asia pacific lng
ASIA PACIFIC LNG MARKET recent developments and emerging issues
Allison Ball • There are several recent developments and Asia Pacifi c LNG trade in 2004 emerging issues in liquefi ed natural gas (LNG) markets that are likely to shape Asia Pacifi c Strong growth in imports LNG trade in the coming years. Prospects In 2004, LNG imports in the Asia Pacifi c grew for ongoing strong growth in LNG imports in by 6.0 per cent to an estimated 88 million tonnes, many existing and new markets have fi rmed, up from 83 million tonnes in 2003. Globally, as have prospects for some regional LNG ex- LNG trade in 2004 rose by 5.4 per cent, from port projects. 123 million tonnes to 132 million tonnes. • While there is ample regional LNG export In the Republic of Korea, LNG imports potential in the longer term, few projects dedi- increased by 15 per cent to 22.1 million tonnes cated to Asia Pacifi c LNG trade are due on in 2004, refl ecting continued gas market growth line before the end of the decade. As a result, and problems at some nuclear power plants. the LNG market in the Asia Pacifi c appears in- In Chinese Taipei, the startup of new gas fi red creasingly tight in the short term, especially to power plants drove a 26 per cent increase in LNG meet seasonal demand peaks. Construction of imports to 6.8 million tonnes. However, LNG LNG export projects continues to be delayed imports in Japan fell by 2 per cent in 2004 to 56.8 until some long term sales contracts are con- million tonnes, as more of the country’s nuclear fi rmed. • The scale of the expected LNG trade expan- LNG imports, Asia Pacific sion requires large volumes of capital and labor with particular skills, raising further A concerns about the timing and cost of export projects, including those in Australia. Other 50 key issues shaping the market include current 2002 40 high LNG prices linked to oil prices, buyer 2003 2004 demands for more fl exible contracts, and the 30 continuing globalisation of the market. 20 The objective in this article is to review recent developments and emerging issues in LNG 10 markets and to analyse their implications for LNG trade in the Asia Pacifi c region. The article Mt provides a brief update of ABARE’s major study Japan Korea Chinese India on the Asia Pacifi c LNG market, released in Taipei November 2004 (Ball et al. 2004). • Allison Ball • +61 2 6272 2065 • [email protected] australiancommodities • vol. 12 no. 2 • june quarter 2005 351 asia pacific lng power plants came back on line. India began LNG imports, Asia Pacific importing LNG in early 2004, with an estimated B volume of 2.0 million tonnes (fi gure A). Other 125 Export capacity also increased California/Baja China Regional LNG export capacity also increased 100 India in 2004, with the completion of RasGas Train Chinese Taipei 3 in Qatar (4.7 million tonnes) and North West 75 Korea Shelf Train 4 in Australia (4.2 million tonnes), Japan and debottlenecking at Qatargas in Qatar (0.6 50 million tonnes). Capacity in the eight countries 25 regularly supplying LNG to the Asia Pacifi c was more than 104 million tonnes in early 2005 (table Mt 1), an increase of 9 per cent relative to capacity 2004 2010 2015 at the beginning of 2004.
LNG export capacity, early 2005 underpinned by strong economic growth and 1 increases in gas fi red power generation. Based on results from ABARE’s global trade and envi- Project Capacity Trains ronment model (GTEM), it is projected that Mtpa no. LNG imports in the Asia Pacifi c will increase at Asia Pacifi c an average annual rate of more than 5 per cent, Alaska, US Kenai 1.4 2 Australia North West Shelf 11.7 4 from 88 million tonnes in 2004 to 124 million Brunei Lumut 7.2 5 tonnes in 2010 and 156 million tonnes in 2015 Indonesia Arun 6.8 4 (fi gure B). More detailed information on the Bontang 22.6 8 drivers of regional gas demand and the modeling Malaysia MLNG Satu 7.6 3 framework can be found in Ball et al. (2004). MLNG Dua 7.8 3 MLNG Tiga 6.8 2 The Asia Pacifi c currently accounts for around two thirds of world LNG trade. However, Middle East Oman Oman LNG 6.6 2 expected strong growth in Atlantic LNG markets, Qatar Qatargas 8.9 3 particularly the emergence of east coast north RasGas 11.3 3 America as a major LNG importer, could result UAE Das Island 5.7 3 Total 104.4 42 C Cedigaz world LNG trade outlook Despite this increase in capacity, regional LNG supply remained tight in 2004 and early Europe Latin America 2005. There has been a greater reliance on distant 300 exporters from outside the region to meet Asia North America Pacifi c LNG demand, including sourcing of spot Asia cargoes from Algeria, Nigeria and Trinidad. 200
Outlook for regional LNG trade 100
Imports to grow strongly Mt LNG imports in the Asia Pacifi c region are pro- 2003 2010 2010 2020 2020 jected to nearly double in the next ten years, low high low high
352 australiancommodities • vol. 12 no. 2 • june quarter 2005 asia pacific lng in the share of the Asia Pacifi c market falling are projected to reach 11 million tonnes in 2010 to around half of world trade by the end of the and 12 million tonnes in 2015. decade. Cedigaz has forecast that world LNG India also has strong potential for growth trade will increase to 200–235 million tonnes by in gas use, with gas import plans progressing 2010, and to 320–380 million tonnes by 2020 signifi cantly in the past year, although there is (Logan 2005; fi gure C). still considerable uncertainty about projections. The outlook for LNG imports will be affected Growth in existing markets by the pace of development of LNG terminals, The four existing markets –– Japan, Korea, gas pipelines and gas fi red power plants, which Chinese Taipei and India — will continue to is likely to be slower than current plans indicate, account for the majority of LNG imports in as well as resolving issues with LNG pricing. the Asia Pacifi c in the coming decade. Despite Indian LNG imports are projected to be 8 million slow growth, Japan is expected to remain the tonnes in 2010 and 11 million tonnes in 2015. largest LNG market in the region, with imports projected to reach 62 million tonnes in 2010 and New regional markets for LNG 64 million tonnes in 2015 (table 2). China is expected to be a key market for LNG in the coming decade, with considerable advances in LNG plans in the past year. LNG imports into Projected LNG imports, Asia Pacifi c the Guangdong terminal are likely to commence 2 in mid-2006, while the Fujian terminal is now 2004 2010 2015 due on line in 2008. Import capacity in China Mt Mt Mt is expected to expand further, with the annual capacity of the Guangdong terminal proposed Japan 56.8 61.8 64.1 Korea, Rep. of 22.1 26.0 32.0 to rise to 10 million tonnes by 2010. Four Chinese Taipei 6.9 11.1 12.1 new terminals have also received government India 2.0 8.1 11.2 approval –– in Zhejiang, Shanghai, Shandong China – 7.7 18.3 and Jiangsu –– while many others are proposed. California/Baja – 7.5 14.0 Approved and proposed LNG import capacity in Other – 2.2 3.9 China is currently well above 50 million tonnes. Total 87.8 124.4 156.6 However, not all projects are expected to proceed in the timeframes proposed. China’s LNG imports are projected to reach 8 million Korea is expected to remain the second tonnes in 2010 and 18 million tonnes in 2015. The largest LNG market in the region, with imports success of the Guangdong project could boost reaching 26 million tonnes in 2010 and 32 prospects for growth in LNG imports; however, million tonnes in 2015. Korea’s government the timing of developments in China may also recently announced that the country will increase depend on expansion in regional supply. its reliance on LNG fi red power generation this LNG imports to the north American west decade, while reducing the emphasis on nuclear coast are likely to commence this decade. The power compared with previous energy plans most progress to date has been in Mexico –– the (MOCIE 2004). Energia Costa Azul terminal in Baja California The recent growth in LNG imports in Chinese has started construction, with a planned annual Taipei is expected to continue, driven by further capacity of 7.5 million tonnes, and the GNL expansion in gas fi red power generation this Mar Adentro de Baja California terminal has decade. This includes the possibility that Tai- received federal permits but is awaiting local power’s large Tatan power plant will come on permits (box 1). Progress on the three proposed line in 2006, two years earlier than scheduled Californian terminals has been slower, and there (Platts 2005a). LNG imports in Chinese Taipei is still strong public opposition to terminal siting in both California and Baja California. If two australiancommodities • vol. 12 no. 2 • june quarter 2005 353 asia pacific lng terminals on the north American west coast per cent of LNG imports are expected to be met proceed in the next few years, LNG imports by existing contractual supplies, leaving around could be up to 14 million tonnes by 2015, with 15 million tonnes of LNG for which new supplies imports limited more by terminal capacity than will need to be procured. This fi gure, referred by gas demand. to as uncontracted LNG demand, assumes no LNG terminals have also been proposed in renewals of existing long term contracts, except Washington and Oregon in the United States in the case of those already offi cially announced. and in British Columbia in Canada, as well as in By 2015, uncontracted LNG demand is expected Chile, although these potential markets are not to rise to 68 million tonnes, or around 44 per considered in this analysis. cent of projected imports, as imports continue to grow and more existing long term contracts Uncontracted LNG demand expire (fi gure D). A considerable proportion of future LNG demand Japan accounts for nearly 40 per cent of in the Asia Pacifi c will be met under existing long projected uncontracted demand in 2015, while term LNG supply contracts. By 2010, around 88 signifi cant potential supply shortfalls are also
Box 1: Outlook for gas demand in Mexico
Mexican gas demand is expected to grow strongly managing the risks associated with such a substan- in the coming years, with LNG likely to play tial investment. an important role in supplying the market. The Much of the growth in gas demand will come Mexican Government has forecast that gas de- from the industry and commercial sectors, as well mand will rise by 5.8 per cent a year between 2004 as new power plants to serve the rapidly growing and 2013, from 40 to 70 million tonnes of LNG population. In Baja California, fi ve new gas fi red equivalent. The share of gas in power generation is power plants are planned by 2013, as well as the forecast to rise from 31 per cent in 2003 to 51 per conversion of one fuel oil plant to gas (Sempra cent in 2013 (Sener 2004). Energy 2005; Lindquist 2005). The proponents Future sources of gas supply remain a chal- of the Energia Costa Azul LNG terminal (Sempra lenge for Mexico. While Mexico has large gas Energy/Shell) currently under construction in Baja reserves, it lacks investment in the domestic gas California expect half the gas to be used locally, sector and Mexico currently is a net importer of and the other half to be an alternative source of gas from the United States. To diversify sources of gas for California until the Baja market grows to gas supply, Mexico currently has two LNG import consume the plant’s full output (Sempra Energy terminals under construction, at Altamira on the 2005). The terminal is expected to be operational east coast and near Ensenada in Baja California in late 2007 or early 2008 and have an annual on the west coast. import capacity of 7.5 million tonnes. Gas demand in the north west region, which LNG is currently contracted through long term includes Baja California, is forecast to grow by supplies from Indonesia’s Tangguh (up to 3.7 10.7 per cent a year between 2004–13, from 1.9 million tonnes a year), Russia’s Sakhalin-2 (up to to 5.2 million tonnes of LNG equivalent, or 7 per 1.6 million tonnes a year), and Australia’s Gorgon cent of total Mexican gas demand (Sener 2004). (up to 2.5 million tonnes a year). With the Baja California region not connected to Other proposed LNG import facilities in Baja Mexico’s gas supply grid and totally dependent California are the GNL Mar Adentro de Baja on US domestic gas supplies, LNG imports are an California project (Chevron), the Sonora Pacifi c attractive gas supply option, despite the signifi cant Terminal project (Sonora Pacifi c LNG), and the volumes of investment in infrastructure involved. Terminales y Almacenes Maritimos de Mexico S.A. Unfettered access to the US market through open de C.V. project (Moss Maritime) (Energy Commis- access pipelines provides a cost effective way of sion 2005).
