australia’s role in meeting asian energy demand growth · web viewadjustment dynamics in the...

Australia’s role in meeting Asian energy demand growth

Ross Lambie, IAEE Asian Conference

February 2016

Australia’s role in meeting Asian energy demand growth

Ross Lambie

16 February 2016, IAEE Asian Conference

Thank you to the International Association of Energy Economics and the University of Western Australia for inviting me to present today on Australia’s role in meeting Asian energy demand growth.

My presentation is largely descriptive to give you the ‘lie of the land’. It will take you through a relatively high-level overview of Australia’s rich endowment of energy resources, the impact of the ‘resources boom’ on Australia’s resources and energy sectors, and energy exports to Asia in particular. Some of the major opportunities and challenges facing Australia’s energy exports to Asia and how the energy sector and Government are responding to them will also be discussed.

Australia’s role in meeting Asian energy demand growthAustralia’s role in meeting Asian energy

demand growth 1

1.1 Australia’s resource endowment

Australia has an abundant and diverse range of high quality energy resources and reserves, which are distributed across the country.

Relative to the rest of the world, it has the largest uranium reserves, the fourth largest coal reserves and the 11th largest gas reserves. Our resources of crude oil, condensate and liquefied petroleum gas are not as abundant and as a result Australia is increasingly reliant on imports. However, there remains significant potential for the discovery and development of petroleum resources both onshore and offshore.

Australia also has significant renewable energy resources. The country possesses some of the highest solar radiation levels per square kilometre of any continent in the world and has some of the world’s best wind resources. Geothermal, bioenergy, wave and tidal resources are also world class and hold considerable potential for producing energy.

In 2013–14, total primary energy production in Australia was 18,715 petajoules, around three times larger than domestic consumption. Net exports accounted for 72 per cent of production. In that year, black and brown coal accounted for 66 per cent of Australia’s primary energy production (in energy content terms), followed by uranium (14 per cent), natural gas (13 per cent), crude oil, condensate, and LPG (5 per cent), and renewables, mostly bioenergy and hydro, contributed the remaining 2 per cent.

1.2 Australia’s position as a net energy exporter

In 2013, Australia was the world’s 8th largest energy producer and 6th largest energy exporter.

Australia is currently the world’s largest exporter of metallurgical coal, and the second largest for thermal coal. In 2014, Australia accounted for 58 per cent of the world metallurgical coal market, and 27 per cent of total coal trade.

In 2014, Australia was the world’s third largest LNG exporter, behind Qatar and Malaysia, and accounted for 10 per cent of world LNG trade.

Australia is a net importer of crude oil and other refinery feedstock but a net exporter of LPG. Around 77 per cent of this production is exported , while about 83 per cent of refinery feedstock for Australia is sourced from imports.


demand growth 2


demand growth 3

1.3 The resources boom and its impact on Australia’s productive capacity

Australia was a key beneficiary from the price and investment phases of the resources boom that began in the mid-2000s. The decade-long increase in commodity prices, driven by a combination of economic growth in China, a slow global supply response and the depreciation of the US dollar, contributed to a large and sustained increase in investment in Australia’s resources and energy sectors. From 2003 to 2014, over $400 billion was channelled into resources and energy projects.

The largest increase in investment occurred in LNG, with the seven projects in Queensland, Western Australia and Northern Territory among the largest energy projects undertaken anywhere in the world over the last ten years. By 2019–20, Australia will have a total of 87 million tonnes of LNG production capacity in place, putting it on track to become the world’s largest LNG exporter.

The factors that led to the investment boom are now at various stages of unwinding and along with declining terms of trade, investment in Australia’s resources and energy sectors is declining. From the lofty peaks of the investment phase in 2011, the number of projects under construction has fallen from more than 100 to less than 40 in October 2015. Exploration expenditure on energy resources has also been adversely impacted. In 2014-15, exploration expenditure declined $1 billion from the previous year to $4.1 billion – largely due to cutbacks in coal and uranium exploration – resulting in oil and gas exploration accounting for 93 per cent of total expenditure.

