The economics and impacts of resource developments

John Rolfe

CQUniversity

Resource developments are becoming more contested

• Tradeoffs between mining, agriculture and communities becoming more obvious

• Developments of coal seam gas in Darling Downs and other areas is bringing concerns to a head• Loss of good agricultural land • Risk of impacts on water quality below ground• Risk of impacts on water quality above ground• Changing face of communities • Pressure on infrastructure• Unknown risks for people living close

Economics of resource development in regional areas

• Resource developments generate economic benefits in regional areas

• Key knowledge gaps are:– How big are the benefits?– Where do they accrue?– How to balance up the benefits against other

impacts and risks?

• Addressed in this talk with a focus on coal and gas industries

Coal mine case study

• Medium sized mine in Bowen Basin• 3.8 Mtpa of coking coal • 16 years of mine life • Footprint to cover 2,030 ha of grazing country • Up to 90 hectares of native vegetation may also be

cleared• Other environmental impacts managed on site • Site will be rehabilitated to grazing post-mining

– Major tradeoff in resource use is between using land for cattle production or for coal mining

Applying economic analysis

• What are the net benefits of allocating land resource to coal mining or cattle production?– Identify the profit streams of using land for

coal production, including all environmental and land rehabilitation costs

– Compare to the profit streams of maintaining for cattle production

– Net present value (NPV) of streams identifies which is best option

Broad estimates of annual revenues & profits by coal price

Comparing benefits and costs of coal production

At lowest expected price, and discounted over 16 years at 10%, coal will generate $552M in profits and royalties

Maximum profit from cattle production in future on same resource is $3M

How does the same analysis apply to Coal Seam Gas in Surat Basin?

– Involves joint use of land

• small proportion reserved for well heads and pipelines

– Wells can operate for up to 20 years

– Density varies, but minimum spacing of 750 metres (approximately 1 well per 200 ha)

Gas well development is low intensity

– Well footprint of about 60m x 60m (.4ha) when drilling, and 15mx15m (.02ha) post drilling

– assume 1ha/well with pipelines and roads

– Loss of productive land is 0.5%

– Ag. Land prices range from $950/ha to $6000/ha

Image Copyright Origin Energy, 2002.

Australia Pacific LNG example

• Plans to develop up to 10,000 wells in Surat basin over 30 year period– Up 10,000 hectares out of agricultural production

(for 20 years) • At average land price of $3500/ha = $35M in perpetual

lost Ag. profits

• Annual increase in Gross State Product of > $900M in Surat Basin for 30 years

• Assuming 10% of GSP is profit and royalties, PV at 10% discount rate is $850M.

• CSG generates > 20 times economic return of agriculture

Why the level of protest?

Given the economics of allocating land to CSG, why the level of protest?

Three reasons tested

1.Distribution effects 2.Externalities (Water)3.Lifestyles and assumed property rights

Reason 1: distribution effects

• Concern is that regional area will not share in the wealth

• But already substantial coal, gas, oil and power generation in southern Qld

• CQU team did assessment of resource expenditure in every LGA in Qld in 2010.

• Results show that there are already large impacts of resource industries in southern Qld • 1,185 direct jobs in the Darling Downs SD• $430M business and community spend

Salary payments in Queensland LGAs with top ten expenditure areas labelled

Supplier expenditures in Queensland LGAs with top ten expenditure areas labelled

Total addition to Gross Regional Product by LGA

Input-output models used to estimate flow-on effects

• Multipliers based on Aust. 2006 accounts

• Different to normal I-O or GE models in three main ways – Modelled impact of

initial spending by SD and LGA

– Used actual spend data in 2009-10

– Counts both operating and capital expenditure

Selected comparisons across LGAs

Direct and indirect impacts by LGA in Queensland. Total

Income (Initial + addition)

Addition to GSP

(expenditure + Value

Add)

Total jobs (Initial + addition)

% of regional

workforce

Additional job multiplier

Brisbane 8,401.81 24,092.02 136,667.90 22.74 22.49

Central Highlands 1,254.32 2,703.17 15,389.00 87.33 2.08

Gladstone 872.52 2,509.13 12,813.80 42.99 4.72

Gold Coast 102.67 287.56 1,952.20 0.75 7.96

Mackay 1,537.85 4,950.19 23,715.60 39.70 6.74

Maranoa 84.52 244.55 942.58 11.54 2.34

Mount Isa 810.81 2,184.59 8,346.46 70.22 1.22

Rockhampton 468.20 1,160.61 6,673.52 12.37 3.56

Sunshine Coast 158.25 419.81 3,256.30 2.16 7.64

Toowoomba 237.12 606.25 3,462.50 4.24 6.68

Western Downs 227.75 527.22 3,500.80 21.62 4.53

Modelled employment impacts

• For every resource sector person currently living in the Surat basin (Darling Downs) there are approximately:– Another 2.4 jobs locally– Another 2.9 jobs in region– Another 1.5 jobs in Brisbane

• But there is likely to be some substitution between regional and Brisbane effects

Distribution of economic impacts

• Increasing share of economic benefits going to major centres and coastal zones– Home location of workforce

– Home location of contractors

– Spending flows in business supply chain

– Increasing economic leakages as wealth increases and population becomes more mobile

• While regional areas benefit from major projects, only a share is retained– Level of expenditure capture appears to be falling

in mining and smaller communities

Reason 2: Externalities

• Concerns are that land use change will generate other costs– Business, housing and labour force pressures– Social and community pressures – Impacts on water resources – Issues of CSG water and salt disposal

APLNG example

• APLNG will cover approximately 570,000 ha of gas fields (joint use with agriculture)

• Agriculture has concerns that there will be impacts on water tables and other issues.– Assume in hypothetical worst case scenario that

there are perpetual declines in agricultural productivity of 10%

• At average land price of $3,300/ha, total value of lost production is $200M.

• All agricultural losses would still be less than production value ($850M > $35M + $200M)

– Range of other sustainability reasons for avoiding external impacts

Reason 3: Lifestyle and assumed property rights

• Concerns about inconvenience issues

• Concerns about impacts on perceived property rights

• Perceptions that there are major impacts on good agricultural land

• Perceptions about changes to communities and lifestyles

Conclusions

• CSG has very high level of economic returns relative to agriculture – Makes it difficult to argue against introduction

of CSG industry – Focus should be on minimising key problems

• Ensuring regional development impacts are positive

• Avoiding and minimising negative externalities • Minimising lifestyle disruptions and encouraging

culture change