Western Australia’s Energy Boom: Built to Last?

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Western Australia’s Energy Boom: Built to Last?

With China’s slowdown, environmental concerns and the cyclical nature of the resource and energy industry, can the boom in the “wild west” endure?

Western Australia’s energy boom has seen the state outpace the rest of Australia in job creation and economic growth, helping the conservative Liberal-National coalition comfortably win re-election. The state’s traditional secessionist sentiment has been fuelled by Premier Colin Barnett, who has demanded a greater share of tax revenues from the federal government in Canberra.

Australia’s leading resource state has more than A$175 billion worth of projects agreed to or under construction. With the petroleum sector second only to iron ore, new gas projects planned include: the A$43 billion Gorgon gas project, the A$30 billion Browse LNG (liquefied natural gas) project and the A$29 billion Chevron-Wheatstone LNG project, in addition to a range of iron ore, gold and other projects.

Covering the whole western third of Australia, the state accounts for nearly 15 percent of national gross domestic product (GDP) along with over 40 percent of total exports. China is the state’s biggest consumer, “taking 42 percent of its output,” followed by Japan, South Korea, India and Thailand.

But with China’s slowdown, environmental concerns over onshore gas processing and the cyclical nature of the resource and energy industry, can the boom in the “wild west” endure?

‘Four more years’

“Four more years” was the chant at the Western Australian Liberal Party headquarters after the party’s poll victory earlier this month, and the sentiment was shared by the resource industry.

The federal Labor government’s mining tax and carbon price have proven deeply unpopular in Western Australia, with Barnett capitalizing on the dissatisfaction in securing control of both houses of the state’s Parliament.

The Australian Petroleum Production and Exploration Association (APPEA) described the outcome as a “clear cut” result which “creates a platform for the government to provide renewed leadership in capturing the benefits of growth opportunities associated with the state’s oil and gas sector.”

Congratulating the premier, APPEA’s chief operating officer in the western region, Stedman Ellis said: "The oil and gas industry is a significant contributor to the Western Australian economy and it looks forward to the re-elected Liberal National Government taking early action on its post-election policy plans.”

"The industry would place particular priority on early action to further improve the Government’s commitments to strengthening a market based approach to energy policy, extending the existing approvals tracking scheme and to establishing a biodiversity, water and cultural heritage database.”

The Chamber of Minerals and Energy of Western Australia (CME) publicly backed the government’s mines and petroleum policy during the election campaign, welcoming a commitment to “strongly ruling out additional levies and taxes on the resource sector.”

The uranium industry also hailed the outcome, with the opposition Labor Party having committed to stop any new uranium mines in the state. While the state does not currently have any such existing mines, proponents including Toro Energy said the result gave investors greater confidence.

"It gives predictability and more certainty for projects that are in the pipeline and coming after [Toro Energy’s] Wiluna [project]," Toro managing director Vanessa Guthrie told the West Australian.

According to the state’s Department of Mines and Petroleum (DMP), mining accounts for more than a third of gross state product, with the value of its minerals and petroleum industry topping A$106 billion in FY 2011-2012 from its iron ore, petroleum, gold and other resources.

Strengthening Barnett’s push for a greater share of national spending, the state accounts for 46 percent of Australia’s merchandise exports, 57 percent of minerals and energy exports and over a third of new private investment, along with 62 percent of natural gas production.

Fuelled by Asian demand, the surging resource and energy sector helped the state economy expand by 14.2 percent over the past year – second only to the smaller Northern Territory’s 33 percent growth.

The DMP expects new resource projects to generate more than 50,000 construction jobs and more than 15,000 permanent jobs, and the sector has already delivered the lowest jobless rate in the country.

The latest unemployment figures from the Australian Bureau of Statistics showed Western Australia’s jobless rate was 4.5 percent in February, lower than even the government-dominated Australian Capital Territory’s 4.6 percent and even below resource-rich Queensland’s 5.8 percent.