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D Uncontracted LNG imports, Asia Pacific E Australian LNG exports
Other Total 60 10 California/Baja United States 50 China Europe 8 Chinese Taipei Korea 40 Korea 6 Japan 30 Japan 4 20 2 10
Mt Mt 2010 2015 1989 1993 1997 2001 2005 evident in Korea and China. Most of Japan’s to 156 cargoes. Exports in 2005 are forecast to existing long term contracts have optional exten- increase to nearly 12 million tonnes (fi gure E). sion clauses, and extensions of such contracts There is one LNG project in Australia currently would contribute signifi cantly to meeting under construction, the Darwin LNG project, uncontracted demand. It is not certain, however, which is expected to be on line in early 2006 and what proportion of long term contracts will be have an annual LNG production capacity of 3.5 renewed, and it is expected that at least some of million tonnes (table 3). On completion of the the uncontracted demand will be contestable. project, Australia is expected to have an annual Until recently, a signifi cant shortfall between LNG supply capacity of 15.2 million tonnes. Korea’s LNG demand and long term contractual LNG supplies had emerged, with the govern- Opportunity for growth ment delaying new long term contracts until gas There are also other export projects proposed market reform issues were resolved. In early in the coming decade. North West Shelf Train 2005, Korea awarded three long term contracts 5 (4.2 million tonnes) is currently due on line to MLNG Tiga, Sakhalin 2 and Yemen LNG, for in late 2008, with a fi nal investment decision a combined total of at least 4.5 million tonnes a year from 2008. Korea has put sellers on notice that it will soon launch a tender for an additional Australian LNG projects 3 million tonnes a year of LNG from 2010. 3 While this has lowered Korea’s uncontracted Project Capacity Trains Planned startup LNG demand in 2010 and beyond, Korea will Mtpa no. continue to rely heavily on spot and short term Existing contracts in the interim period. North West Shelf 11.7 4 1989 Under construction Australian LNG exports Darwin LNG 3.5 1 2006 Proposed Until 2004, Australia’s LNG exports had re- North West mained relatively fl at since the mid-1990s. The Shelf Train 5 4.2 1 late 2008 North West Shelf fourth train was completed in Gorgon 10.0 2 early 2010 September 2004 and increased Australia’s annual Sunrise 5.3 1 stalled, was 2010 Pilbara 6.0 1 2010 liquefaction capacity from 7.5 million tonnes to Browse 7.0 1 2011 11.7 million tonnes. Australia exported more Total 32.5 6 than 9 million tonnes of LNG in 2004, equal australiancommodities • vol. 12 no. 2 • june quarter 2005 355 asia pacific lng announced recently. Construction is due to start statements. Some projects will need to proceed in July 2005 and will boost total production quickly if they are to be operational in the stated capacity at the plant to 15.9 million tonnes a year timeframe, and it is probable that some projects on completion. will not be realised as planned. The Gorgon project is now proposed to be on line by fi rst half 2010, with a fi nal investment decision due in 2006. Recent reports suggest Outlook for other regional exporters that both trains, with total capacity of 10 million LNG export capacity in other countries is also tonnes a year, will come on line simultaneously. likely to expand in the next few years, with The Sunrise project was targeted to come on many current exporters undertaking, or planning line in 2010, but the project has stalled since the to undertake, expansions of existing facilities end of 2004 because of uncertainties about the and/or new projects. The Russian Federation is lack of agreement between the Australian and also constructing its fi rst liquefaction plant on Timor Leste governments on a maritime border Sakhalin Island, and several other countries, and distribution of oil and gas royalties. including Yemen, Iran and Peru, are planning The initial concept for the proposed Browse LNG export facilities. project involves 1–3 LNG trains with capacity to There are two projects currently under con- export up to 7–14 million tonnes a year. Browse struction in the region dedicated to Asia Pacifi c could be in production from 2011–14, depending markets –– Sakhalin-2 (9.6 million tonnes due on additional appraisal, customer negotiations late 2007) and Darwin LNG (3.5 million tonnes and regulatory approvals. The project is currently due early 2006). Around half of the capacity at undertaking further appraisal drilling. Oman LNG Train 3 (1.6 of 3.3 million tonnes The proposed Pilbara LNG project consists of due 2006) is also expected to go to the Asia single train plant with a capacity of 6.0 million Pacifi c. By the end of the decade, regional LNG tonnes a year. It is currently at the prefeasibility supply capacity from existing LNG suppliers study stage, with a number of concepts for the and those with capacity under construction is fi eld development being examined. It is proposed expected to be 111 million tonnes. Construc- to come on line from 2010. tion at Indonesia’s Tangguh project (7.6 million If all the projects discussed above come on tonnes due late 2008) is expected to begin soon, line as currently planned, Australia’s annual with the project recently announcing fi nal agree- LNG supply capacity could be around 50 mil- ments with the Indonesian Government and a lion tonnes by early next decade. There are also fi nal investment decision. possibilities for further trains as part of the North Additional LNG projects will be required West Shelf, Gorgon and Browse projects. The to meet forecast regional demand. There are extent to which Australia’s LNG export poten- numerous proposed projects to supply the tial is realised and the ultimate timing of projects Asia Pacifi c over the coming decade, with a will depend signifi cantly on securing long term combined annual liquefaction capacity of 88 supply contracts to underpin investment. The million tonnes. The majority of the proposed proposed timing of the projects also suggests that LNG capacity additions are in Australia and some will be under construction concurrently, Indonesia (fi gure F). This is an indication of raising issues about the availability of labor with potential capacity only and it is unlikely that all particular skills, discussed later in the paper. projects will be realised in the timeframe stated The analysis of potential LNG supply by project developers, as projects will continue capacity in Australia and the region in this and to wait until long term contracts are secured. As the next section is based on public statements in such, LNG supply capacity is not expected to company and industry publications on planned develop far ahead of demand. start dates of projects. No assessments are made There could be additional LNG supplies avail- by ABARE of the likelihood of projects being able from the Middle East to supply Asia Pacifi c realised in the timeframe specifi ed in the public markets from the planned signifi cant increases
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LNG projects to supply the Asia Pacific that signifi cant gas volumes will be required for F reinjection into Iran’s oil fi elds. It is unlikely Australia that Iran will be ready to export LNG in 2009 as Indonesia planned (FACTS 2005). For this analysis, poten- Malaysia tial LNG supply from Iran to the Asia Pacifi c is Brunei estimated to be around 15 million tonnes a year Alaska by 2015, from two potential projects. Russia Qatar Proposed Oman Under construction Tight outlook for regional supply UAE Iran Existing LNG markets have been tight during 2004 and Yemen early 2005. In previous years, the tight supply Bolivia situation had been the result of lack of available Peru LNG carriers. But more recently, the tightness has Mtpa 10 20 30 40 50 been the result of limited supply of LNG itself. This situation is expected to continue in the next few years. New Asia Pacifi c demand could in Qatari capacity –– almost 50 million tonnes of emerge quickly compared with the relatively slow additional annual capacity is proposed –– which emergence of the fi rst three markets of Japan, have not been included in fi gure F. The extent to Korea and Chinese Taipei, raising concerns about which this Qatari supply is allocated to the Asia the ability to expand LNG supply at an adequate Pacifi c, if at all, will depend partly on growth pace. While suppliers in the region are planning in LNG imports in the United States east coast expansions and new projects, these proposed market and in Europe, where the Qatari LNG projects cannot have any impact until the third projects are targeted. quarter of 2008 at the earliest. If construction of a greenfi eld LNG facility has not commenced by New LNG supply sources the end of 2005, production startup is unlikely Prospects for LNG exports from Yemen were before 2010. boosted in early 2005 when Yemen LNG was In particular, the rapid expansion of the Asia announced as a supplier to Korea for 1.3–2.0 Pacifi c market to include the north American west million tonnes of LNG a year from 2009. Yemen coast will tighten the regional LNG market, with also has two agreements for sales of LNG into growing volumes from Asia Pacifi c suppliers the United States east coast of 4.5 million tonnes fl owing to north America. While suppliers from a year from 2009 for 20 years. The Yemen LNG outside the region can send LNG cargoes to the project consists of two trains of 6.7 million Asia Pacifi c, expected strong demand and prices tonnes, due on line at end 2008 or early 2009. in Atlantic markets should mean that netbacks With volumes now fully committed, a fi nal on cargoes for these suppliers will be higher investment decision is currently planned in 2005 in Atlantic markets than Asia Pacifi c markets, (Total 2005). reducing the incentive to supply the Asia Paci- The likelihood of Iranian LNG exports also fi c. appears to have fi rmed, with Iran signing a fi nal Adding to the tightness in LNG markets are agreement with India in early 2005 for up to 7.5 recent supply diffi culties in Indonesia (box 2) and million tonnes a year from late 2009. There is current procurement activities to meet Korean also preliminary agreement to supply LNG from LNG demand in the next few years. KOGAS is Iran to China. Despite this, there is much confu- absorbing much of the available regional capacity sion and uncertainty about Iran’s LNG export with its short term and spot cargo procurements. projects. Projects appear to change in size regu- BP is also acquiring cargoes for Korea to meet larly, there are discrepancies between upstream contractual commitments for the period between and downstream gas marketing, and it is likely POSCO’s imports commencing in mid-2005 australiancommodities • vol. 12 no. 2 • june quarter 2005 357 asia pacific lng
