Dangerous time ahead: Resources Council

The interconnection of North West Queensland and the Northern Territory to the National Electricity Market has been put forward as a prime example of nation building under the Federal Government's Building Australia Fund by the Queensland Resources Council.

The interconnection of North West Queensland and the Northern Territory to the National Electricity Market has been put forward as a prime example of nation building under the Federal Government’s Building Australia Fund by the Queensland Resources Council.

The Council’s chief executive Michael Roche told delegates at the 12th Queensland Power and Gas Conference that the global financial crisis is causing the world economy to apply the brakes on development and mineral infrastructure.

“A number of developed economies are close to or moving into recession, while growth in emerging economies is also slowing.

In Australia, the federal government has moved boldly by putting around half of the projected budget surplus into the hands of targeted consumers to stimulate domestic consumption and the housing sector.

Prime Minister Kevin Rudd has made it clear that economic growth in Australia will slow, and unemployment will rise.

The exchange rate that was moving closer and closer to parity with the US dollar earlier this year has been down in the mid-60s in the past week. Such is the vulnerability of a medium-sized trading nation like Australia, but no-one is going to survive this extraordinary set of economic and financial circumstances unscathed. Our export performance — and particularly the contribution of the minerals and energy sector since the turn of the century — is expected to cushion Australians from the worst of the global downturn.

With regard to the Queensland resources sector, there is no headline in saying that uncertainty exists. Despite being diversified in our customer base and in the commodities we export, Queensland is going to be adversely affected.

Historically high metal commodity prices were already trending down in the face of additional supply.

Now, the expected slowing in global resource consumption is seeing commodity prices decrease across the board in line with consumer and business confidence. Given the inevitability of higher capital costs and continued instability in global credit markets, companies will seek to minimise their levels of debt.

For some in our sector, this could delay some investment plans — placing pressure on job creation and government revenues from taxation and royalties. On the upside — and this is certainly valuable to Australia — the International Monetary Fund is predicting that countries such as China and India may be a source of resilience as they reap the benefits of strong productivity growth and improved policy frameworks.

There is a strengthening view that beyond the next 12 to 18 months, demand for energy and mineral commodities will continue to be underpinned by economic growth in these emerging economies.

As reported in yesterday’s China Daily newspaper, that country’s version of a slowdown is an average 9.9 per cent economic growth for the first three quarters of this calendar year.

China’s annual growth rate to the September quarter slowed to a still pretty respectable 9%, but that is down from the double digit growth of a year ago.

Consistent with the remarks made by one of the country’s chief trade negotiators in Brisbane just two weeks ago, China anticipates annual growth of between 8 and 9 per cent, regardless of outside influences.

Spread across a population of more than 1.3 billion people, it makes sense for Premier Wen Jiabao to describe the developed world’s outlook as having a ‘gradual’ effect on his country.

‘Unfavourable international factors and the serious natural disasters at home have not changed the basic growth situation of our country’s economy,’ Premier Wen said a statement posted on a government web site. Assuming a similar prevailing attitude in New Delhi, Australia and Queensland are set to play continuing key roles as commodity suppliers to the most dynamic emerging economies in the world.

The world is hungry for our minerals and energy resources and beyond their economic significance to our nation; they are indispensable rungs on the ladder needed to meet the aspirations of almost 40% of the world’s population.

In framing my key message from this presentation, let me call all none other than a true champion of capitalism, master investor, Warren Buffett. In a rare article for the New York Times last week, he invoked the following advice, which he probably shared with the late Kerry Packer: ‘Be fearful when others are greedy.

Be greedy when others are fearful.’ Put into a local context, I suggest to you that there is a stronger case than ever for this country to start reinvesting some of its windfall from the recent supercycle of resource sector growth into preparing for the next one. Given that the beginning of the supercycle generated by China and India earlier this decade took us all somewhat by surprise, there is a strong case for viewing a global slowdown as an opportunity to draw breath, and more importantly, make ready for the next round. Some 2.5 billion people in India and China aren’t going anywhere in a hurry. What I would like to raise with you today — at the local level but with global implications — is the promise contained in the future, as outlined by the Prime Minister in Brisbane earlier this month.