However, it should be appreciated that a legacy of the investment phase of the boom is the increased productive capacity in the resources and energy sectors, which is now translating into additional supply. For example, the Office of the Chief Economist’s most recent five year projections are for Australia’s exports of thermal coal to increase over the next five years, from around 200 million tonnes in 2014 to over 230 million tonnes in 2020. LNG exports are projected to increase more than threefold, from 23 million tonnes last financial year, to around 75 million tonnes in 2019-20. Associated with the projected increase in export volumes is a projected increase in export earnings.

While the investment phase of the boom lasted just over five years, the production phase is going to endure for a considerably longer period, as many of the large energy projects completed have very long operating life spans. As a result, Australia is now well-placed to meet future increases in demand for energy, particularly in the Asian region.


demand growth 4

1.4 Australia’s exports are dominated by resources and energy to Asia

Given its geographical proximity and rapid economic development over the past few decades, Asia has emerged as an important market for Australia. The region takes in excess of 80 per cent of all Australia’s exports and over 80 per cent of these are resources and energy commodities.

Our largest trading partner by value is overwhelmingly China, which accounted for around 38 per cent of Australia’s resources and energy exports in 2014–15. The next three largest export destinations by value are Japan, Korea and Chinese Taiwan. The largest contribution by value came from iron ore, with the next two largest being coal and LNG.

The volume of Australia’s energy exports has increased considerably over recent years as new supply capacity has come online. Exports of LNG increased 63 per cent from 2008–09 to 2014–15, while thermal coal exports increased by 50 per cent over the same period. In 2015, Australia became the world’s largest coal exporter and, as already mentioned, by 2019–20 is expected to be the world’s largest exporter of LNG.

In 2014-15, energy exports contributed 39 per cent of the total value of Australia’s commodity exports – about $67 billion. Coal was the largest energy export earner at just under $40 billion, of which about 60 per cent of the total value was contributed by metallurgical coal, followed by LNG at just under $17 billion and crude oil and other petroleum products at $11.5 billion.

While the majority of the earnings from exports to China were from iron ore, China accounted for 22 per cent of Australia’s coal exports and about 15 per cent of LNG exports.

When looking at energy alone, Japan is by far Australia’s largest export market with a value of $27 billion in 2014–15, or 40 per cent of the total. About 80 per cent of Australia’s LNG production and 31 per cent of its coal exports are destined for Japan.


demand growth 5

1.5 The Asia energy demand complex

There is no doubt that the current market conditions for energy exports are challenging and likely to be so for the next few years. However, a case can be made for a more optimistic outlook for Australia's energy exports over the medium to long term, based on projected increasing demand, particularly in Asian markets. Such a favourable outlook is largely dependent on increasing urbanisation and the expansion of manufacturing in emerging, highly populated Asian economies over these time frames. In these economies, a significant impact on total demand for resources and energy may arise from small increases in per capita consumption.

How much each country satisfies increases in its growth in energy demand through imports of specific energy types will depend on policy settings with respect to objectives regarding energy equity and cost (ensuring access and affordability), energy security and environmental sustainability. There are complex trade-offs between these three objectives, which have a bearing on each country’s energy mix and are likely to increasingly do so in a carbon constrained world. The relative weight attached to each objective will differ between countries and vary over time. Consequently, a change in policy may significantly alter a country’s demand for particular energy imports.

This highlights the need for Australia to remain a relatively low cost, reliable supplier of energy commodities.

1.6 Competitive conditions change over time

Competitive conditions in Australia’s major energy export markets have not remained static.

This is illustrated using the Herfindahl-Hirschmann Index (HHI) for a number of key markets for Australian LNG and thermal coal.

The recent growth in LNG markets has been associated with an even greater growth in the numbers of both buyers and suppliers, from 25 in 2000 to 48 in 2014. LNG buyers, who previously had only a limited number of options for sourcing LNG, now have access to a growing range of suppliers across many regions.

With the deepening of the market, there has been an increase in the diversification of LNG supply in consuming countries, although the extent of this diversification varies. Japan, South Korea and China have achieved a low to moderate concentration of LNG supply in recent years, but India remains heavily reliant on Qatar.


demand growth 6

The HHI for Japan and China is expected to increase in the medium term, given the increasing share of Australian LNG from projects recently completed or under construction. As such, medium to long term growth in LNG exports from Australia is more likely to be from emerging importers, such as India, rather than these foundation buyers.