LNG import prices Box 2: Indonesia LNG supply issues G monthly, ended February 2005 Recent tightness in the market has been exac- Chinese Taipei erbated by a decline in available LNG exports 7 from Indonesia. Indonesia’s LNG exports Korea peaked in 1999 at 29.0 million tonnes and fell United States to around 22.4 million tonnes in 2004, below 6 contractual commitments, with Indonesia buying LNG cargoes for onward sale to its long 5 Japan term customers (FACTS-EWCI 2005). Exports in 2005 are also expected to be 4 below contractual commitments. Indonesia announced in January 2005 that it would delay the shipment of 51 cargoes of LNG to buyers US$/MBtu in Japan, Korea and Chinese Taipei. This is Jan Mar MayJul Sep Nov Jan a result of declining production at the Arun 2004 2005 LNG plant, coupled with gas supply problems at Bontang, and the reported diversion of gas supplies from export to domestic fertiliser pro- tion of imports coming from Indonesia. Chinese ducers (Watkins 2005). Taipei, which relies heavily on Indonesia, paid Indonesia has reportedly had diffi culties in US$6.33/MBtu on average for LNG imports in securing these additional cargoes, with nego- 2004 (Energy Argus 2005b; fi gure G). tiations in April 2005 failing to secure any spot cargoes to meet export commitments (Platts Other issues in LNG markets 2005b). Growing labor and capital requirements The scale of the expected increase in LNG trade and late 2008 when the Tangguh project is now will require signifi cant capital and labor with expected to be on line. BP needs to source up to particular skills. Annual expenditure on LNG 1.35 million tonnes a year of LNG during this facilities worldwide was recently forecast to period (Energy Argus 2005a). increase from US$7.2 billion in 2004 to US$17.5 billion in 2009, including a total of US$31 billion on constructing new liquefaction trains in 2005– LNG prices 09 (Douglas-Westwood 2005; fi gure H). The Because most long term LNG contracts are still IEA (2003) has forecast that cumulative invest- linked to oil or oil product prices, the strong rise ment in the global LNG chain over the period in oil prices in 2004 and early 2005 has had a 2001–30 will amount to US$252 billion. big impact on LNG prices. The average price of Projects currently under construction and LNG imported into Japan rose to US$5.13/MBtu planned have been subject to signifi cant cost in 2004, compared with US$4.73 in 2003. Simi- pressures from rising steel prices. According larly, Korea’s average LNG import price rose to to some reports, the Sakhalin 2 project has US$5.77/MBtu in 2004 (Platts 2005c). increased its capital expenditure estimate from Asia Pacifi c importers have attempted to US$10 billion to US$12 billion, and the project reduce the impact of oil price fl uctuations by is not due for completion until late 2007 (Platts introducing s-curve pricing formulas, which 2005d). moderate LNG prices when oil prices are above/ Rising prices for steel and other construction below a certain range. However, many Indo- materials, as well as wage pressures associated nesian supply contracts do not feature the s- with a shortage of labor with particular skills, are curve, and there has been a strong correlation likely to affect development of LNG projects in between higher import prices and the propor- the region, with a number of projects scheduled
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Annual capital expenditure on LNG market. However, growth has also been fueled H projects worldwide by extraordinary circumstances, including unex- pected closures in Japan’s nuclear generating Import terminals capacity, delays by the Korean Government LNG tankers 15 in signing long term contracts, and the ability Liquefaction terminals of some LNG plants to produce above design capacity. The increasing use of self contracting 10 by suppliers — that is, writing sales contracts with their own marketing affi liates — may also be assisting this expansion of short term trading 5 (Jensen 2004). However, the industry will continue to be US$b underpinned by long term contracts. The use of long term contracts has enabled both buyers and 2003 2004 2005 2006 2007 2008 2009 sellers to undertake the large scale infrastruc- ture investment involved in LNG transactions to be built concurrently in the next few years. with some certainty. Long term contracts have, Possible impacts on projects could include however, become more fl exible in recent years higher project costs, delays in construction and in response to buyer demands, with some of the commissioning, and building components of the newer contracts including less rigid take or pay projects offshore, reducing local content. and/or destination clauses, free on board (fob) pricing and increased fl exibility in the timing of A globalising LNG market deliveries. The present market for LNG is not the set of An indication of the importance of these traditional regional isolated gas markets it had contracts is that despite the strong outlook for been in earlier decades. There is active arbitrage LNG demand in the next few years, and the rela- within Atlantic markets, with LNG cargoes tively few projects that can come on line in this diverted between the United States and Europe, period, most projects continue to delay construc- depending on price. With the Middle East tion until signifi cant volumes have been sold. increasingly supplying both Asia Pacifi c and Atlantic markets, price signals can also be trans- LNG shipping trends mitted between the two regional markets. But Nineteen new LNG tankers were delivered in volumes of LNG in this type of trading are small 2004. As of end 2004, there were 174 existing compared with the size of the gas markets they LNG tankers, with 105 on order. A further 26 serve. This is likely to limit potential gas market tankers are due in 2005. The large number of price linkages between regions (Jensen 2004). ships on order has led to pressure on availability There are other limitations to the development of new ship building capacity and ship building of a global LNG market. These include diffi cul- prices. The plans to expand shipping capacity ties associated with transporting LNG over long come despite the current surplus of LNG tankers, distances and differences in gas specifi cations which has resulted in charter rates falling in 2004 between markets. and early 2005. LNG fl eet utilisation in 2005 is expected to be below 90 per cent (Platts 2005e; Short term trading Poten 2005). In 2004, spot and short term LNG trade accounted The trend toward bigger tankers is also for around 9 per cent of total LNG trade, with expected to continue, with the fi rst orders for more than 80 per cent sold to the United States tankers over 200 000 cubic metres were placed (Platts 2005c). Some of the expansion in short in 2004. The increase in tanker size is expected term trading represents a genuine trend toward to make LNG cargoes from distant suppliers a more fl exible, responsive and globalised LNG more competitive. australiancommodities • vol. 12 no. 2 • june quarter 2005 359 asia pacific lng
Conclusions FACTS-EWCI 2005, Gas Databook I: Asia- Pacifi c Natural Gas and LNG, Hawaii. The Asia Pacifi c LNG market is at a critical FACTS 2005, ‘Iran’s gas industry and export stage of development. LNG demand is forecast projects’, FACTS Gas Insights, issue 45, to continue to grow strongly, and while there is May. ample LNG supply potential in the longer term, IEA (International Energy Agency) 2003, World in the short to medium term supply is increas- Energy Investment Outlook, OECD, Paris. ingly tight. Most projects are continuing to delay Jensen, J. 2004, The Development of a Global construction until some long term sales contracts LNG Market, Oxford Institute for Energy are secured, while buyers are demanding increas- Studies, NG 5, Oxford. ingly fl exible contract terms. Lindquist, D. 2005, ‘Mexico pushes forward The emergence of nontraditional LNG mar- with LNG plans’, Union Tribune, San Diego, kets and suppliers adds to current uncertainties California, 27 February. in the market, including those relating to timing Logan, E. 2005, ‘Will LNG speed globalisation and reliability, as well as making forecasting of the gas markets?’, Energy Economist, issue LNG trade diffi cult. In addition, strong growth 282, April, pp. 16–20. in Atlantic LNG markets will increasingly affect MOCIE (Ministry of Commerce, Industry and the Asia Pacifi c, as the LNG market moves Energy) 2004, The 7th Long Term Natural Gas toward a more global orientation. Supply and Demand Plan, Seoul, December. Against this backdrop, Australian LNG sup- Platts 2005a, ‘Taipower seeks early gas’, Inter- pliers have the opportunity to expand exports national Gas Report, issue 522, 22 April, p. signifi cantly in the coming decade. Australia 24. will face strong competition to secure markets –––– 2005b, ‘Pertamina abandons spot cargo in this timeframe. However, with LNG buyers bid’, International Gas Report, issue 522, 22 continuing to take fl exibility, diversity, market April, p. 21. stability and reliability, as well as price, into ––––2005c, ‘World natgas clocks up 3% growth account in procurement decisions, the outlook in 2004’, International Gas Report, issue 522, for the Australian LNG industry remains strong. 