In describing infrastructure constraints as a drag on economic growth, Mr Rudd accused labeled them correctly as holding back productivity and adding to inflationary pressures. He also observed that infrastructure bottlenecks would tighten in coming years unless we invest now. If this was a Parliament, this room would be echoing to the sound of ‘hear, hear’.

So here’s a nation-building proposition worthy of the opportunity presented by a rare combination of political will and the funds ready to be invested. Let’s join the dots between the National Electricity Market and the Northern Territory via one of the most valuable pieces of ground in the world.

To the uninitiated, it’s called the North West Minerals Province, centred on Mount Isa.

Former Premier Beattie clearly loved his geometry at school, because at the last state election he added Bowen and Townsville and came up with a construct called the Northern Economic Triangle.

But with apologies to the good folk of Bowen and Townsville, their future as service centres, export ports and mineral processing centres is tied to our success in developing the North West Minerals Province.

Since 1872, this region has generated 85 billion dollars in mineral wealth for Australia and that, according to those in the know, is just literally scratching the surface.

When it boils down, it’s hard to find a better example of nation building than the practicality of linking resource rich provinces such as North West Queensland and the Northern Territory to reliable and competitively-priced energy supplies.

Competitively-priced energy is fundamental to their development and the national interest in ensuring the development of new mines, new industries and new opportunities for northern Australia.

We are told that from the North West Minerals Province to the Northern Territory that there is potential electricity demand of more than 800 Megawatts needing to be met. This is from industrial users alone, contemplating new mining and minerals processing opportunities against a current backdrop of unreliable and increasingly costly energy options. In the North West, electricity costs are double those on the coast while in the Territory consumers pay almost six times as much as their southern counterparts per capita for electricity and gas, despite a hefty Commonwealth subsidy. This is not what you would call an incentive for industrial growth in the north. The reason behind this current national shortcoming in North West Queensland is a mismatch in investment horizons. The demand for infrastructure services such as energy comes from mining and minerals processing projects, typically established on the basis of an 8 to 10 year economic lifespan. In contrast, new generation capacity is costed on the basis of 30 to 50 year investment timeframes. Such services are typically provided by government-owned corporations that maintain a low-risk mandate, which effectively limits their scope to an explicit industrial development role. This investment horizon mismatch means that to secure an infrastructure expansion, the GOC supplier is required to capitalise the expense of new infrastructure over the much shorter mine life. In turn, this dramatically increases the unit infrastructure costs and provides a much greater investment threshold for the start-up of new operations or expansions. By serving to front-load the cost of infrastructure, the mismatched investment horizons increase the cost of starting new mine operations in the region. These higher costs not only deter new start ups but also reduce the time that an ore body continues to be profitable. In short, we are talking about a market failure that deserves government attention. What I am saying to you today is that to maximise the economic value on offer from the North West Minerals Province and the Northern Territory, both should become part of the National Electricity Market, currently straddling the east coast of Queensland. I am not going to suggest that a project of such magnitude should be undertaken at the drop of a hat. After all, it took more than a century for the railway line between Adelaide and Darwin to be completed. But it’s more than a coincidence of history that the 1000 kilometre railway line still servicing Mount Isa from Townsville was built in the depression for more than simply economic reasons.

