas pipeline network.

Austalian FlagIs your government intending to build this out or to incentivize conversion to natural gas vehicles?
We are taking an approach that it is really up to industry to resolve this matter. As a net energy exporter, we are not concerned that we might be exporting a lot of gas and importing oil. In the end, we are net exporters. We don’t see a strategic imperative in making sure that we are self-sufficient in transport fuels.

ministerAnd the emissions issue?
In terms of emissions, we have a number of strategies and we are confident that we will achieve our target of lowering emissions by five per cent by 2020. But the issue with gas at the moment is that it has become very expensive. Domestic price of gas has gone from say around $4 Australian to upwards of $8 in some cases $12 Australian. So that price increase has deterred people from converting and also has caused a significant reduction in the amount of electricity generated from gas. Just under 80 per cent of our power still comes from coal, gas generates around 10 per cent and renewables the balance.

Do you have shale gas and oil?
We have shale and what we call tight gas, which is sort of close to shale but that is in very early stages. It’s an industry where we have two companies that have flowing wells in that area but are not producing significant quantities. But that is an area where we see enormous potential and after the coal seam gas, coal seam methane and conventional gas developments in eastern Australia, we see that as being the next big thing. This could end up producing 300 trillion or 400 trillion cubic feet of gas depending on how the technology works.

“We class ourselves as an energy superpower, not just gas, but obviously coal and uranium.”

You are the G20 leader this year, and your theme is Stronger Economic Growth and Better Employment Outcomes. Is your cornerstone energy?
We class ourselves as an energy superpower, not just gas, but obviously coal and uranium. After Canada, we are the second biggest or third biggest exporter of uranium depending on what is happening in Kazakhstan. We have the world’s largest proven deposits of uranium and coal is basically unlimited as we have about 400 years of supply.

leafYes energy is very much a cornerstone and our coal is low sulfur so, unlike North American coal, it’s a cleaner burning. So yes we are cognizant that gas is a lower emission but in the end it’s a tradeoff between how much you pay for energy.

We are very strong in the resource sector, like your country, we have massive exports. We are the biggest exporter in the world of iron ore. We have massive commodities. Oil is the only thing we are short of. So that has kind of provided a cornerstone, but so does a modern business structure — very sound legal and corporate government structure, good regulations incentivizing business by removing taxation issues and red tape and speeding up the environmental approvals for projects.

Are you into alternatives, renewables and research on the technologies that can disrupt [replace] some of your commodities?
We have a mandatory renewable energy target of 20 per cent. That’s currently under review and most would suggest that this target is probably going to be adjusted, perhaps not in percentage sense because energy consumption in Australia has fallen quite dramatically. At the moment we have about 10,000 megawatts of overcapacity in base load generation in Australia. That is affecting renewable energy projects. Wind farms are strong, and we have over a million houses fitted with their own photovoltaic systems.