22 April, pp. 1–3. ––––2005d, ‘Sakhalin II confi dent on sales’, International Gas Report, issue 521, 8 April. References –––– 2005e, ‘Golar charts LNG growth’, Inter- Ball, A., Schneider, K., Fairhead, L. and Short, national Gas Report, issue 519, 11 March, p. C. 2004, The Asia Pacifi c LNG Market: Issues 32. and Outlook, ABARE Research Report 04.1, Poten 2005, LNG Shipping 2004: Standout Year Canberra, November. Or Start of Trend?, Poten & Partners, New Douglas-Westwood 2005, ‘LNG business set for York, February (www.poten.com). remarkable growth in capital expenditure’, Sempra Energy 2005, ‘Sempra LNG plans’, Web News release, Houston, Texas, 10 March site, San Diego (www.sempra.com). (www.dw-1.com). Sener 2004, Prospectiva del Mercado de gas Energy Argus 2005a, ‘Private LNG imports natural 2004-2013, Secretaria de Energia, poised to start’, Argus Asia Gas and Power, Mexico. 25 May, p. 5. Total 2005, ‘Yemen LNG signes three agree- –––– 2005b, ‘Taiwan pays for Indonesian reli- ments for the sale of LNG’, Press release, ance’, Argus Asia Gas and Power, 13 April, France, 18 February (www.total.com). p. 9. Watkins, E. 2005, ‘Indonesia riles LNG buyers Energy Commission 2005, ‘Status of proposed with supply disruption’, Oil and Gas Journal LNG projects – California and Baja’, Web Online, 26 January (ogj.pennet.com). site, 5 May, Sacramento, California (www. energy.ca.gov).
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RUSSIAN OIL AND GAS impacts on global supplies to 2020
Marina Kim • In the past few years the Russian Federa- Economic growth in the Russian Federation tion has become an important player in world is projected to slow to about 4 per cent a year to energy markets. Since 2000 it has been ag- the end of the current decade and then to average gressively increasing oil output to become 3.4 per cent a year during the 2010s (IEA the world’s largest crude oil producer and 2004a). This is less optimistic than the Russian the second largest oil exporter. The Russian Government’s projections of the average rate of Federation has the seventh largest proven oil economic growth of 5–6 per cent a year over the reserves in the world. It is also the world’s period 2005–08, which is, nonetheless, a slow- leading producer and exporter of natural gas down from the average growth rate of 6.8 per and is expected to maintain its dominant posi- cent a year over the period 2000–04. tion in the longer term, backed by abundant The projected future deceleration of economic reserves. growth results primarily from assumptions about falling world energy prices, in particular oil • The Russian Federation’s energy supplies prices, and export infrastructure constraints. The have major implications for world energy higher bound of the economic growth projec- supply security, particularly while the Middle tions represents gains from the diversifi cation East remains an area of heightened political of the Russian economy away from energy and uncertainty and investment risk. Major Asia other commodity exports and from further insti- Pacifi c energy importers, in particular, are al- tutional reforms (MEDT 2005a). ready competing for Russian oil and gas in The projected slowdown in economic devel- their pursuit of supply diversifi cation. opment in the medium to long term can also be attributed to the assumed slowing of growth in Economic overview industrial production, as the share of service After the disintegration of the Soviet Union in activities in the economy increases, and the 1991, the Russian Federation went through a per- expected aging and contraction of the Russian iod of deep economic recession. By 1999 the feder- population, leading to a decline in the workforce ation’s economy had largely recovered, enabling and productive potential (IEA 2004a). the start of robust economic growth, further stimu- lated by the expansion of natural resource exports in response to strong world demand. Since 1999 Oil and gas in the Russian economy the Russian Federation has recorded its sixth Oil and gas is a major sector of the Russian eco- successive year of economic growth (table 1), nomy that plays a key role in providing state bud- refl ecting robust domestic consumer spending, get revenues and maintaining positive balance and growth in investments and exports. of payments. The sector accounted for 27 per • Marina Kim • +61 2 6272 2238 • [email protected] cent of gross domestic product (MEDT 2005b) australiancommodities • vol. 12 no. 2 • june quarter 2005 361 russian oil and gas , supplied by courtesy of the International Energy Agency, OECD, Paris , supplied by courtesy of the International Energy Agency, elds and pipelines World Energy Outlook 2004 World Russia’s oil fi Russia’s Map from
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Key economic indicators 1 Russian Federation 1997 1998 1999 2000 2001 2002 2003 2004 Gross domestic product (nominal) – in national currency billion roubles 2 343 2 630 4 823 7 306 8 944 10 834 13 285 16 543 – in US dollars US$b 405 271 196 260 307 346 433 572 Growth in real GDP % 1.4 –5.3 6.4 10.0 5.1 4.7 7.3 7.1 Population million 147.3 146.9 146.3 145.6 144.8 144.1 143.4 na Energy consumption Mtoe a 596.8 582.9 604.2 615.2 622.7 619.0 na na a Million tonnes of oil equivalent. na Not available. Sources: IMF (a,b); IEA (2003); World Bank (2004); IET (2005). and 54 per cent of total exports in 2003 (IMF are included, the estimate rises to 116 billion 2004a). The oil and gas sector is often referred barrels, with West Siberia accounting for about to as the locomotive of the Russian economy 74 per cent and the rest split among Volga–Urals/ because of its signifi cant contribution to the Precaspian, Timan–Pechora, East Siberia and growth in industrial output after the fi nancial the Far East regions (IEA 2004a; map 1). crisis of 1998. Possible reserves, which are in addition to the Diversifi cation of the Russian economy is abovementioned 116 billion barrels and which likely to reduce the oil and gas sector’s share are likely to be even less profi table for production, of gross domestic product, as other economic are estimated at approximately 30 billion barrels, sectors grow. Further expansion of the sector while undiscovered resources are estimated may also be hindered by insuffi cient explora- at 90 billion barrels. Although still dominant, tion for natural resources, export infrastructure West Siberia’s share in the location of possible constraints, and lack of new product develop- reserves and undiscovered resources is expected ment, such as liquefi ed natural gas (LNG) and to decline, while East Siberia’s share is expected petroleum products. Nonetheless, maintaining a to increase signifi cantly. These possible reserves rapid rate of economic growth remains depen- and undiscovered resources are not expected to dent on strong exports of natural resources, come into production until the second decade of mainly hydrocarbons and metals. the century. The potential impact of their devel- The Russian Government’s target of doubling opment on Russia’s production profi le is highly average GDP per person by 2010 (within a uncertain and heavily dependent on the capacity decade of the election of President Putin in 2000) to convert them to proven plus probable reserves is also likely to provide an additional stimulus to and on the rate of development (Lambert and maintain a high level of energy exports at least in Woollen 2004). the short to medium term. Oil production Oil reserves In 1987 the Russian Federation (excludes former At the end of 2003 the Russian Federation had the Soviet republics) produced 11.5 million barrels seventh largest proven oil reserves in the world of oil a day, the highest oil production in one and the largest among non-OPEC producers (BP country in the history of the oil industry (MIE 2004). Various sources estimate Russian proven 2004). Oil production then declined sharply, oil reserves at 60–69 billion barrels (IEA 2004a), partly as a result of depressed domestic and inter- equivalent to around a quarter of Saudi Arabian national demand, reaching its lowest level in the proven oil reserves, the largest in the world. second half of the 1990s (table 2). Since 2000, Russian reserves are expected to last for 22 years oil output, driven mainly by private oil compa- based on current production (BP 2004). nies (box 1), has risen substantially in response When probable reserves, which have a smal- to higher world oil prices and growing external ler probability of being produced profi tably, oil demand (IET 2001, 2004, 2005; fi gure A). australiancommodities • vol. 12 no. 2 • june quarter 2005 363 russian oil and gas