While Queensland’s new LNG industry powered by “unconventional” coal seam gas has attracted attention, Western Australia has up to 90 percent of the nation’s conventional gas reserves in the North West Shelf’s Carnarvon Basin. More than two-thirds of the nation’s gas production comes from the state, led by the flagship North West Shelf project, with the new Gorgon, Pluto and Wheatstone projects set to further boost supply.

The growth in gas supply also has environmental benefits, given that gas-fired power stations are estimated to produce half the emissions of coal-fired power.

“In addition to the savings in emissions resulting from gas being a lower emissions energy source (compared to other fossil fuels) the new projects in the state are required to commit to putting in place environmental and carbon offsets. The new projects will help to meet the global demand for energy, while displacing millions of tons of greenhouse gas emissions compared to coal,” an industry source told The Diplomat.

Troubled waters?

However, it is not all plain sailing ahead for the industry, according to analysts.

“The energy space in Western Australia right now is in a very interesting place,” Perth-based energy journalist James McGrath of EnergyNewsPremium said.

“It has so far been driven by a supportive state government, and the enormous resource off the coast of WA driving investment in some of the world’s largest LNG projects such as Gorgon, the North West Shelf project, and Wheatstone.”

“However, the capacity for mega-projects to be built in the state has been questioned in recent times due to a high Australian dollar and labor shortages being impacted by the state’s mining sector driving the cost of greenfield projects ever higher. You only need to look at the cost blowouts at Gorgon as an example of those forces at work.”

“This could all come to a-head with the yet-to-be-approved Browse LNG onshore project, being pushed primarily by the state government. Project partner Shell is thought to be pushing for the Browse field to be developed with a floating LNG facility, a thought the state government despises as it would lose out on royalties. However, the cost savings associated with the offshore construction of such a facility would save the joint venture a small fortune in development costs.”

Environmentalists have campaigned strongly against the Browse project’s proposed onshore gas hub, winning a high share of votes at the recent election in the affected electorate of Kimberley.

Former federal Greens leader Bob Brown, described the party’s 12 percent swing in the seat as “a huge statement by the people of Broome and the Kimberley that they don’t want the gas hub.”

Project leader Woodside is yet to reach a “final investment decision” on the project, with commentators warning that the industry’s future was uncertain.

“Australia has priced itself out of the market with a domestic cost structure that is amongst the highest in the world, just as the price of globally-traded LNG starts to fall," analyst Tim Treadgold said. 

“That’s why companies proposing to develop LNG projects off the WA coast are shelving plans drawn up over the past few years and casting around for cheaper options.”

Citigroup’s head of energy strategy, Seth Kleinman, has warned of a “huge wall of LNG” from U.S. shale and Africa hitting the market over the next four to five years, potentially reducing prices in Asia and affecting the high-cost Australian projects.

A number of new Australian LNG projects are targeting production for the middle of the decade, followed by U.S. LNG exports and then East Africa. Citigroup expects oil prices to decline over the same period, impacting gas prices linked to Brent crude.

Should China’s growth slow further, the industry would suffer the fallout, although the premier has been bullish on the outlook for the state’s top customer.

"When China eventually starts to plateau in its growth rate that will have an impact, but that's still, in my view, a long time away – at least a decade or more," Barnett told Reuters. 

But Western Australia also has its eye on another new gas source: shale.

“We have been paying higher prices for gas in Western Australia even though we have loads of conventional gas in this state and, indeed, export it overseas,” Former Mines Minister Norman Moore told state Parliament last June.

“But our domestic consumers, certainly when long-term contracts expire, will have to compete for that domestic gas in the context of international market place prices, which are much higher than exist here.”

In this context, a shale gas revolution similar to the United States is being eyed to aid domestic consumers, according to EnergyNewsPremium’s McGrath.

“The government will be hoping fertile shale grounds such as the Canning Basin in the state’s northwest and the North Perth Basin could provide a basis for a US-style ‘shale gale’,” he said.

“Such a development would open up a new industry for the state, while the government would have more claim to royalties as it’s onshore, compared to the offshore resources which are considered to be in Commonwealth waters.”

With Western Australia currently earning more than A$5 billion a year in royalties from minerals and petroleum, the state’s future is closely tied to the success of the energy boom.