There is a compelling case during a market slowdown to provide more energy, more reliably and more competitively to regions that are not only blessed with mineral wealth but also adjacent to some of the fastest growing economies in the world. The Mount Isa region is currently responsible for 43 percent of the country’s copper production, 62 percent of its zinc, 84 percent of its silver and 70 percent of its lead production. The reality is that we are benefiting from mineral discoveries made 15 to 20 years ago and to address that situation, the exploration and development incentives must be made more attractive to global exploration managers. Linking the North West and the Northern Territory to the National Electricity Market would provide added stimulus for the development of the energy resources along the route from the coast. In that respect, I refer specifically to the Galilee Basin’s 2.2 billion tonnes of thermal coal, located 200 kilometres west of Emerald. This resource makes perfect sense for establishment as a long-term energy hub. Another bonus from such a scheme would be the potential for transmission access to geothermal power sources known to exist along the Northern Territory-Queensland border. There is a commercial proposal before the Queensland Government for such a high voltage transmission link running from the Bowen Basin through the Galilee Basin and on to the North West. Such proposals deserve further attention from Commonwealth, Queensland and Territory governments. We think it’s time for governments to move beyond the roles of brokers, facilitators and business case assessors. Where are the public assets of the future to come from, if not from calculated, bold and visionary investments by governments of the day? In the words of Sir Humphrey Appleby, it might be termed a ‘politically courageous’ vision but I don’t see it as beyond either our capacity or our ambition to lock-in the future prosperity for the nation from two of its richest regions. The Federal Government has committed 20 billion dollars to the Building Australia Fund. We believe opening up the mineral wealth of the North West and the Northern Territory by addressing a market failure is an appropriate targeted use of some of the Building Australia Fund. A combination of patient investment capital and a preparedness to carry some long tail risk from the Commonwealth and Queensland Governments could make all the difference to moving proposals such as the IsaLink project off the drawing board and into construction. And before the purists start quoting back at me the ins and outs of the National Electricity Market, and why the NEM throws up lots of reasons for governments not to make such targeted investments, let me say quite clearly, it is time for the NEM to adapt to the realities of market failures such as those we see in the North West.

Of course, the mere mention of new baseload electricity generating capacity under such a scenario is enough to send shudders down the spines of politicians. In the current uncertain environment, we have to acknowledge that the chances of securing finance and approvals for a conventional baseload coal-fired power station are at very long odds. There is no shortage of willing project proponents, but they all want to first know the shape of the Federal Government’s Carbon Pollution Reduction Scheme.

With Queensland now surpassing Victoria in greenhouse gas emissions, with consistent 5 per cent economic growth and an historical exposure to emissions-intensive industries, it’s not hard to understand political wavering or indeed, public disquiet. What’s going to be harder for both audiences to come to terms with is that Queensland will require new baseload generating capacity in the first half of the next decade. In the interim, a range of intermediate and peaking gas-fired plants will ensure the lights stay on in Queensland. Assuming that we are not prepared to stand at the dockside and farewell industries as they relocate to countries with less onerous obligations under the Kyoto Protocol and its successors, we have got to start buying time for our coal-fired generation sector. By this, I mean stalling electricity demand growth through measures we have available to us now. Graham Reed from the Centre for Low Emission Technology will be speaking to you shortly on the rapidly evolving developments associated with carbon capture and storage for coal-fired power stations. I don’t propose stealing any of his thunder reporting the progress of projects under way in Queensland. However, as I am sure he will point out, if the latest scientific advice is accurate, time is a critical commodity in seeking to commercialise carbon capture and storage technologies. In reality, the world is waiting for the United States to decide if it is serious about reducing emissions. Next month, American voters will elect a President from two candidates both committed to the development of low-emission power technologies in the interests of addressing the twin concerns of domestic energy security and climate change. Hopefully, this will be a turning point for a truly global effort. In the national interest, the United States spent the equivalent of 136 billion dollars over 13 years to put a man on the moon in 1969. It’s a dreadful analogy, but the world is still to put the battle against climate change on a ‘war footing’. It’s the QRC’s view that we should be working much harder at ‘buying the time’ to refine and commercialise low-emission technologies. What we need and can achieve right now are stretch targets for energy efficiency and conservation. Queensland — indeed Australia as a whole — should be taking a leaf out of British Columbia’s book in Canada. The provincial government has stipulated that half the growth in electricity load to 2020 must be satisfied by energy efficiency and conservation.

The target and the approach have won the support of experts in both government and non-government sectors. Achieving the target means tough new building codes for houses and commercial buildings. It means incentives to throw out energy-inefficient appliances, rebates for efficient lighting and pricing that encourages electricity conservation. It also means government funding for ‘energy managers’ to work with large commercial and industrial users of electricity.