World oil prices have been relatively high Crude oil and refined products industry since 1999, driving increases in investments A Russian Federation and oil output in the Russian Federation. By 2004, Russian oil production was 50 per cent Production above its 1999 level. A new oil price spike in 8 2004 and 2005 has caused signifi cant uncer- tainty about future world oil price dynamics. 6 However, it is expected that the high prices Non-CIS export reached in 2004 and 2005 will not be sustained. 4 Domestic By 2010, real oil prices are forecast to decline consumption from their present high levels (IEA 2004a; 2 Burg, Haine and Maurer 2005) and reach levels CIS export similar to those at the beginning of the current mbd decade — levels that were nonetheless suffi - 1992 1994 19961998 2000 2002 2004 cient to drive the recent expansion in Russian oil production (table 3). After 2010, world oil prices are projected to increase gradually in that has already occurred since 1999 is expected real terms (IEA 2004a). to dampen growth in upstream investment and Russian oil production is projected to production capacity in the medium term. Addi- continue to grow to 2020, although at a slower tional downward pressure will be exerted by the rate than over the period 1999–2003. The current tax system in the oil sector in the Russian projected easing in world oil prices from their Federation (box 2). recent highs, along with the rapid expansion
Production, consumption and exports of crude oil and products, and natural gas 2 Russian Federation 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Oil mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd mbd Production 8.02 7.11 6.38 6.16 6.05 6.14 6.09 6.12 6.49 6.99 7.62 8.46 9.21 a Exports of crude oil and products b 3.63 3.41 3.56 3.40 3.67 3.77 3.83 3.84 4.14 4.63 5.28 6.06 6.74 a – to non-CIS c 1.84 2.31 2.63 2.80 3.22 3.37 3.40 3.40 3.73 4.12 4.57 5.24 5.85 a – to CIS 1.80 1.10 0.93 0.59 0.45 0.38 0.44 0.44 0.41 0.51 0.71 0.81 0.89 a Domestic consumption 4.65 3.95 3.04 3.02 2.64 2.65 2.51 2.42 2.47 2.47 2.48 2.61 2.63 a US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl US$/bbl Real world oil price d 21.48 18.47 17.61 18.48 21.49 19.67 12.64 18.24 27.50 22.16 22.02 24.66 30.43 Gas bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm bcm Production 641.0 618.4 607.2 595.4 601.1 571.1 591.0 590.7 584.2 581.5 594.5 620.3 634.0 a Exports 194.4 174.4 184.3 192.2 198.5 200.9 200.6 205.4 193.8 180.9 185.5 189.3 200.8 a – to non-CIS 87.9 95.9 109.3 121.9 128.0 120.9 125.0 131.1 133.8 131.9 134.2 142.0 144.4 a – to CIS 106.5 78.5 75.0 70.3 70.5 80.0 75.6 74.3 60.0 48.9 51.3 47.3 56.4 a Domestic consumption 453.6 450.0 426.9 407.1 407.2 374.7 393.4 389.4 394.5 404.7 416.2 439.8 442.0 a
a Estimates. b Totals may not add up as a result of rounding. c Commonwealth of Independent States (CIS) refers to Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russian Federation, Tajikistan, Turkmenistan, Uzbekistan and Ukraine. d Real trade weighted crude oil prices (in constant 2000 US$). mbd = million barrels a day; bbl = barrels; bcm = billion cubic metres. Sources: IET (2001, 2004, 2005); ABARE’s estimates based on US Energy Information Administration data.
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Box 1: Corporate structure of the Russian oil and gas sector
The oil sector in the Russian Federation currently company owns and operates a national network of comprises eleven vertically integrated oil compa- high-pressure interregional gas pipelines and has nies that produce more than 90 per cent of Russia’s a monopoly over Russian gas exports to non-CIS crude oil (table below). There are also a number of countries. project operators under production sharing agree- Oil companies and independent gas producers ments and about 150 small scale oil producers. account for about 14 per cent of total indigenous However, their share in total Russian crude oil gas production, almost a quarter of which is output has been steadily declining as a result of fl ared. This is largely attributed to unprofi table gas less favorable business conditions than for oil processing and sales conditions for these producers majors. The state retains major shares in Rosneft compared to Gazprom. In most cases, these other and Gazprom, while other companies have been producers will have to sell gas to Gazprom, or gradually privatised since the start of the 1990s. Gazprom has to provide pipeline access to deliver At the end of 2004, the oil sector went through gas to non-Gazprom buyers. Nonetheless, in the signifi cant restructuring after Yukos’s main government’s Energy Strategy it is expected that producing asset, Yuganskneftegaz, was sold at the share of non-Gazprom gas in production will auction. Yuganskneftegaz, with a production reach 20 per cent by 2020 (Government of the capacity of 1 million barrels of oil a day, became Russian Federation 2003). While one of the poten- part of the state owned Rosneft, which brings the tial sources of non-Gazprom gas is imports from share of state owned companies in total oil produc- neighboring central Asian countries, it is highly tion to 18.6 per cent. uncertain whether these supplies will occur as The gas sector is dominated by Gazprom, planned. The limited throughput capacity of the the largest gas producing company in the world. pipeline linking central Asian gas reserves with Gazprom holds licences to fi elds containing more Gazprom’s network, together with the associ- than 55 per cent of Russia’s proven gas reserves, ated political issues, raise serious concerns about provides about 20 per cent of state budget revenues, stability of supplies. If so, the only way to ramp up produces 86 per cent of Russia’s gas and supplies supplies of non-Gazprom gas would be to improve it to generate around 50 per cent of electricity pipeline access and gas sales conditions for inde- in the Russian Federation (OECD 2004). The pendent producers and oil companies.
Corporate structure of oil and gas production in the Russian Federation, end of 2004
Share in Share in Oil production total output Gas production total output mbd % bcm % Russian Federation 9.21 100.0 633.95 100.0 Lukoil 1.69 18.3 5.02 0.8 Rosneft + Yuganskneftegaz 1.47 16.0 10.80 1.7 TNK–BP 1.41 15.3 8.00 1.3 Surgutneftegaz 1.20 13.0 14.31 2.3 Sibneft 0.68 7.4 1.95 0.3 Yukos – Yuganskneftegaz 0.68 7.4 2.01 0.3 Tatneft 0.50 5.5 0.74 0.1 Slavneft 0.44 4.8 0.92 0.1 Bashneft 0.24 2.6 0.36 0.1 Gazprom 0.24 2.6 544.42 85.9 RussNeft 0.13 1.4 0.77 0.1 Other producers 0.52 5.6 44.65 7.0
mbd = million barrels a day; bcm = billion cubic metres. Source: IET (2005).
australiancommodities • vol. 12 no. 2 • june quarter 2005 365 russian oil and gas
Average world real oil prices lihood of more rapid expansion in Russian oil 3 In 2000 US dollars output. These IEA projections are more optimistic 2001 2003 2010 z 2020 z than those of the Russian Government in the US$/bbl US$/bbl US$/bbl US$/bbl Energy Strategy of the Russian Federation for ABARE a 22 25 21 na the Period up to 2020 (the Energy Strategy), IEA b na 27 22 26 the main offi cial document that sets out priori- a Trade weighted crude oil prices. b IEA crude oil import prices. ties and goals for Russian energy sector devel- z Projections. Sources: IEA (2004a); Burg et al. (2005) (projections reported in opment for the period to 2020. However, in the constant 2005 US$ have been converted to constant 2000 US$). past, both offi cial and private projections have consistently underestimated the scale of Russian oil production. Importantly, the Energy Strategy Oil production in the Russian Federation is was developed before the strong rise in world oil projected to reach 10.4 million barrels a day in prices in 2004 and 2005 in response to a combi- 2010 and 10.7 million barrels a day in 2020 (IEA nation of sound underlying market fundamen- 2004a; table 4). If, contrary to current expecta- tals and signifi cant concerns about the security tions, high world oil prices were to be sustained of global oil supply (Burg et al. 2005). These for a long period, there would be a greater like- factors have driven Russian oil production and exports to the 2010 levels earlier than projected in the Strategy.
Box 2: Tax regime in the oil sector Gas reserves in the Russian Federation The Russian Federation is extremely well en- In 2002, a new tax on minerals production dowed with natural gas reserves. At the end of (equivalent to a royalty) was introduced as 2003, Russia’s proven gas reserves amounted part of tax reform in the oil sector. It replaced to 47 trillion cubic metres, the largest share of a number of earlier oil production related taxes total proven gas reserves in the world (26.7 per and deductions and simplifi ed the overall cent). These are expected to last for more than tax system. The reform has established the maximum rate of oil export tax, depending eighty years at the current rate of production. on the world oil price. Under the new regime, The country also has an estimated 33 trillion if the world price for crude Russian Urals oil cubic metres of undiscovered gas resources rose by US$1 above US$25 a barrel, the state (IEA 2004a). budget received 68.5 cents of the extra dollar Three quarters of Russia’s gas reserves and a through the tax on minerals production, export similar share of current production are located duty and profi t tax. in West Siberia, mostly in the Nadym–Pur–Taz The tax regime in the oil sector underwent region, followed by the European part of the additional signifi cant changes in 2004, leading Russian Federation (to the west of the Ural to an increased tax burden on the sector, partic- Mountains), East Siberia and the Far East (IEA ularly on oil exports. The new, more progres- 2004a; map 2). sive, scale of taxation is aimed at withdrawing extra profi t from oil exporters when world oil In 2002, 80 per cent of gas was produced at prices are high. Under the most recent scale, fi elds with declining production (Government deductions in favor of the state budget rose of the Russian Federation 2003), which means above 70 cents of an extra dollar if world prices that signifi cant new capacity will need to come for Russian Urals oil exceed US$25 a barrel. on stream over the next two decades to maintain Some sources estimate these deductions at 90 current rates of production. The Energy Strategy per cent of extra profi t. projects that West Siberia will remain the main Sources: IET (2003a); IEA (2005). gas producing region until 2020, although its share in total gas production will decline.
