The Hon Josh Frydenberg MP Minister for Resources, Energy and Northern Australia Federal Member for Kooyong SPEECH SYDNEY INSTITUTE SYDNEY

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1 The Hon Josh Frydenberg MP Minister for Resources, Energy and Northern Australia Federal Member for Kooyong SPEECH OPPORTUNITIES AND CHALLENGES IN AUSTRALIA S RESOURCES AND ENERGY SECTORS SYDNEY INSTITUTE SYDNEY 22 MARCH 2016 ***CHECK AGAINST DELIVERY*** Introduction It's a great honour to be here tonight at the Sydney Institute and a privilege to provide my second address in this place of rich policy history. It has been nearly 30 years since the Institute s doors were opened, and public debate is much better as a result. Your two fearless leaders, Anne and Gerard Henderson, can rightly take much credit for this and for continuing to make their own contributions to the public policy discussion in this country. Today I want to make three points. First, the importance of Australia s resources and energy sectors to our economy and the important role we play in leading global energy security and alleviating energy poverty. Second, despite current volatility in international markets and heightened pessimism about the global economy, Australia should be optimistic about the future and our capacity to innovate and seize opportunities. Thirdly I will highlight areas in need of attention, in particular the application of geoscience technology to exploration and development and the need for greater labour market flexibility. These government-led reforms together with the

2 industry s own efforts will ensure the resources sector remains a stable and reliable supplier of high quality resources extracted at the low end of the global cost curve. Australia as a resources and energy global power Australia has a remarkable economic story to tell. We are in our 25th year of consecutive economic growth having survived and prospered through the Asian Financial Crisis (1997), The Dot Com Bust (2000) and the Global Financial Crisis (2007). This is a record only beaten in the developed world by the Netherlands with 26 years of consecutive growth ending in 2008 a record we intend to break. Our rich endowment of natural resources, combined with our strong and stable institutions and the drive of private enterprise, has been integral to this economic success story. Today, the resources and energy sectors represent around 10 per cent of our GDP, is responsible for more than half of our exports and employs over 300,000 Australians. As a sector, mining pays the highest wages, employs large numbers of skilled workers such as engineers, and has the highest proportion of Indigenous Australian employees. Australia is the world s largest exporter of both iron ore and coal. By the end of this decade we expect to overtake Qatar to be the largest exporter of Liquefied Natural Gas. Australia is also the second largest exporter of gold and zinc, the third largest exporter of nickel and the fourth largest exporter of copper. These Australian resource exports have been essential for infrastructure and economic development in emerging economies, lifting millions out of poverty in the process. This is not a recent development. The resources story is synonymous with Australia s national identity. By tracing the history of mining development in Australia, one can see how we turned from a series of struggling, underpopulated British colonies in the early 19 th century to a prosperous, cohesive nation. 2

3 The discovery of gold in Australia in 1851 triggered a gold rush and marked the beginning of our mining industry. The gold rush precipitated a doubling of Australia s population in less than ten years. Fast forward 150 years and most recently Australia has been among the greatest beneficiaries of what is often called the commodity super-cycle. This was driven by Chinese growth and the continued demand from our longstanding customers in Japan, Korea and the rest of East Asia. But now we have reached the end of a decade-long super cycle, whose record prices led to around $400 billion of investment in Australia. The current state of play In February I led a delegation of Australian energy and resources industry leaders to CERAWeek in Houston, a leading annual global energy conference. Here, a key question throughout the conference was where will the current price volatility in the energy and resources sector leave us? The price of oil was at the forefront of this discussion. In a short period of time, we have seen the oil price fall from around $140 at the peak of the boom to the current price of around $40 a barrel. Why is this so? The answer is a complex combination of supply and demand dynamics, with the emphasis being on changes to the supply side. In the last five years, more than 4.2 million barrels a day have come on stream from shale oil in the United States. Saudi Arabia, which produces on average 10 million barrels of oil a day, has lifted their production by five per cent in January alone. Iran, no longer the subject of sanctions, is producing nearly three million barrels a day with the expectation of lifting production by at least another one million barrels a day. Nevertheless, with the resulting lower prices, we have also seen, according to the International Energy Agency, for the first time on record, two years of consecutive negative growth in oil exploration. In fact, just last week it was reported that US oil and gas exploration rigs fell to an all-time low of 476, having peaked at 4,530 in This underinvestment will result in demand eventually catching up with supply and prices rising. 3

4 When it comes to resources markets more broadly, the end of the super cycle is seeing a return to more normalised, cyclical patterns of demand. Particularly in China, as its economy transitions from investment to consumption and a greater focus on services. However, China remains central to the global resources story. It is the world s largest producer and consumer of coal, the largest consumer of iron ore and producer of steel, the second largest consumer of oil, and the third largest consumer of gas. China importantly is also increasing its reliance on renewables, becoming the largest investor in renewables in the world, bigger according to the International Energy Agency than the EU and the US combined. I want to dispel the notion that because the Chinese economy is transitioning that suddenly the demand for hard commodities and the subsequent export income earned from their sale will dry up. To paraphrase Mark Twain: the rumours of the death of the global resources sector are greatly exaggerated. International demand for Australian resources remains strong, our companies remain resilient, and the depreciation of our dollar has acted as an automatic stabiliser, increasing our competitiveness. The reality is that over the decades ahead hundreds of billions of dollars will flow to Australia as both demand and supply increases. A good illustration of this dynamic is Australia s export earnings from coal and iron ore between and Despite price falls of between 43 per cent and 57 per cent, export earnings from these commodities fell only 16 per cent. This reflects a lower Australian dollar, a 30 per cent increase in coal export volumes and a 60 per cent increase in iron ore export volumes. When it comes to LNG, there is an even more powerful story to tell. Export earnings between and have increased by more than 40 per cent. Driven by increased volumes and a lower Australian dollar, export earnings are expected to almost triple to $49 billion by , when we are expected to become the world s largest LNG exporter. So where is this demand coming from and why is the Australian sector so resilient? 4

5 First, the Chinese economy at US$11.4 trillion is two and a half times bigger than it was in This means that a 6.8 per cent annualised growth in 2015 is equivalent to 14.2 per cent growth in It emphasises how important it is to avoid drawing conclusions from simplistic comparisons of annualised growth rates. Remarkably, each year the Chinese are adding an economy the size of Turkey. In December 2015, China imported more iron ore than ever before. Some is used for the production of steel for export, the rest for domestic use. Chinese steel exports to the emerging economies are growing, with steel exports in 2015 increasing by 26 per cent to India and 55 per cent to Vietnam. While China has seen rapid rates of industrialisation in recent years, leading to more than 200 million people moving to the cities, 37 thousand kilometres of rail track and 63 million flats completed in the last decade, there is still a long way to go. For a country with such a large land mass and population, its rail system is just one third the size of that in the US and one sixth of that in the EU. Demand will continue to grow, providing a lot of scope for Australia's iron ore and metallurgical coal. When it comes to energy demand, China s per capita consumption is still a third of that in the United States, an equation that the International Energy Agency predicts will change dramatically as Chinese per capita energy use increases in the years ahead. But I want to emphasise that the China story is not the only game in town. Economic growth in India and South-East Asia is driving increased demand for Australia s resource exports. In 2015, India s economy grew by 7.4 per cent and is forecast to grow by 6.5 per cent a year from now to On the numbers the Indian economy will be five times bigger in 2040 than it is today and as a result, demand for coal, gas, iron ore and renewables is taking off. Consider this: today India has 18 per cent of the world s population but represents only six per cent of global energy use. Astonishingly, on a per capita basis, it is lower than that of Africa. 5

6 Around 300 million Indians have little access to electricity or no access at all. But by 2022 Prime Minister Modi wants every Indian to be connected to the grid. India s consumption of steel is also comparatively low. On a per capita basis it s a quarter of the global average and around one eighth of that in China. With over 300 million Indians expected to move to the cities by 2040, demand is soon to escalate. By 2020, India is forecast to overtake China, Japan and the EU to become the largest coal importer in the world as it seeks to almost treble coal fired power generation between now and All this is good news for Australia. Contracts for LNG from our Gorgon project to Petronet LNG have been signed and are soon to flow and our coal exports to India, already sizeable, are set to increase. The reality is that there will be significant demand for our energy and minerals going forward and this forms the basis for long term optimism for these sectors of Australian industry. It s the consequence of simple arithmetic. Between 2010 and 2030, the world s population will increase by 23 per cent and the world s middle class will more than double, all of which fuels demand for hard commodities. The biggest movements are occurring in emerging economies right on our doorstep, putting Australia in an ideal position to capitalise. Innovation will help Australia seize these opportunities Australia has never rested on its laurels and the ongoing supply and demand dynamic emphasises the need for a country like Australia to focus on what we can control boosting our nation s competitiveness. We also know that we have to be innovative to seize future opportunities. Lowering trade barriers, streamlined regulatory processes, greater labour market flexibility, and productivity-enhancing infrastructure projects are also important. Australian iron ore miners like BHP, Rio Tinto and Fortescue have pioneered the adoption of automation, operating drilling equipment, trucks and trains at their mines in the Pilbara remotely from their Perth operations, some 1,500 kilometres away. This is helping ensure that three quarters of Australia's iron ore production is in the bottom half of the global cost curve. 6

7 The Australian coal industry is achieving five to 10 per cent increases in productivity from longwall mining automation, helping put Australia on track to be the world s largest coal exporter. This is a highly competitive industry with countries such as China, the United States, Indonesia, Russia, South Africa and Colombia all major producers. Woodside are operating autonomous underwater vehicles at Pluto and Santos has partnered with IBM to use big data to predict problems on their pipelines. Australia is pioneering Floating LNG technology which allows for the production of LNG offshore. The Prelude floating LNG platform, to be located off the coast of Western Australia, will weigh 300,000 tonnes and will be the largest offshore facility ever built. This new technology could support the next wave of investment in Australia s offshore petroleum sector at a time of growing international competition. I recently joined Chevron Australia at its Gorgon LNG joint venture, on Barrow Island off the coast of Western Australia, ahead of its first LNG shipment bound for Asian markets. The scale of this project is incredible. It is the largest ever private sector investment in Australia at around $70 billion and has the largest subsea structure ever built. At full capacity, an LNG tanker will load around every two days and each shipment will have enough energy on board to supply around 80,000 Japanese homes for one year. But in addition to supplying energy to both Australia and Asia, it also includes the world s largest commercial scale carbon capture and storage facility, with CO2 injected into a saline formation two kilometres below the surface, to reduce plant emissions by around 40 per cent. Our comparative advantage in resources is maintained by very high levels of investment by companies in R&D, and then captured in patents. A study by IP Australia found there were more than 6,500 inventions in the mining sector between 1994 and In fact, Australia produces more than 60 per cent of the world s mining software. In coming years, sophisticated use of digital technology and data analytics will further drive productivity gains. Last year Rio Tinto launched its Analytics Excellence Centre, which uses predictive mathematics, machine learning and advanced modelling to process the huge amount of data captured by sensors, reducing maintenance costs and the incidence of unplanned breakdowns. 7

8 In Jandakot outside of Perth, GE s $100 million advanced analytics and digital training and monitoring centre employs 350 people in digital technology and supports the training of the next generation of workers in the energy industry. GE has equipment on all LNG projects operating in Australia. Through its Industrial Internet, it can monitor machinery behaviour and notify operators if a machine is behaving abnormally, avoiding unplanned downtime. The National Innovation and Science Agenda highlights Australia s underperformance on industry-research collaboration compared to other OECD countries. Companies such as Exxon and Chevron are helping address this, establishing partnerships with Australian universities. The University of Western Australia has runs on the board its self-anchoring system for floating LNG and pipeline construction has resulted in a $125 million saving in construction costs for one company alone. In addition to these private sector-led initiatives, there is much the Government can do to leverage off its existing scientific expertise and databases to enhance the productivity of exploration activity. In the absence of major new discoveries, Australia s production of many minerals is likely to decline over time. We know the reasons why Australia s exploration success has declined. It is because our easily discoverable near surface mineral deposits have already been developed. However, the great success of Australia s resources sector has been generated from just 20 per cent of our land mass. Eighty per cent of Australia s land mass is virtually unexplored as mineral deposits in these parts of Australia occur further below the surface. Geoscience Australia has the technical capacity to undertake geological mapping of mineral deposits both near the surface and to depths down hundreds of metres. This is a classic public good. Individual companies cannot do this mapping on a large scale. But if governments make this data available to all, the insights it provides will crowd in private sector explorers searching for the new Tier 1 deposit. 8

9 A key focus of such spending could be northern Australia which, despite already producing over two-thirds of Australia s resource exports, has enormous untapped potential. With pressures on company balance sheets leading to a significant decline in exploration activity, there is no better time for the Government to undertake such a program. And it works. For example, in 1996 Geoscience Australia undertook $3 million worth of work in the Browse Basin, the information from which facilitated the discovery of the Ichthys field which will lead to more than $70 billion in export earnings over the next forty years. Similar success has been achieved by federal and state agencies with their work at the Olympic Dam site and in the Bight Basin. Indeed it s been estimated by an independent Western Australian study that the rate of return for every dollar invested in pre-competitive programs has a multiplier of more than 20 times. Reform critical to Australia s continued success Notwithstanding these significant achievements, ongoing economic reform is also vital to help Australia seize these opportunities. An area where there is both an opportunity and need for reform is in the industrial relations space. Now, more than ever, Australian projects need to deliver productivity gains if they are to remain competitive. We need to leave the mindset of capital versus labour behind as both the worker and the investor stand to gain from better productivity encouraging greater investment. As a West Australian and the minister responsible for employment, Michaelia Cash, knows this firsthand. The reestablishment of the Australian Building and Construction Commission (ABCC) is vitally important to the resources sector and so too are reforms to union right of entry rules and Greenfield agreements. The Prime Minister has demonstrated his commitment to this vital reform by recalling Parliament specifically to see the ABCC pass in April. With regard to right of entry, it is our policy to restore some balance to a process which has seen unions exploit the law to make in some cases hundreds of site visits 9

10 over a short period of time. Reducing the frequency of visits by union officials to premises where they have no members or they are not invited to send a representative would be a positive step forward. With regard to Greenfield sites, the Parliament, with the assistance of the members of the crossbench, passed important legislation last November which allowed employers to go to the Fair Work Commission after a six month negotiation period had passed without agreement between them and the union. This was an important amendment that will prevent negotiating tactics dragging out indefinitely. A further matter important to the resources sector which has been raised with me relates to extending the duration of the Greenfield agreements to the duration of the construction period of the particular project. Otherwise you have a situation like we ve seen at Gorgon where the completion of billions of dollars worth of investment can be delayed while protracted and difficult negotiations take place. This is an additional and unnecessary risk that companies have to factor in to their investment decisions which deserve further consideration. Conclusion The resources and energy sector has been here before. Peaks and troughs are part of a cycle reflecting complex supply and demand dynamics. This is a long term business and I am proud of the role Australia plays. The good news is that Australia has the economies of scale, innovative practices, highly skilled workforce and proximity and access to markets that give us the resilience we need at this time. There is no room, however, for complacency. We are operating in a fiercely competitive global market. We must continue to innovate and push for economic reform. With such an approach, I am confident Australia will remain an energy and resources world leader. Thank you. Ends 10