That last component is particularly important, given that around two thirds of Queensland’s daily electricity consumption is used by industry. Certainly QRC member companies have recognised the economic and environmental benefits of maximising energy efficiency, and in industry circles, they are setting the benchmarks for innovation. With the support of state and local governments, south east Queenslanders have shown already through their water conservation culture that ‘here and now’ measures can work and work well. There is no reason why we can’t extend ourselves beyond the laudable ambitions for energy conservation contained in the Queensland Government’s recently released Q2 vision statement. In the wake of the economic turmoil that has engulfed the United States and Europe, it was interesting to note calls from a couple of EU member nations to delay the introduction of new energy targets. In Australia, there were also calls for a delay to the introduction of the proposed Emissions Trading Scheme set for 2010. I am not going to speculate on the politics of the issue but rather the crying need for some certainty in these already uncertain times. A delay in implementation of the ETS is nowhere near as important for industry as having the hard details of proposed targets and trajectories and the proposed treatment of trade-exposed and strongly affected industries. Industry also needs to be confident that these ETS details have been arrived at through the use of the best quality data. Armed with these details, industry can start making informed investment decisions bearing in mind that most resource projects have long lead times and in nearly all cases, longer pay-back periods. We are now waiting nervously for the next chapter in the ETS saga. Professor Ross Garnaut’s targets and trajectory scenarios have certainly been successful in encouraging debate around the dinner table but there’s no substitute for the main course. From the QRC’s perspective, addressing the challenges of climate change in a least-cost manner requires a set of coherent energy and climate change policies. As I have mentioned, this is vitally important for Queensland, given its significant energy reserves, growing energy exports, and emissions-intensive industries. The reality is that Queensland is particularly exposed to the risk of any hastily conceived or implemented emissions trading scheme. However, a well-designed scheme that provides for an economically efficient, environmentally effective and equitable regime could be a watershed in Australia’s efforts to address market failures that arise from the global challenges associated with managing emissions. As Australia looks to take a lead in the development of a global consensus on climate change, it is important to recognise that Australia’s decisions need to taken in the context of an emerging global transition, notwithstanding the events of the past few weeks. In order for our actions during this transition period to meet the triple test of being economically efficient, environmentally effective and equitable — we also need to conserve the international competitiveness of our energy and emissions-intensive industries. We must recognise that we are imposing an emissions constraint before many of our international trading competitors.

If we ignore our industrial base in negotiating the transition to a consistent international emission trading scheme, we risk inadvertently providing a counter-example for other resource-intensive countries considering following our lead.

The Federal Government’s emissions trading Green Paper recognises the need to avoid an export of jobs and carbon emissions from Australia’s emissions-intensive trade-exposed industries. However, that does not guarantee that the final package of assistance measures to those industries gets the balance right.

Based on the criteria set out in the Green Paper, sectors like black coal production have more work to do to provide a case for assistance.

The Green Paper proposes including fugitive emissions from coal mining in the scheme from day one, yet it is clear that there are huge problems with the accuracy of the current methods of calculating emissions, particularly from open cut mines.

Unless these emissions are measured accurately it could lead to serious overcharging or undercharging for individual mines and that, in turn, could create issues of equity and distort competitiveness between mines.

As most in this room would be aware, the Green Paper did not accept the Garnaut Review case for no compensation to coal-fired power generators.

There has been scant detail on the nature of the proposed Electricity Sector Adjustment Scheme to date but QRC welcomes the paper’s recognition of the need to shore up the investment environment in the generation sector. Emissions are the most highly magnified cross-hairs aimed at the coal industry at present, and I suggest they will be in the frame for some time to come.

The reality is that despite the optimism for renewable energy technologies — and their contribution must continue to grow — the Intergovernmental Panel on Climate Change, Al Gore, Sir Nicholas Stern, Professor Garnaut,, WWF-Australia, the Climate Institute — and most recently former Australian of the Year, Dr Tim Flannery — are among those who recognise the global necessity to develop low-emission technologies for coal and gas-fired electricity production.

The world will need every piece of energy technology that it can muster to meet the expectations of 1.8 billion people in developing nations who are yet to take electricity for granted.

To conclude before inviting questions if we have time, I would like to quote from Peter Huber and Mark Mills’ 2005 book, The Bottomless Well: ‘Economic growth marches hand in hand with increased consumption of electricity — always, everywhere, without significant exception in the annals of modern industrial history.’ This is what China, Indonesia, Malaysia, South Korea and the United Arab Emirates have had in common over the past 15 years, during which their power generation grew by more than 244%.

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