Keynote address to the Institute of Chartered Accountants Business Forum, Perth
Monday, 12 April 2010
Energy and the Future for Western Australia
*** Check against delivery ***
Good morning distinguished guests and delegates, Chartered Accountants all.
Mike, I am in fact a director of the West Coast Eagles and yet I am still delighted to be at your Business Forum in Perth today!
Recently, a mining engineer from Great Britain came out to Australia to take up a job on one of the big resource projects in the North West. He boarded a light plane at Perth airport (this is a true story) with an executive from his new employer mining company and off they headed north.As the plane flew over Western Australia, the engineer marvelled at the sheer size of this State, with its land mass 10 times the size of the entire United Kingdom, but with so few people.
And as they flew from Perth to Port Hedland, a 1600 km trip, he looked out of the plane and saw nothing but desert – kilometre after kilometre. Nearing Port Hedland, the mining executive broke some not so good news.
“Look mate we haven’t been able to secure a house for you yet” he said. “What’s the problem?” the engineer asked. And without a hint of irony, the executive said “Land shortage”.
Given there is less than one person per sq km in WA compared with 250 people per sq km back home in Britain, it’s no wonder the British engineer was a little confused.
So as the current debate rages about Australia’s population growth and what size is sustainable, in the context of recent Treasury forecasts of a population of 36 million by 2050, let’s think of it this way:
If you are stuck in peak hour traffic in Melbourne trying to get to the airport for that last flight home, you curse the size of Melbourne.
If you live in the SE corner of Queensland, the lack of infrastructure to cope with the exploding population turns the dream of a Big Australia into a nightmare.
If you have lived through an Adelaide summer with its severe water restrictions and watched your gardens die through lack of water, it’s hard to imagine how a larger population can be sustained.
If you are at a weekend house auction in Sydney’s outer suburbs competing with many others for a modest home that is unlikely to go for under half a million dollars, you may well think Sydney is big enough already.
But if you are running a mining or resource company in WA facing a shortage of skilled workers to complete one of a number of the massive projects underway or on the drawing board, you would be all in favour of a significant increase in population.
Population size – like beauty - is in the eye of the beholder.
The current debate about population is not new. Australia's political leaders have been engaged in this debate for decades. The intensity tends to ebb and flow in response to economic, immigration and environmental considerations.
It is no coincidence that some of these debates have taken on greater intensity during times described as ‘mining booms’ (although we should avoid calling them booms these days as that implies there must be a bust. I should call them “periods of sustained growth”).
The first such period, the Gold Rush of the 1850s, saw rapid increases in population driven by migration. In 1850 Australia's population was estimated at just under 440,000 people, but that almost trebled to more than 1.1 million in the following decade.
This placed significant pressure on infrastructure and led to social tensions, not only on the Goldfields, but also elsewhere in society with tensions arising from competition for labour, rapidly rising wages and rapid population movements.
Recently Reserve Bank deputy governor Ric Battelino pointed out that Australia has experienced five significant mining booms including the 1850s Gold Rush. Then there was the minerals boom in the late 1890s where the population of our State alone more than trebled from 48,000 to 180,000, the 1960s boom associated with industrial development in Japan, the 1980s minerals and energy boom, and the current period of sustained growth, largely driven by demand from China, and underwritten by demand from our traditional customers including Japan and South Korea.
Queensland had a similar long history of metals and minerals discoveries and became a large supplier of coal to the world with growth in exports to Japan mirroring the iron ore exports from WA from the 1960s on. But the way the population expanded in Queensland differs significantly from that in Western Australia and offers an interesting contrast.
A combination of mining and agricultural development led to the decentralisation of Queensland's population and the establishment of large centres up its coastline and to a lesser extent in its interior.
According to the Australian Bureau of Statistics the current population of some of these cities and their surrounding districts are: Mackay 116,000; Rockhampton 114,000; Townsville 182,000; and Gladstone 60,000.
In contrast, currently the major centres of Western Australia's coastline, north of Perth, are Geraldton with 38,000; Broome 16,000; Port Hedland 14,000 and Karratha 11,000.
In other words over 420,000 people reside in 4 coastal Queensland towns compared with 79,000 in 4 coastal Western Australian towns for example.
It would be overly simplistic to compare the two coastlines, and the reasons for this pattern of development are many. However it has long been a source of concern to many policy makers that Western Australia has not decentralised and developed at least one major city in its north.
The Reserve Bank deputy governor also described the current mining boom as having begun in earnest in 2005, and believes it has the potential to far exceed all previous booms.
