Economics and Industry Standing Committee The economic impact of floating LNG on Western Australia Volume 1 Report No. 2 Legislative Assembly May 2014 Parliament of Western Australia Committee Members Chairman Mr I.C. Blayney, MLA Member for Geraldton Deputy Chairman Hon F.M. Logan, MLA Member for Cockburn Members Mr P.C. Tinley, AM, MLA Member for Willagee Mr J. Norberger, MLA Member for Joondalup Mr R.S. Love, MLA Member for Moore (from 15 August 2013) Mr V.A. Catania, MLA Member for North West Central (from 9 May 2013 to 15 August 2013) Committee Staff Principal Research Officer Dr Loraine Abernethie, PhD (from 2 September 2013) Acting Principal Research Mr Michael Burton, BEc, BA (Hons) Officer (from 22 May 2013 to 30 August 2013) Research Officer Mr Michael Burton Legislative Assembly Tel: (08) 9222 7494 Parliament House Fax: (08) 9222 7804 Harvest Terrace Email: [email protected] PERTH WA 6000 Website: www.parliament.wa.gov.au/eisc Published by the Parliament of Western Australia, Perth. May 2014. ISBN: 978-1-925116-07-6 (Series: Western Australia. Parliament. Legislative Assembly. Committees. Economics and Industry Standing Committee. Report 2; Volume 1) 328.365 Economics and Industry Standing Committee The economic impact of floating LNG on Western Australia Volume 1 Report No. 2 Presented by Mr I.C. Blayney, MLA Laid on the Table of the Legislative Assembly on 15 May 2014 Chairman’s Foreword am pleased to present the first of the Economic and Industry Standing Committee’s (the Committee’s) reports from its Inquiry into the economic impact of floating Iliquefied natural gas (FLNG) on Western Australia. Natural gas is incredibly important to Western Australia (WA) and to Australia. Approximately 60 per cent of WA’s electricity generation is fuelled by natural gas. Not only does it power households and industry, since 1989 natural gas produced in WA has been at the heart of Australia’s LNG export industry. Currently, Australia produces 24 million tonnes per annum of LNG for export, and is well placed to become the world’s largest producer of LNG by 2020. WA has played an important role in developing Australia’s current position and will continue to have a strong role. Two of the three existing LNG plants are situated in WA, namely the North West Shelf and Pluto plants, with a further two major LNG export facilities currently under construction in the state—the Gorgon plant on Barrow Island and the Wheatstone plant near Onslow. Historically, then, Australia’s offshore petroleum resources have been processed onshore. Recently, though, Shell has commenced construction of its Prelude FLNG unit, which will extract and process offshore the resources in the Prelude field. Woodside, too, has announced that FLNG is its preferred development concept at this time for the development of its Browse Retention Leases. The aim of this Inquiry was to explore the impact of the use of FLNG technology on the engineering and design, manufacturing and fabrication, and construction and ancillary services sectors of the WA economy. The Inquiry also investigated the impact of FLNG on the supply of domestic gas for WA and the impact on state government revenue. This Inquiry has shown that the development of FLNG technology to process Australian petroleum resources represents a particular challenge to WA, due largely to the limited opportunities available to local content providers, for a variety of reasons. FLNG will also generate less income for Western Australia than processing the same fields using onshore processing, which is something that should be of serious concern to the state government. There is significant current demand for domestic gas in WA. There is also a significant appetite in some areas of WA industry to use natural gas as a substitute for diesel. It is clear that a sufficient and reliable supply of domestic gas is essential for the continued economic development of the state. Along with my fellow Committee members, I fully support the retention of the state gas reservation policy, particularly as FLNG technology will not provide any gas into the domestic market. It is therefore essential that the Western Australian Government reviews its policies to reflect the existence of FLNG technology and continues to play an active role in energy regulation in WA. One way to meet some of the challenges presented by FLNG development is to look for opportunities that might be generated by the use of an innovative technology. The main opportunities at present seem to be in subsea engineering and the operational phase of FLNG developments, and the continued development of WA’s world class workforce development and training sector. Like all offshore oil and gas operations, FLNG developments will need logistical support throughout their installation and operational phases. There is the potential for significant local content to be involved in providing these ancillary services to FLNG developments off the WA coast. James Price Point represents an excellent opportunity for a regional supply base that would also operate as an emergency response facility, helicopter support facilities, fabrication and maintenance support and, ultimately, a valuable defence site. It is essential that Western Australian industry is able to take advantage of as many FLNG‐generated opportunities as possible. Project proponents have signalled an intention to use local content, and it is vital that project proponents, governments and local content providers work together to ensure maximum local content on all oil and gas projects. Given the importance of local content, the Committee will be undertaking further work on the opportunities that could come from FLNG for WA and will table a separate report on this issue. Generally speaking, petroleum resources are located in the Commonwealth offshore area with only a very small percentage of offshore petroleum resources falling under WA’s exclusive jurisdiction. This means that the vast majority of Australia’s offshore petroleum resources are governed by the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (the OPGGS Act), with Joint Authorities established to make decisions about Exploration Permits, Retention Leases and Production Licences for particular jurisdictions. Retention Leases have operated as a review mechanism for offshore petroleum reserves, with lease provisions, such as those relating to commercial viability, limiting— though not eliminating—the potential for project proponents to warehouse reserves. The implementation of FLNG technology should further ensure that petroleum reserves cannot be locked away for decades solely on commercial viability grounds. Until recently, the Commonwealth–Western Australia Offshore Petroleum Joint Authority took a consultative approach to decision‐making. For example, until 2013, all conditions on the seven Browse Retention Leases were the same, despite five of these leases being for Commonwealth area reserves and two for state areas. However, in December 2013, the then Commonwealth Minister made a unilateral decision to approve the removal of the condition on the lease that required onshore processing at James Price Point. That Commonwealth decision fundamentally affects WA by opening the way for FLNG development of the Browse fields, which may not be in the state’s best interest. The primarily Commonwealth public administration of offshore petroleum reserves added an additional layer of complexity to this already complex Inquiry. Not only are Commonwealth decisions not necessarily best for the state, as a Committee of the Western Australian Parliament we are limited in the recommendations that can be made to remedy particular problems generated at a federal level. This has resulted in a significant number of the recommendations in the report being directed to the state government urging it to negotiate with the Commonwealth as a matter of priority to address areas of concern. As Chairman of the Committee, I wish to emphasise this point. Given the importance of natural gas to the state, its households and industry, it is essential that the Western Australian Government take urgent action in relation to the findings and recommendations made in the report. The Committee invited NOPSEMA, as the National Authority, to attend a hearing for this Inquiry. Unfortunately, NOPSEMA declined to appear before the Committee. Regrettably, as yet, the Committee has also been unable to meet with the Commonwealth Minister for Industry, Hon Ian Macfarlane MP. This Inquiry would not have been possible without the contributions of my fellow Committee members, namely Hon Fran Logan, MLA, the Deputy Chairman, Mr Jan Norberger, MLA, Mr Peter Tinley AO, MLA, Mr Vince Catania, MLA, who left the Committee in August 2013, and Mr Shane Love, MLA, who joined us at that time. I would like to thank the Committee staff, Dr Loraine Abernethie and Mr Michael Burton, for their assistance. The Committee was also able to engage Mr Bill Tinapple as a technical consultant to provide specialist advice throughout this Inquiry. I thank Bill for his invaluable support. MR I.C. BLAYNEY, MLA CHAIRMAN Contents—Volume 1 Executive Summary i Ministerial Response ix Findings and Recommendations xi 1 Introduction 1 A significant resource 1 Current (un)conventional natural gas reserves 5 Current Australian LNG projects 6 Liquefied natural gas 7 Floating LNG 8 Stranded gas 10 Property rights 18 The Committee 21 Conduct of the Inquiry 21 A note on the terms of reference 24 The importance of this Inquiry