A New Age Of Energy – Martin Ferguson

Following the Australian Labor Party’s win in 2007, Martin Ferguson AO was appointed to Cabinet as Minister for Resources and Energy and Minister for Tourism. Prior to entering Parliament, Martin Ferguson was President of the Australian Council of Trade Unions (1990-96) and vice-president (1985-90), having joined the ACTU after fifteen years service with the then Miscellaneous Workers’ Union. On Monday, 1 March Martin Ferguson addressed The Sydney Institute on the topic of managing Australia’s resources for the future.

A NEW AGE OF ENERGY

MARTIN FERGUSON

It’s a pleasure to be here this evening – my first time as Minister for Resources, Energy and Tourism. Last time I spoke here in August 2006, I was the Shadow Minister for these portfolios. I must say it is far preferable to have responsibility for them from Government than from Opposition.

Back in 2006, the reality of the China boom was still emerging and global fears about energy security were looming in the minds of policy-makers as oil prices passed the US$70 a barrel mark – hitting record territory. In my last address to The Sydney Institute, I reflected on the fact that fears about energy security were being fuelled by:

• instability in exporting nations;
• the threat of terrorism;
• a nationalist backlash;
• a scramble for resources; and
• the fundamental desire of nations to protect their own economic growth.

I noted that this insecurity was placing the world in danger of retreating from the open markets and free trade we have worked so hard to achieve since World War II. More oil-producing countries were nationalising their industries, sending away vital foreign investment and industry capability. The scramble for resources was global – driven by a fear that China’s unprecedented growth and insatiable demand – might limit access for others. I was compelled to agree at the time with the Treasurer, Peter Costello, that the “best energy security is guaranteed by an open global market with strong institutional framework[s].”

This was one of the biggest issues on the G20 agenda. Back in 2006, few would have forecast that oil prices would skyrocket to almost US$150 a barrel by July 2008 or that a global financial crisis would see them collapse to a low of US$40 in January 2009, recovering today to about US$79 a barrel. We have seen the same price volatility in other energy commodities and mineral resources. The fact is the supply side was not ready for the China boom – this was both a global problem and an Australia-specific problem. In both contexts we were not ready on four fronts:

• Investment frameworks;
• Production and export infrastructure capacity;
• Skills and labour; and
• Looking to the future, a pipeline of resource projects for development.

The challenge for Australia is to not make the same mistakes twice.

Investment

Australia must be ready, willing, able and, above all, productive and competitive to capture its share of the new boom. A lot has been said over the past two years on foreign investment and sovereign risk, but I think we have come a long way on this front. We are a country built on foreign investment and we continue to welcome it, particularly when it is in our national interest and facilitates the development of Australia’s resources for the benefit of Australians. Our policy is long-standing and non-discriminatory and this government has sought to more clearly define our foreign investment guidelines.

While there is no hiding from the fact that the relationship between China and Australia over the last two years has faced some difficulties, I believe we have both learnt a lot over that time. Importantly, I believe we are both committed to finding a mutually satisfactory way forward in the resources relationship. And the truth is we are having more successes than failures.

In 2008-09, more than $26 billion of Chinese investment was approved in the Australian resources sector. Earlier this year, I had the pleasure of speaking at a ceremony formalising the merger between Yanzhou Coal Mining Limited and Felix Resources. This $3.5 billion acquisition represents one of the top 10 mergers and acquisitions undertaken in Australia in 2009 and represents a good deal for both Australia and China.

It is a deal that moves beyond the strict producer/ consumer relationship and involves technology and expertise exchange. Just as the Japan-Australia trade and investment relationship matured and grew into a lasting friendship over the last 50 years, so will the China-Australia relationship, and the next wave to watch will be India.

When it comes to investment confidence, I know some companies are concerned about what the government’s response to the Henry Review will be. We have to be frank – over time, taxation regimes do change – in fact governments have often responded to requests by industry to adjust taxation arrangements.

It is worth remembering that over the course of the last two decades, under both Labor and Coalition governments, Australian industry has benefited significantly from business tax reform. I am confident this government will continue to deliver taxation reform that is in the best interests of the nation and modernised to deal with the new challenges and opportunities of the 21st century.

Infrastructure

When it comes to infrastructure, we need to continue to move forward with investment in ports, road and rail access, and energy supply. Infrastructure Australia has already commenced work on Australia’s first ever National Port Strategy and a National Freight Strategy. These strategies will ensure port expansions are accompanied by the land-side development necessary to prevent the bottle-necks which have reduced growth in the past.

Last year’s Budget made significant progress to address shortfalls in investment under the Howard Government, including:

• $580 million for Hunter Valley rail projects which will double coal-carrying capacity;
• $339 million for critical common user infrastructure at Oakajee Port; and
• $50 million for the proposed Darwin Port expansion.

I read with interest the speech given here last week by the Deputy Governor of the Reserve Bank, Ric Battelino. He sees Australia in the midst of a long-term resources boom that started in the mid-2000s, tempered only by the global financial crisis in 2008-09.

The boom is driven by emerging economies, mostly China, and on the ground, it is occurring mostly in coal, iron ore and gas – and the supply side constraints are starting to re-appear. The Deputy Governor notes that mining booms always bring significant economic change and policy challenges. He warns that “key among these is the need to ensure flexibility in the economy and maintain disciplined macroeconomic policies…to contain the inflationary forces generated by the boom.”

Skills and labour

This is particularly so in the labour market. Flexibility is key – and so is productivity.

Collectively – employers, unions and governments – cannot afford to abandon the goal of productivity growth and the real reforms that have strengthened the Australian economy progressively over the last 30 years. To meet the challenges of the new boom, a new wave of productivity growth is essential.

I’m pleased to say that my colleague, Gary Gray, Parliamentary Secretary for Western and Northern Australia, today released a discussion paper, Resourcing the Future, to begin a national conversation about these complex, but vital issues. The National Resources Sector Employment Taskforce, reporting to me and Mark Arbib, the Minister for Employment Participation, has been established to address the workforce needs of major resources projects for the next five years and beyond.

As both Minister for Resources and Energy, and Minister for Tourism, I see the workforce pressures first-hand and it is one of my greatest concerns in the current environment. Nevertheless this is a much better problem to have than high unemployment.

Project pipelines for the future

Not only do we have to keep an eye on the productive constraints of today – we have to look to the future. We need to know where the next Pilbara province is, the next North West Shelf, the next Hunter Valley or Bowen Basin. Just as Australia has been built on the back of intermittent mining booms for the last 160 years, those new resource provinces will provide for the next 160 years.

It is well-known that greenfield mineral exploration is falling compared to total exploration expenditure – at just the time we need to be replenishing our stock of economically-viable resources for the long-term. It is for this reason the government is considering exploration incentives through the Henry review. But I also note that my agency, Geoscience Australia, is vital to keep the project pipeline going for future generations of Australians. The work of Geoscience Australia provides important pre-competitive exploration data and mapping of Australia’s resources to encourage commercial investment in exploration and further resource assessment.

Australian energy resource assessment

Geoscience Australia has also been assisting with the development of the government’s Energy White Paper process over the last year. I am pleased to release tonight the first comprehensive national assessment of Australia’s energy resources.

The Australian Energy Resource Assessment has been compiled by Geoscience Australia and ABARE (the Australian Bureau of Agricultural and Resource Economics). It examines Australia’s identified and potential energy resources ranging from fossil fuels and uranium to renewables. It reviews and assesses the factors likely to influence the use of Australia’s energy resources to 2030 including the development of cleaner, more efficient energy technologies.

The two big findings are the extraordinary potential of coal seam methane and unconventional gas resources, and for the first time, we can see just how extensive Australia’s renewable energy resources are. But the Energy Resource Assessment is more than a snap-shot of Australia’s energy resources. It is a national prospectus for energy investment and exports. If we get the settings right, Australia can not only secure its own energy future, but become the premier supplier of energy resources in the Asia Pacific region.

The export opportunities

The challenge of meeting rapidly expanding energy demand on our doorstep in Asia – in a sustainable way – is daunting. There are presently 1.6 billion people in the world who do not have access to electricity. As the world’s largest exporter of coal, the second-largest exporter of uranium, and the 5th largest exporter of LNG, Australia’s place in this debate is front and centre.

The industrialisation and urbanisation taking place in China at present is hard to comprehend. Australia today has five cities with more than 1 million people. Europe has 35. By 2030 China will have more than 220. In that same time, 50,000 new Chinese skyscrapers will be built. In the next decade alone, around 1,000 new Chinese coal-fired power stations will be brought online.

Australia is in fact one of only three net energy-exporting OECD countries, the others being Canada and Norway, so we are part of a very small club and our role and our assets in global energy supply should not be under-stated.

Our energy challenge at home

In the same way we have great energy export opportunities to Asia, we have challenges here at home. We are an energy-rich nation, and while the challenge of energy security is important domestically, our biggest challenge is probably the transformation to a low carbon economy – through clean energy technologies, energy efficiency, and ultimately, a price on carbon.

Energy efficiency

My Department has responsibility to work with Australia’s biggest energy consumers to identify and implement energy efficiency opportunities. The 200 businesses included in this program account for nearly one-third of Australia’s energy consumption.

The First Opportunities report shows Australia’s largest energy users have committed to energy savings that will reduce Australia’s annual CO2 emissions by 0.7 per cent of 2006-07 levels. This means businesses have committed to implementing energy savings that will save them more than $500 million every year. Additional efficiency opportunities still being investigated could see the program reduce Australia’s annual greenhouse gas emissions by more than 1 per cent. The efficiencies already committed to will deliver emissions reductions equivalent to taking more than a million cars off Australian roads.

Energy efficiency is a key plank of the Australian government’s climate change policy and this program is delivering real action to reduce greenhouse emissions.

It is a timely reminder of how much potential there is for businesses to both lower their costs and reduce their environmental impact. It also demonstrates the importance of introducing a price on carbon to drive further uptake of efficiency measures – and I will come back to this later in my address.

Clean Energy Initiative

The Australian government unveiled a $4.5 billion Clean Energy Initiative in last year’s Budget, aimed at accelerating the development and deployment of clean energy technologies – and driving down their costs. The Clean Energy Initiative is another key plank of the Government’s climate change policy to reduce Australia’s carbon emissions through technology development. It includes:

• $1.5 billion for Solar Flagships;
• $2.4 billion for CCS Flagships;
• the $100 million a year Global Carbon Capture and Storage Institute;
• the $100 million Australian Solar Institute;
• the $235 million Renewable Energy Demonstration Program;
• the $50 million Geothermal Drilling Program;
• the $15 million Second Generation Biofuels Program; and
• nearly $570 million for the Australian Centre for Renewable Energy.

We are giving new clean energy technologies an unprecedented opportunity to compete in the market place. Solar, wind, geothermal and biomass technologies are moving to the next stage of development – the vast extent of these resources is outlined in the new Australian Energy Resource Assessment.

At the same time, Australia’s Renewable Energy Target of 20 per cent by 2020 is driving further investment. The $1.5 billion Solar Flagships Program will deliver large-scale solar power stations feeding solar energy into homes across the nation. I am pleased to report that proposals for Round One of the Program – targeting 400 megawatts of grid-connected solar generation – closed on 15 February 2010. And that my Department has received a total of fifty-two applications.

Applications are currently being assessed against the eligibility criteria. While it is early days, I am very encouraged by the quality of the applicants and the interest they have shown in this program. However, we cannot ignore the need to also clean up fossil fuels which still account for more than 80 per cent of the world’s energy output.

Centre stage is carbon capture and storage. CCS has the potential to reduce carbon emissions from fossil fuels by up to 90 per cent. By reducing emissions from coal and gas-fired electricity, we consolidate their place in the energy mix of the future.

The Gorgon gas project in Western Australia will be the world’s largest carbon capture and storage project – placing Australia at the forefront of CCS demonstration globally. It will store up to four million tonnes of CO2 a year, an amount comparable to all the CO2 geologically stored every year globally at present.

Price on carbon

We need these new clean energy technologies, but the fact is that – like energy efficiency gains – progress will stall if we don’t front up to a price on carbon. The greatest threat and risk to business confidence in the energy sector, particularly the clean energy sector – is the Coalition. How can investors make any decisions about new generation investments when there is no price on carbon?

We need around $100 billion of investment in the energy sector over the next decade just to meet growing demand and replace aging infrastructure. Without certainty about a carbon price, investment will stall. On top of that, without a price on carbon, there is no driver for large-scale electricity generators to invest in cleaner forms of power generation such as CCS, gas and renewables such as solar.

When I last addressed the Institute, I recalled Winston Churchill’s consternation about energy security on the eve of World War I. Faced with the fact the navy would no longer be able to rely on home-grown coal from Wales, but it would need oil from Persia, he noted: “Safety and certainty in oil lie in variety and variety alone.”

As Australia – and the world – face up to the twin challenges of delivering both clean and secure energy supplies in the 21st century that truth still holds. Diversification is the key.