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The development of gas fi elds in East Siberia, Natural gas industry the Far East, the European part of the Russian B Russian Federation Federation (including the Arctic Sea shelf) and Production Yamal Peninsula are expected to become a 600 priority in the next decade (Government of the 500 Russian Federation 2003). The rate of devel- Domestic consumption opment of new gas fi elds will be signifi cantly 400 affected by the ability to raise the required 300 amount of investments (as discussed later). 200 Non-CIS export 100 Gas production CIS export Over the period 1992–2004, the Russian Federa- bcm tion remained the world’s largest gas producer, 1992 1994 19961998 2000 2002 2004 accounting for more than a fi fth of world gas production (IEA 2004b). As with oil, gas production declined after the disintegration of and power generation (IEA 2004a). The less the Soviet Union. However, the reductions were optimistic projections of future gas output in the not as great as those for oil (IET 2001; 2004; Energy Strategy can be attributed to concerns 2005; fi gure B). Gas output fell to its lowest over declining output from the major producing level of 571 billion cubic metres in 1997 before fi elds in West Siberia and the limited capacity to rising to 634 billion cubic metres in 2004 (table incur signifi cant investments required to main- 2). Unlike oil, changes in gas production have tain and further boost gas production. been driven mainly by domestic consumption, with low regulated domestic gas prices favoring the uptake of gas against other fuels. Investment in the oil and gas sector Gas output is expected to expand further in the Investment in oil exploration and production has period to 2020, backed by abundant gas reserves. increased in the Russian Federation since the It is projected to reach 655 billion cubic metres start of the current decade (table 5). Between in 2010 and 801 billion cubic metres in 2020 2000 and 2003, oil sector investments made (table 4). Most of the incremental gas produc- up around 35 per cent of total industry invest- tion is likely to be consumed domestically, as ments in the Russian Federation (OECD 2004) the country continues to rely heavily on gas as a and led to marked acceleration in oil produc- primary energy source and the main fuel for heat tion and exports. The robust growth in oil output
Projected growth of oil and gas production and exports to 2020 4 Russian Federation 2004 2010 2020 IEA Energy Strategy IEA Energy Strategy Oil mbd mbd mbd mbd mbd Production 9.2 10.4 8.9–9.8 10.7 9.0 – 10.4 Exports of crude oil and products 6.7 7.3 6.1–6.8 7.0 6.1–7.0 Gas bcm bcm bcm bcm bcm Production 634 655 555–665 801 680–730 Exports 201 182 a 250–265 249 a 275–280 a Net exports. mbd = million barrels a day; bcm = billion cubic metres. Sources: IEA (2004a); Government of the Russian Federation (2003); IET (2005). australiancommodities • vol. 12 no. 2 • june quarter 2005 367 russian oil and gas , supplied by courtesy of the International Energy Agency, OECD, Paris , supplied by courtesy of the International Energy Agency, World Energy Outlook 2004 World Russia’s gas reserves and infrastructure Russia’s Map from
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368 australiancommodities • vol. 12 no. 2 • june quarter 2005 russian oil and gas occurred partly as a result of bringing under- Investment in oil exploration and utilised or idle standing facilities into produc- 5 production Russian Federation tion, and there is still potential for greater and Investment Change from 1998 more effi cient utilisation of existing facilities. However, in the longer term it will be necessary US$m % to increase capital investment in new projects to 1998 2 795 100 sustain high rates of production. 1999 1 821 68 2000 4 143 148 The size of investment in natural gas explo- 2001 6 018 215 ration and production is largely determined by 2002 4 679 167 Gazprom, the dominant player in the domestic 2003 a 4 690 168 gas market (box 1). The company needs to a January–October. Source: OECD (2004). make signifi cant investments if it is to maintain current levels of gas production in the medium to long term, as production from mature gas fi elds The total level of capital investment in the declines and infrastructure degrades. Russian Federation, amounting to around 18 The development cost of new large gas fi elds, per cent of GDP, is still considered low relative all of which are located in the harsh Arctic zone, to other fast developing economies in eastern is estimated at US$35–40 billion, excluding Europe and Asia, and relative to the average necessary gas infrastructure (OECD 2004). Esti- level of investment in OECD countries of about mated reserves of the new gas fi elds are signifi - 22 per cent (table 6). cant. For example, Yamal Peninsula reserves are estimated at 5.8 trillion cubic metres of gas Concerns over exploration rates for (Government of the Russian Federation 2003). The high cost of development and lack of new natural resources infrastructure may be one of the reasons why The Russian Government views insuffi cient Gazprom prefers investing in new smaller fi elds exploration of natural resources and a growing in the vicinity of working giant fi elds in West share of oil and gas fi elds that are costly to Siberia to be able to use the existing pipeline explore and less attractive for investment as a system (IEA 2004a). threat to national energy and economic security Another issue is that the low regulated (Government of the Russian Federation 2003). domestic gas prices make it practically impos- For example, after an increase of 33 per cent sible to raise the required capital for invest- over 2000 and 2001, exploration oil drilling fell ment, as three quarters of Gazprom’s gas is used by 40 per cent in 2002 and by a further 11 per domestically. cent and 18 per cent in 2003 and 2004 respec- 6 Capital investment to GDP ratio in selected countries 1995 1996 1997 1998 1999 2000 2001 2002 % % % % % % % % Russian Federation 21.1 20.0 18.3 16.2 14.4 16.9 18.9 17.9 OECD 21.0 21.7 22.3 22.8 22.5 22.5 22.0 21.0 Japan 27.7 28.3 27.9 26.8 26.2 26.2 25.6 24.1 United States 18.2 18.7 19.1 19.8 20.3 20.5 19.7 18.6 Hungary 20.0 21.4 22.2 23.6 23.9 24.1 23.6 22.3 Poland 18.6 20.7 23.5 25.1 25.5 23.9 20.9 19.1 Korea, Rep. of 36.7 36.8 35.1 29.8 27.8 28.4 27.0 26.8 China 40.7 33.8 33.4 35.7 36.4 36.8 38.8 42.2
Source: OECD (2004). australiancommodities • vol. 12 no. 2 • june quarter 2005 369 russian oil and gas tively. Similarly, the number of new oil wells put started to rise slowly in response to the strong into operation grew by 85 per cent over 2000 and economic recovery and reached 619 Mtoe in 2001 before falling by 22 per cent in 2002, 5 per 2002 (table 7). While this was considerably less cent in 2003 and 1 per cent in 2004 (IET 2003b, than in 1992, the Russian Federation remained 2004, 2005). the third largest energy consumer in the world The Ministry of Natural Resources has devel- after the United States and China (IEA 2003). oped a long term program for the development of During the period 1992–2002, the share of natural resources for the period 2005–20. It calls oil in the primary fuel mix declined from 29 for total investment of almost US$90 billion in to 21 per cent as a result of reduced industrial exploration over fi fteen years, with US$9 billion consumption and lower use of fuel oil in power from the budget and the rest from the mine oper- generation. However, the share of natural gas ators. The 2005 budget provides only US$277 rose from 47 per cent in 1992 to over 52 per cent million for natural resources exploration, which in 2002, maintaining its dominance in both the needs to be raised to US$756 million a year by primary fuel mix and heat and power generation 2020 (MNR 2005). It is uncertain whether the (IEA 2004a). government will be able to signifi cantly increase Total primary energy consumption in the the exploration budget and whether this initia- Russian Federation is projected to grow by 1.7 tive will stimulate increased investment from per cent a year until the end of the current decade private investors. and then by 1.2 per cent a year in the 2010s as High world oil prices and the current tax economic growth slows. By 2020 the share