He is certainly not alone in that view. In the absence of a deeper global recession, the current indicators are that Western Australia in particular will experience further rapid growth and development in its minerals and energy sectors.
There are already major skills shortages in this State but further development means there will be a need for many thousands more workers and a dramatic increase in the infrastructure which will be required to service them.
So in the context of the current debate about population size, we in the West need to think very strategically about our future development.
The ABS reports that Western Australia's population as at 30 June 2008 was nearly 2.2million, with the State experiencing strong annual population growth over the past 8 years or so.
However, just under 75% of the people live in the greater Perth region and 11% live in the State's south west. That leaves just only 14% of the population living away from the South West corner.
While there has been some growth in the Pilbara, our mining and resource companies overcome this challenge with fly in – fly out arrangements rather than opt for a permanent population.
This has proven to be effective in supporting developments in the north and on the NW Shelf, but I believe it is not in the long term interests of Western Australia for the current situation to continue indefinitely.
And its very existence as an employment practice has worked against the presence of a more stable growing population in the north.
Western Australia's great premier and statesman, Sir Charles Court was famous for his support of mining development in Western Australia, but he also had a vision of bigger population centres in the North.
Premier Colin Barnett has also spoken of the need to work with the private sector to develop the Pilbara, the Kimberly, the Ord River, with more permanent populations and with his vision of a Dubai in the North (obviously we would now take into account the economic lessons of that city).
Anyone considering relocating to a northern centre would, of course, need reassurance that the current mining boom will be sustainable and that work will be available into the foreseeable future.
We cannot of course predict with any certainty that China will continue to grow at current levels, but any slow down in China, for example, would be likely offset by increasing demand for our resources from India, Indonesia and other nations of South-East Asia. And Japan will continue to be one of our biggest trading partners.
Australia, and Western Australia in particular, has the potential to be the major supplier of energy to our region and by “region” we must include the countries on the Indian Ocean Rim and not just the Asia Pacific in defining “our region”.
The demand for iron ore appears insatiable. According to the Australian Bureau of Agricultural and Resource Economics, exports of iron ore (97% of which come from WA) grew from just over 100 million tonnes per annum in 1989 to 156 million tonnes in 2001.That is an increase of 50% over 12 years.
Iron ore exports increased to almost 240 million tonnes by 2005 – an increase of 50% in just over 4 years. Exports increased to more than 360 million tonnes in 2009 – another increase of 50% in just under 4 years.
It may take some time for the world economy to fully recover from what our Reserve Bank now calls the North Atlantic financial crisis rather than a global financial crisis, but analysts are predicting that iron ore exports will continue to increase.
The demand for infrastructure in China, India and other expanding economies means there will be strong demand for steel for many years to come.
While the outlook for iron ore appears to have excellent long-term prospects, the outlook for our energy sector is at least as equally promising.
The International Energy Agency is forecasting strong global growth in demand for energy in coming decades. Its latest World Energy Outlook Report predicts there will be a 40% increase in overall energy demand by 2030, based on current trends.
The report forecasts more than 90% of that increase coming from non-OECD countries, with China and India accounting for most of the increase.
The International Energy Agency also predicts that the world will continue to rely on fossil fuels for more than 75% of its energy needs. Excluding the petroleum sector, it predicts that there will be a 76% increase in demand for electricity.
Demand for coal is forecast to increase by over 50% and demand for natural gas by over 40%.
It does predict that renewable sources of energy will increase from the current 18% of total supply to 22%. However, to put this huge expansion in some perspective, the IEA also assumes that 1.3 billion people worldwide will still not have access to electricity by 2030 – although that figure is currently 1.5 billion people.
With billions of people located in our Indian Ocean/Asian-Pacific region, we can safely assume that demand for our energy sources will continue to grow for decades at the least.
Which brings me to the concerns about the environmental impact of this massive increase in the burning of fossil fuels.
Without getting into the detailed politics of the climate change debate, I should remind you at this point that only a few months ago Prime Minister Kevin Rudd said that climate change is the greatest moral, economic and environmental challenge of our age.
Mr Rudd predicted environmental Armageddon if Australia failed to adopt his “Carbon Pollution Reduction Scheme” otherwise known as a great big tax on everything, prior to the Copenhagen Climate Change Conference.
Well Copenhagen came and went and I don’t think Mr Rudd has uttered the words ‘climate’ and ‘change” in the same sentence since.
But if we assume that Mr Rudd actually believes his own statements, and that’s a very big “If”, we should also assume that Mr Rudd would take every possible action to mitigate against the greatest moral challenge of our age and do what Australia can to reduce our and other nation’s global greenhouse gas emissions.
The only known low emission technology for base load electricity generation is nuclear. And this is where politics has overtaken policy and is harming our national interests.
The Rudd Government has overturned a decision of the Howard Government to sell uranium to India. With its increasing population and economy and its increasing demand for electricity, India plans to significantly expand its nuclear power capacity, which will also be part of its contribution to reducing global greenhouse gas emissions.
The United States, Canada and France have agreed to sell India nuclear fuel and technology, as they believe appropriate safeguards can be put in place.
However Mr Rudd has repeatedly refused to sell to India what it needs to expand its nuclear power production and reduce its greenhouse gas emissions, and that’s uranium.
I can confirm that a Coalition Government would overturn that ban and would agree to sell uranium to India for its civilian energy needs, with appropriate international and bilateral safeguards.
After all India has an exemplary record of non-proliferation and Labor’s refusal to trust India with Australian uranium is illogical, ideological and represents a missed opportunity for Australia to increase its resources exports and create more jobs. Indian authorities have confirmed they have been told by the Rudd Govt that the ban is due to internal party politics. In other words, Labor party interests are being put above the national interest.
There was a similar situation in Western Australia at the State Government level, where the previous Labor Government banned uranium mining, even though uranium was being mined under Labor governments in South Australia and the Northern Territory.
The same flawed logic as the old Three Mines Policy under the Hawke and Keating Federal Labor Governments was still in place. Uranium from those three mines could be exported overseas and was presumably “good” uranium, but uranium in other mines could not be developed and exported, presumably the “bad” uranium.
The Barnett Government has overturned that ban and there is great interest in developing Western Australia's significant uranium reserves, some of which are very high quality.
Australia has the largest known reserves of uranium in the world and there has been long term interest in uranium mining in WA for several decades. The two most significant deposits are at Kintyre in the East Pilbara and Yeelirrie just over 400 kilometres north of Kalgoorlie.
Kintyre, first discovered by Rio Tinto in 1986, has an estimated 24,000 tonnes of uranium oxide and a feasibility study into commencing operations is expected to be undertaken later this year.
The Yeelirrie deposit, first discovered in 1972,is believed to be the largest of its type in the world, with an estimated 52,000 tonnes of uranium oxide. Development of the mine was about to commence in the early 1980s until the three mines policy was enacted and also later thwarted by the State Labor Government ban. I understand that planning is now well under way to commence production.
Let me move from uranium per se into dangerous territory for a Federal politician in Australia and discuss the “N” word in more detail.
To raise the topic of nuclear power in an Australian context is to invite howls of protest from Labor politicians who will now demand to know where on Cottesloe Beach in my electorate I intend to site a nuclear power reactor. It seems we still cannot have a rational debate in this country on nuclear power!
With growing global concerns about energy security and climate change, it is fair to say there has been a renaissance of interest in nuclear energy as a clean green and safe alternative source of power.
Every economy in the G20 has nuclear power as part of its future energy planning strategy, even oil rich Saudi Arabia – with the exception of Australia.
The United Kingdom Government recently announced it would build 10 new nuclear reactors.
President Obama has committed the United States to a large expansion of its nuclear power sector.
Globally, there are currently 436 nuclear power reactors in 31 countries producing about 15% of the electricity demand.
France derives nearly 80% of its electricity from nuclear power.
Currently, there are 50 reactors being built in 13 countries, with the majority in Asia. The East Asian giants of Japan, China and South Korea are expanding their nuclear power capacity. There is also a significant program of plant upgrades under way in many countries, which will boost capacity and extend the life of existing reactors.
The International Atomic Energy Agency is forecasting rapid increases in nuclear power capacity by 2030.
Opponents to nuclear power usually cite the storage of waste as an insurmountable problem. Recently I was told about the experience in Sweden, which derives 20% of its energy from nuclear.
The Government identified two locations for the storage of nuclear waste in deep clay beds located in stable geological formations. Both locations were not far from two reasonably sized cities, one in the centre of Sweden and one in the east. The local governments and the citizens of the two towns immediately mobilised into action. But they were not strapping themselves to the barricades in protest. Both began furious lobbying to attract the waste facility to their region.
The public is well informed about the nuclear fuel cycle and understood how waste can be stored and were keen to attract the project for the jobs it would provide.
Fear from ignorance can be overcome by knowledge.
I believe it is time Australia had a mature debate about the potential for Australia to more fully engage in the nuclear fuel cycle from the mining and exporting of uranium to a consideration of supplementing our cheap sources of energy from coal and gas with nuclear power, and how and where to store nuclear waste.
However, no matter how compelling or how logical it would be, such a debate is unlikely to occur under a Federal Labor Government.
The International Energy Agency is assuming there will be steep increases in energy prices in coming years, based on the level of capital investment required to meet the huge increase in demand for electricity and the impact of policies designed to reduce greenhouse gas emissions.
Prices for other energy sources such as natural gas and uranium will also increase in line with demand, as has occurred with oil and coal, although further price rises are likely for all such commodities.
According to the IEA, “Price volatility will continue, but the days of cheap energy are over.”
Demand for LNG has been growing strongly for the past 20 years and has seen Australia become one of the largest exporters in the Asia Pacific. Virtually all of our exports go to nations in our region.
Production has increased to more than 44 billion cubic metres in 2008, with about half that production used in our domestic market. Exports in 2008 were worth more than $6 billion.
LNG has become an attractive option for many countries as they strive to reduce greenhouse gas emissions, diversify their sources of energy and improve energy security. The largest increases in demand for Australian LNG have come from Japan, China and South Korea.
Australia faces significant competition from LNG exporting nations in the Middle East in particular.
The Australian Bureau of Agricultural and Resource Economics is forecasting strong growth in production in coming years as new gas fields come on line, including in the North West shelf and the Timor Gap.
The combination of our reserves of uranium, coal and natural gas has led some analysts to describe Australia’s potential as the Middle East of Energy in the 21st Century. Given our abundance of natural resources and our geographic location, we are ideally positioned to be that major energy supplier.
Which brings us back to the population debate and the consequences. For it will mean developing larger cities in the north of Western Australia as we forge closer ties to the coming giants of our region. It will mean rethinking our defence and security arrangements to protect a growing population and nationally significant development projects in the north of this State.
While the thinking will have to be long term, there is currently a black cloud on the horizon. We should not forget that the development of the iron ore industry in this State was seriously undermined by union militancy in the Pilbara.
The 1970s was an infamous decade for industrial thuggery. The celebrated cases of one mining project suffering 157 strikes in one year, the case of a strike over the flavours of ice cream in the staff canteen and other trivia, are all legendary.
The level and intensity of industrial disputation almost brought the Pilbara to its knees as it forced our major customer Japan and its steel mills to seek alternative supplies of iron ore. Australia could no longer be relied upon as a long term supplier.
Recently I met with senior executives from the Japanese steel industry and they retain very vivid memories of the 1970s and 1980s, reminding me that because Australia was not considered a reliable trading partner in those days. Japan invested in an alternative supplier, helping to develop the huge Vale iron ore mine in Brazil that became our biggest competitor.
Fortunately, the Court Government and later the Howard Government introduced flexible workplace agreements and companies such as Rio Tinto were able to change the culture of the workplace and embrace employment laws and practices from which everyone has benefited.
These same Japanese executives have recently raised concerns with Australian mining companies and with Rudd Government Ministers about increased union activity in the Pilbara and the North West Shelf under the Rudd government’s new employment laws.
The strike on Woodside's Pluto project last year was the first strike in the NW mining and energy sector for more than 10 years. It sounded a note of foreboding amongst our trading partners.
We should never delude ourselves into thinking that there are no alternatives to Australia's mineral and energy resources, as the case study of Rio Tinto and Vale demonstrated.
It is vital that Australia retain flexible employment laws that ensure our mining and resource companies can meet the challenges of increasing demand for our exports. The Rudd government must resist any attempts to take us back to the bad old days of industrial sabotage and a rigid inflexible industrial relations regime.
With strategic policy settings from government including: -
coherent foreign affairs policies that focus on our bilateral relations with our important strategic and trading partners, defence and security policies that refocus existing defence arrangements to enhance the protection of our North West Coastline and secure our onshore and offshore projects, as well as taxation, skilled migration and employment policies that encourage investment and development at a federal level, and with planning, infrastructure, service delivery and environmental policies at a State level that can sustain a permanent population in the north of this State, governments and the private sector can capitalise on the potential for this State to be a major contributor to the prosperity of not only Australia but also the region of the Indian Ocean/Asia Pacific.
The potential is boundless and that is the vision I share with you today.