The HHI of coal in Australia’s key markets of Japan, China, South Korea and Chinese Taipei indicate a relative consistency in the level of supply competition over time compared with LNG. This is because there is considerable variation in the quality and characteristics of coal, with most coal-fired power plants configured to use coal with specific energy content. As a result, consumers tend to source coal from particular locations, with limited variation.

However, growth in coal use and imports in these markets is likely to be limited over the medium term. The potential sources of import demand growth, such as India and southeast Asia, are likely to have a greater focus on the cost of coal. Consequently, Australian producers will need to focus on keeping costs low to compete with other suppliers into the region including Indonesia and Colombia.

This highlights the trade-off between security, access and environmental sustainability is dynamic and it depends not just on the price, quality and sustainability of Australia’s energy exports, but also those of our competitors.


demand growth 7

1.7 Adjustment dynamics in the energy sector in response to changing demand and supply conditions

Although current operating conditions for energy producers are challenging, the industry has in the past demonstrated its resilience and ability to respond to the changes in market dynamics.

Australia’s thermal coal industry over the last 20 years is a good example of how the industry responds to changes in market conditions.

Looking at the Australian coal industry’s cost curves in 1995 and 2000, there was very little change in the cost structure, which reflected the relative stability of the market at those times. This started to change in 2005 as the rapid growth in China’s commodity consumption commenced. Between 2005 and 2010 the cost of extracting each tonne of coal increased considerably, for very little increase in output as companies pushed their operations harder and tried to extract as many tonnes as possible regardless of the cost.

As the global supply response led to price corrections from 2011, the margins of companies were squeezed and they increased production to sustain an income and pay off the investments they had made in new capacity over the previous five or so years. They were also forced to find ways to cut costs and look for ways to improve their productivity, which contributed to the increase in output.

The cost curve in 2015 demonstrates the industry’s ability to rapidly change its cost structure, achieving cost reductions of up to 50 per cent over the course of a few years.

Similar dynamics are in-play across Australia’s energy sector, particularly in oil and gas supply. The sector’s responses to these dynamics have to date ensured a relatively small overall effect on Australia’s export earnings during a period of significant price declines. The substantial increase in volumes and a lower Australian dollar provided a huge offset to the lower prices that occurred between 2011–12 and 2014–15.


demand growth 8

1.8 Maintaining competitiveness

In addition to the work done by the energy sector to improve productivity and reduce costs in response to low commodity prices, the Australian Government is playing its part to ensure Australia remains a competitive supplier of energy exports.

The framework for achieving this is provided in the Energy White Paper, which was released in April last year. The white paper provides an integrated energy policy framework for delivering competitively priced and reliable energy supply by:

increasing competition to keep prices down;

increasing energy productivity to promote growth; and

investing in Australia’s energy future.

The White Paper aims to ensure future investment in Australia’s energy resources, and enable competitively priced and reliable supply of these resources into both international and domestic markets.

The guiding principle across the White Paper is that markets should be left to operate without unnecessary government intervention. Competition, productivity and investment will deliver reliable and cost competitive energy and energy resources. The role of Government is to provide policies and regulatory frameworks that contribute to each of these attributes effectively and efficiently playing their role in achieving the desired outcomes.

For example, improvements in workforce productivity, streamlined project approvals, and the finalisation of Free Trade Agreements with regional partners are already helping Australian energy producers to continue to compete for sales in global markets, and attract investment in project developments and supply.


demand growth 9

1.9 Conclusion

I hope I have left you with a few key messages.

Australia has abundant and high quality energy resources that will allow it to supply Asia with energy commodities for a long time. The large-scale investment in the sector during the investment phase of the resources boom has ensured that there are both the productive capacity and infrastructure required to meet the growing energy needs of the Asian region.

However, the prospect for significant growth in energy exports is not without its challenges. The energy policies of countries in the region will be instrumental in determining the rate of growth in their energy use as well as their energy mix. Furthermore, Australia is not the only supplier in the region and in general energy export markets are becoming more competitive. Although Australia is a reliable supplier with high quality energy resources, it must ensure that it remains competitive.

Both the energy sector and the Australian Government are responding to this challenge.

1.10 Contact page

If you are interested in seeing more analysis of Australia’s role in Australia’s energy markets I encourage you all to visit our website and keep up to date on new releases through our twitter account.


demand growth 10

australia’s role in meeting asian energy demand growth · web viewadjustment dynamics in the...

Documents