of oil system are the most commonly cited reasons in the primary fuel mix is expected to be main- for declining investment in oil exploration tained at 21 per cent, while the share of gas is (IEA 2004a; Mironov and Berezinskaya 2004; projected to increase to 54 per cent as a result of Tutushkin, Levinsky and Bushueva 2004). the higher uptake of gas in power generation and When oil prices are high, companies concentrate the underlying growth in demand for electricity on production and exports rather than building (IEA 2004a; table 7). up reserves. The current tax regime and In contrast, the Energy Strategy projects a macroeconomic conditions also seem to favor decrease in the share of natural gas in the fuel short term projects and increased production mix to below 50 per cent by 2020, and increases from working fi elds. in the shares of coal, oil, nuclear and hydropower At present, companies do not have the right (Government of the Russian Federation 2003). of fi rst refusal on reserves that they discover. The government’s desire to reduce the share That is, they do not have preference above of natural gas in the primary fuel mix refl ects others to obtain the right to extract the oil they concerns over excessive dependence on gas, have found. This is an additional disincentive which is viewed as an energy security risk. to exploration. Another potential reason for the current decline in exploration activity is that Russian oil companies view their reserves to Oil exports production ratio as relatively high and therefore External demand for Russian crude oil has been do not see the need for making large investments steadily recovering after the downturn at the in exploration. start of the 1990s (fi gure A). Some of the factors responsible for the earlier decline included the loss of subsidised former Soviet buyers, the Domestic consumption depletion of large oil fi elds as a result of overpro- Russia’s economic recession at the start of the duction during Soviet times, and the reorganisa- 1990s resulted in a sharp contraction in domestic tion of the oil sector (EIA 2005). primary energy consumption. After reaching a Exports of crude oil and refi ned products trough of 583 Mtoe in 1998, domestic primary from the Russian Federation have almost energy consumption in the Russian Federation doubled from the historical low of 3.4 million
370 australiancommodities • vol. 12 no. 2 • june quarter 2005 russian oil and gas
Total domestic primary energy consumption, 7 Russian Federation 1992 2002 2010 2020 Mtoe % Mtoe % Mtoe % Mtoe % Coal 132 17.0 107 17.2 118 16.7 125 15.6 Oil 221 28.5 128 20.7 149 21.0 171 21.3 Gas 364 46.9 326 52.6 371 52.4 433 54.0 Nuclear 32 4.1 37 6.0 45 6.4 47 5.9 Hydro 15 1.9 14 2.3 16 2.3 17 2.1 Other 12 1.6 7 1.1 9 1.3 10 1.2 Total 776 100.0 619 100.0 708 100.0 802 100.0
Mtoe = million tonnes of oil equivalent. Source: IEA (2004a). barrels a day in 1995 to 6.7 million barrels a day period compared with relatively low domestic in 2004, making the country the second largest oil demand. oil exporter in the world (table 8). Exports of crude oil and refi ned products are Non-CIS countries (countries other than for- projected to grow further to 7.3 million barrels mer members of the Soviet Union including a day in 2010 and then to decline slightly to 7.0 Latvia, Lithuania and Estonia) accounted for million barrels a day in 2020 (table 4). Growth most of the increase in exports, with their share in domestic consumption, projected to be slower growing from 51 per cent in 1992 to 87 per cent than growth in production in the fi rst decade, in 2004 (table 2). will outstrip the pace of production in the second As well as exports increasing in absolute terms, decade, leaving reduced domestic supply of oil the proportion of total oil production exported available for export (IEA 2004a). has also increased markedly. The proportion of exports in the form of crude oil and refi ned prod- ucts in total oil production has grown steadily, Gas exports from 51 per cent in 1995 to more than 71 per The volume and share of gas exports in total gas cent in 2004 (IET 2001, 2005). Exports were production have remained relatively unchanged the main driver of oil sector growth over this since the start of the 1990s. Being sensitive to the 8 Top ten world exporters of oil and natural gas, 2003 Rank Oil exporters Oil exports a Natural gas exporters Gas exports b mbd bcm 1 Saudi Arabia 8.3 Russian Federation 189.3 2 Russian Federation 5.8 Canada 102.2 3 Norway 3.0 Norway 71.0 4 Iran 2.5 Algeria 63.6 5 Venezuela 2.3 Netherlands 48.3 6 United Arab Emirates 2.3 Turkmenistan 42.8 7 Kuwait 2.0 Indonesia 41.4 8 Nigeria 1.9 Austria 26.6 9 Mexico 1.8 Malaysia 24.6 10 Libya 1.3 United States 19.6 World 45.8 World 783.5 a Net exports. b Exports include pipeline gas and LNG. mbd = million barrels a day. bcm = billion cubic metres. Sources: EIA (2004); BP (2004); IEA (2004c); IET (2005). australiancommodities • vol. 12 no. 2 • june quarter 2005 371 russian oil and gas level of domestic gas consumption, exports were Crude oil export destinations, 2003 sustained over the period 1992–2004 (fi gure B), C CIS at around 30 per cent of total gas production. Germany However, the main focus of export supplies has Other central Europe switched to non-CIS countries, whose share grew Italy from 45 per cent of total gas exports in 1992 to a Poland France high of 72 per cent in 2004 (table 2). Netherlands Net gas exports are projected to increase further Scandinavia to 249 billion cubic metres in 2020, maintaining Spain Greece their share at 31 per cent of total gas production Other western Europe (IEA 2004a). In contrast, the Energy Strategy United States projects higher export supplies of gas, with the Turkey share of exports reaching 38–40 per cent of total China Japan gas production in 2020. Larger amounts of gas Other are expected to become available for export as a % 5 10 15 20 result of a projected decline in the share of gas in the primary fuel mix, accentuating the coun- try’s position as the world’s leading exporter of of Russian gas exports until 2020, the share of natural gas (table 8). Increased export earnings gas exports to the Asia Pacifi c region is expected could also help fi nance investments in the devel- to reach 15 per cent by 2020 from nil at present opment of gas reserves (IEA 2002). (Government of the Russian Federation 2003). The Russian Federation has long been exploring ways to export oil and gas to the Export markets Asia Pacifi c, where China, Japan and Korea At present more than 90 per cent of Russian are the primary markets. This intent is strongly oil exports are destined for Europe, including backed by reciprocal interest from large energy CIS countries (EIA 2005; fi gure C). However, importers in the region, who seek to diversify supplies of Russian oil to Europe are unlikely to their supply sources outside the Middle East and expand signifi cantly over the next ten to fi fteen ensure regional energy security. years. This refl ects the partial redirection in oil exports to other markets, such as the Asia Pacifi c in order to take advantage of oil price differential Top ten recipients of Russian natural gas and the European market’s preference for higher 9 exports, 2003 a quality Middle Eastern oil. Rank Country Imports By 2020, the share of oil exports destined bcm for Europe is projected to decline to 60 per cent (MIE 2004), while the share going to the Asia 1 Germany 37.3 2 Italy 19.4 Pacifi c region is projected to reach 30 per cent 3 Belarus 19.0 from about 3 per cent in 2003. 4 Turkey 12.6 Europe and the CIS are also the main markets 5 Hungary 11.0 for Russian gas exports (table 9). Currently, 6 France 10.6 Russian gas provides almost a quarter of OECD 7 Poland 7.2 8 Czech Republic 7.0 Europe’s total gas needs (IEA 2004a), with 9 Romania 5.8 gas supplied mainly on the basis of long term 10 Finland 5.0 contracts (up to 25 years) on ‘take or pay’ condi- Total of above countries 134.9 tions. Sales volumes under existing contracts Total all markets 189.3 amount to 2 trillion cubic metres of natural gas (Gazprom 2004a). Although European gas a Data are provisional for the OECD and are estimates for the non- OECD countries. bcm = billion cubic metres. demand is expected to remain the primary driver Source: IEA (2004b).
372 australiancommodities • vol. 12 no. 2 • june quarter 2005 russian oil and gas
The IEA has recently urged China, Japan and via pipelines in 2003, either cross-border or to Korea to work together with the Russian Federa- sea terminals (OECD 2004). Higher oil prices tion to develop Siberian oil and gas resources, as in recent years have made rail and barge trans- these are projected to become a major source of port viable economic alternatives despite their energy supplies to Asia (Hardy 2004). A major higher costs relative to that of pipelines. The gas deal for supply of Siberian oil to the Asia Pacifi c pipeline system, the longest in the world (over region has recently been fi nalised by Rosneft, the 150 000 kilometres), also serves as the main new owner of Yuganskneftegaz, with expected transport mode for delivering Russian gas to exports of approximately 1 million barrels of oil external markets. to China until 2010, via railroad. With oil production and exports increasing, The Sakhalin Island projects have resulted in a limited oil transport capacity has emerged as one major development of oil and gas resources in the of the key constraints to further export expan- Russian Far East. Sakhalin-1 and Sakhalin-2 have sion. Declining demand from eastern Europe been implemented by a consortium of Russian and CIS countries has resulted in oil exports and foreign companies on the basis of production being redirected to other international markets, sharing agreements which are discussed later. mainly western and northern Europe. Major The planned Sakhalin-3 oil and gas project is very bottlenecks are occurring at the ports and in the large and incorporates three smaller projects that pipelines supplying those markets, especially on are comparable with Sakhalin-1 and Sakhalin-2. the Black Sea. Sakhalin-4 and Sakhalin-5 are also in the pre- Development of oil export pipeline infrastruc- paratory stages. The combined output of these ture has been identifi ed as one of the priority projects will signifi cantly exceed projected local tasks of the Russian Government, with the Baltic and regional energy needs, with large volumes Pipeline System, East Siberia – Pacifi c Ocean becoming available for export to neighboring and West Siberia – Barents Sea routes being of countries and elsewhere. key importance (table 10). North America is another important pros- pective market for Russian oil and gas. The Exports to Europe promotion of oil and gas exports to the United Russian crude oil fl ows to Europe through the States is the focus of US–Russian energy Druzhba pipeline system and via Russian oil cooperation (White House 2005). However, the ports on the Baltic and Black Seas (map 1). initiatives underlying this energy cooperation The Druzhba pipeline with a capacity of 1.3 so far seem to lack signifi cant support from the million barrels a day, was built in Soviet times parties involved. Additional factors associated and remains the main artery for Russian crude with slow progress in this export direction are oil exports to eastern Europe. The Latvian Baltic the geographic remoteness of the market, and port of Ventspils was the main outlet for Russian the United States being a large regional gas crude oil destined for northern European markets producer itself. However, recent shortages in until Transneft, the state operator of the national supply of natural gas in the region, followed by oil pipeline system, built its own Baltic terminal a signifi cant price hike, could stimulate progress at Primorsk, on the Gulf of Finland, as part of its on gas projects for exports to north America. Baltic Pipeline System (BPS) in late 2001. The recently approved expansion of BPS capacity to 1.2 million barrels a day is one of Transneft’s Development of oil and gas export major projects and is expected to be completed infrastructure by late 2005 – early 2006. The Russian Black Sea ports of Novoros- The Russian Federation has an extensive system siysk and Tuapse, as well as the Ukrainian port of oil and gas pipelines, refl ecting the inland of Odessa, are used to reach western European location of major oil and gas reserves. More markets (IEA 2002). Black Sea ports are running than 80 per cent of Russian oil was exported at full capacity, and there is little additional australiancommodities • vol. 12 no. 2 • june quarter 2005 373 russian oil and gas
Major existing and proposed oil pipelines and sea terminal capacities for export and 10 transit of oil from the Russian Federation to non-CIS destinations 2003 2005 2010 2015 2020 mbd mbd mbd mbd mbd Transport system Baltic Pipeline System (BPS) – sea port of Primorsk 0.60 1.20 1.20 1.20 1.20 Other north western sea ports 0.12 0.30 0.30 0.30 0.30 Druzhba pipeline 1.27 1.33 1.33 1.33 1.33 Transneft a pipeline system – Black Sea ports 1.26 1.26 1.26 1.26 1.26 Caspian Pipeline Consortium (CPC) b 0.4 0.56 1.4 1.4 1.4 East Siberia (Taishet) – Pacifi c Ocean 0.6 1 1.6 West Siberia – Timan-Pechora – Barents Sea 1 1.6 Total 3.64 4.65 6.09 7.49 8.69 a Monopoly state operator of the Russian trunk pipeline system. b CPC connects Kazakhstan’s Tengiz oil fi eld with the sea terminal near Russian port of Novorossiysk. mbd = million barrels a day. Source: MIE (2004). throughput potential. Congestion is also occur- greater security of alternative gas supplies can ring because of bad weather conditions and be ensured. bottlenecks on the Turkish Straits. Two major proposals were developed to Exports to Asia Pacifi c markets bypass the Turkish Straits — building an oil One of the major proposed projects for supplying pipeline across the Turkish territory to the Russian oil to the Asia Pacifi c region is the Aegean coast (Trans-Frakian Kiyiköy–Ibrikhaba construction of a 1.6 million barrels a day pipe- route) or building one through Bulgaria and line from East Siberia ending near the Russian Greece (Burgas–Alexandrupolis route). Neither Pacifi c port of Nakhodka, enabling shipments to project has made much progress since they were Japan, Korea, China and the United States (map proposed several years ago (Transneft 2004; 1). The pipeline’s construction faces several major Krutikhin 2005), perhaps because of the poten- diffi culties, including high pipeline construction tial decline in the attractiveness of the European costs, technical complexity of the project, the market for Russian oil supplies in the medium need for costly greenfi eld oil developments in to long term. West and East Siberia, and the possibility of Russia’s natural gas exporting strategy to the pipeline’s underutilisation. In late 2004 the Europe is based on new large scale projects, Russian Government commissioned a feasibility offshore resources development in the north and study of the project, with the results expected in the Yamal Peninsula projects. These undertak- mid-2005. ings may require investments of tens of billions The major potential sources of Russian gas of dollars, and their realisation is likely to for Asia are East Siberia and the Far East, which depend on favorable prices for natural gas and together are scheduled to produce up to 50 billion large markets being secured to allow investment cubic metres of natural gas a year by 2010, and up funds to be mobilised. to 110 billion cubic metres by 2020 (Government In the medium term, however, rising compe- of the Russian Federation 2003). A large scale tition and liberalisation of European energy project for supplying Russian gas to the Asia markets do not provide suffi cient guarantees that Pacifi c region involves building a pipeline from these projects will be implemented. Moreover, it East Siberia to Dalian and Beijing in China, with is likely that European importers of natural gas an undersea branch to Korea (map 2). However, will be interested in diversifi cation of supplies the export prospects of the project seem some- to enhance energy security, thus reducing what unclear at present, as Gazprom, the coordi- dependence on Russian imports, provided that nator of Russian gas exports to the Asia Pacifi c
374 australiancommodities • vol. 12 no. 2 • june quarter 2005 russian oil and gas region, appears to prioritise Sakhalin Island proj- Japan is the proposed destination for Sakhalin-1 ects over East Siberian gas developments. gas, recent reports suggest that the fi nal destina- The Sakhalin Island projects are renowned tion of Sakhalin-1 gas is not decided yet, with for their gas export initiatives; however, there are northern China being mentioned as one of the also plans for oil production and exports. While potential buyers. The limited national gas pipe-
Box 3: Major export projects targeting the Asia Pacifi c region
East Siberia – Pacifi c Ocean oil pipeline developments in East Siberia and the Far East and The proposal for an oil pipeline from Taishet in gas exports to the Asia Pacifi c region, is report- East Siberia to the Pacifi c Ocean was developed edly prioritising Sakhalin projects over Irkutsk in accordance with the Energy Strategy and gas developments. There are still a lot of issues, based on the long term forecasts of oil production which need to be resolved before the project can and consumption in the Russian Federation and proceed. Project implementation is likely to prog- future demand from Asia Pacifi c markets. Oil is ress at a faster rate once Gazprom and TNK–BP to be supplied from the West and East Siberian reach an agreement on Gazprom’s participation in fi elds. The Russian Government’s decision in late the project. 2004 to commission a feasibility study for the East Siberia–Pacifi c Ocean route has ended the Sakhalin Island oil and gas projects decade long rivalry between China and Japan for Total recoverable reserves of the Sakhalin-1 the pipeline’s destination, practically supporting project area are estimated at 2.3 billion barrels of Japan’s option. However, a potential branch to oil and 485 billion cubic metres of natural gas. The China’s Daqing, favored by China, has not been Sakhalin-1 project is expected to produce approxi- fully dismissed yet. mately 0.25 million barrels of export quality oil If built, the Taishet–Nakhodka pipeline would be a day by the second half of the current decade one of the longest in the world (4130 kilometres), (Sakhalin-1 2005). For gas exports, the Sakhalin-1 over harsh terrain. The state monopoly over oil project consortium plans to build a pipeline with pipelines eliminates private capital participation a design capacity of 8 billion cubic metres a year, in the project, which is estimated at US$11–16 which could run to Japanese Hokkaido Island with billion, and leaves the burden of raising the required an extension to the Niigata or Tokyo area. funds solely in Transneft. The costs of bringing on The recoverable reserves of the Sakhalin-2 main additional capacity from greenfi eld developments project fi elds are estimated at 1 billion barrels in West and East Siberia are likely to be consider- of oil and more then 500 billion cubic metres of ably higher than for existing brownfi eld projects in gas. The Sakhalin-2 project currently produces West Siberia (IEA 2004a), leaving aside the possi- about 0.07 million barrels of oil a day during the bility of underutilisation of the expensive pipeline. summer season, but is expected to produce oil all The proposed high transport tariff could also place year round from 2006 (Sakhalin Energy 2004). restrictions on export volumes. The project consortium has recently signed long term agreements with Japanese and Korean utility Irkutsk gas project companies for the supply of almost 5 million The project to supply natural gas to China and tonnes of LNG a year (7 billion cubic metres), Korea via a pipeline from the Kovykta gas fi eld with the fi rst contracts to start in 2007. The project near Irkutsk in East Siberia was proposed by consortium has also fi nalised a contract to supply RUSIA Petroleum with British–Russian TNK–BP 1.6 million tonnes of LNG a year (2.2 billion as its major shareholder. Explored reserves of the cubic metres) over twenty years to the Energia Kovykta fi eld are deemed suffi cient to produce Costa Azul future terminal in Mexico on the more than 30 billion cubic metres of natural gas west coast of north America. This deal brings the a year for over thirty years (RUSIA Petroleum total volume of natural gas committed from the 2004). However, Gazprom, which was appointed Sakhalin-2 project to 7 million tonnes a year (10 by the Russian Government as a coordinator of gas billion cubic metres).
australiancommodities • vol. 12 no. 2 • june quarter 2005 375 russian oil and gas line network in Japan and competition from the East–West pipeline in China create barriers to the Box 4: LNG projects for the east imports of Russian pipeline gas. The predomi- coast of north America nant reliance of prospective gas buyers, such as A potential gas supplier for the north American Japan and Korea, on LNG also forces Russian market is the Shtokmanovskoye fi eld in the gas producers to seek alternatives to pipeline Barents Sea shelf, capable of producing up to supplies, such as LNG. 60 billion cubic metres of gas a year, with the The Sakhalin-2 project consortium is building full period of development being fi fty years the fi rst Russian LNG plant in Prigorodnoye on (Rosneft 2004). The project envisages construc- the south of Sakhalin, which is scheduled to reach tion of an offshore production platform, an its design capacity of 9.6 million tonnes of LNG LNG plant and an export terminal near the ice- a year in 2008. