Energy Development Down Under

Posted on Wednesday, August 16, 2017

Author: Andrew Pickford

Adjunct Research Fellow, University of Western Australia
Director, Indo-Pacific Energy Security Program, Perth USAsia Centre

The Canadian experience of major energy projects points to a “democratic risk factor” now considered for new ventures. The cancellation of Pacific NorthWest LNG confirmed that LNG investors are not willing to put money into jurisdictions which will change energy policy after a single election. Is this a universal feature of the modern democracy? Can Canada learn anything from Australia; a nation which shares many common features with Canada, especially as a fellow energy exporter?

As a western, industrialised democracy Australia has much in common with Canada, so much so that one academic described the relationship as “strategic cousins”. On the energy file, there are many similarities which include large reserves and relatively small internal markets. Despite this, several key factors including geography, export mix and end user markets vary remarkably. Australia’s fossil fuel exports are skewed towards liquefied natural gas (LNG) and coal, compared to Canada’s significant heavy oil production. Exports from Australia are generally sent to a range of Asian countries, whereas Canadian output is overwhelmingly sent to its southern neighbour.  

LNG is a useful case study. Admittedly Australia started exporting in 1989 and had a number of debates throughout the 1970s over issues including foreign investment, domestic markets and the placement of large infrastructure. From this process emerged a bi-partisan consensus at both state and federal levels of government that remained in place until the 2010s.

The centre of the Australian LNG industry has traditionally been Western Australia. “WA” is a resource state with a relatively small population. It was traditionally an agricultural-based economy and poorer relative of its more industrialised eastern neighbours. Think of Alberta, but hot and with 10,194 kilometres of its own coastline.

In 2017 WA will become the second largest exporter of LNG in the world. When taking into account projects under development and those already online, WA is set to host an LNG export capacity of 49.1-million tonnes per annum by the end of the decade.

The mission to develop LNG within WA has enjoyed consistent support across the political spectrum. Disagreements tend to relate to marginal issues, and focus on local content, workforce issues and more recently environmental impact and indigenous engagement.

It appears that the WA and broader Australian experience should be relevant to Canada.

Unfortunately, encouraging new energy projects which require multi-billion-dollar investments is never a simple process. To paraphrase the fine print on investments advertisements: “past results are not an indicator of future success”.

Firstly, to the differences. All Australian states and territories have their own coastline. This results in provincial-federal dynamics within new projects. Province to province relations are largely irrelevant. In the rare instances where there are interactions between provinces, these interactions tend to manifest in the form of competition, as was the case with the Japanese Inpex LNG plant where WA lost out to the Northern Territory. Furthermore, most large conventional gas fields in WA are located offshore. Aside from the physical LNG plant, there is a relatively small footprint. Shell’s new floating LNG vessel Prelude now negates the need for any land-based presence at all.

Secondly to the common features. WA and British Columbia/Alberta appear similar. Both possess large natural gas reserves; are more Asian focused than their east coast counterparts; and are now home to a growing movement which questions not just the benefits of resource development, but the benefits of industrial processes and development itself.

Thirdly, the different regulatory systems. As the traditional LNG industry has been based in WA, most of the approvals are state-based. State-Federal tension is related to the split of royalties, not a veto over approvals.

The Australian mix of bi-partisan support of the sector and regulation encouraged a large wave of LNG investments totalling over $200-billion in a period around 2010. However, this success expanded the sector beyond its Western Australian and Northern Territory base to Queensland.

With the emergence of coal-bed methane sourced gas in Queensland, the equation changed. Wells were drilled on onshore farming properties in areas unfamiliar with energy extraction, while the creation of an LNG industry linked domestic gas to global prices and pushed the cost of energy up on the populous and vote rich east coast.

Responding to a different dynamic of energy extraction and higher prices, interest groups pushed for a requirement that any new export focused projects should allocate a specified proportion of gas exclusively to local markets. This is locally known as the “domgas” policy and has been in place in WA for some time. In the 2016 Australian federal election, the Australian Labor Party (ALP) proposed the creation of Domestic Gas Review Board and a “National Interest Test” for new LNG projects. The result would be a domgas requirement as part of the approval process. The ALP also proposed a renewed environmental approvals process to the federal level of government, after a period where there had been a bi-partisan effort to streamline Australia’s duplicative federal-state approach. Removing duplication, in practice, shifted the environmental approvals process to states.

While the ALP did not win the 2016 Australian election, the prospect of a National Energy Board (NEB) type entity emerging is now a possibility, with the upcoming 2019 election being regarded as very competitive. Senior ALP figures even flagged the NEB Canadian model. This is part of a general trend of discussions of major energy projects to be elevated to the national level. It is not unique to LNG. Approval for a proposed $21.5-billion coal project in Queensland is one such example. Given that commodity exports would transit the Great Barrier Reef, the project became a proxy for climate change debates. The environmental approvals process was a target for those seeking to delay or cancel the project. It is likely that new LNG projects in Australia will have to meet social acceptance as well as a consensus at the national level. While LNG is viewed slightly differently to coal and heavy oil, its status as a “transition fuel” seems to be waning and it is increasingly being viewed as another fossil fuel, albeit one that burns cleaner than others.

The “democratic risk” premium is not unique to Canada. Aside from the shift of Australian LNG debates to the national level, at least one LNG project in WA has been cancelled because of challenges associated with meeting the expectations of indigenous and environmental groups. Woodside’s Browse project off the coast of WA was initially proposed to be built at James Price Point. It then was promoted as a potential FLNG plant, then indefinitely deferred. 

Developments in mid-2017 confirmed that Australia now has a much higher democratic risk premium, with higher gas prices associated with east coast LNG projects resulting in Canberra introducing the Australian Domestic Gas Security Mechanism. This mechanism provides the federal government the ability to limit LNG exports under certain conditions. Ostensibly implemented to ensure that gas was available to domestic users and industry, this was a government seeking to intervene on a controversial issue to placate an angry public. Industry viewed the development as evidence of greater policy volatility and a higher risk in what was traditionally regarded as a safe and secure investment destination.

Australia’s LNG industry was created in a different era. Many issues debated then still have relevance. While the Australian “democratic risk” premium is increasing, it is informative to look back at the Western Australian experience where vision, compromise and bi-partisanship gave birth to the modern LNG industry.

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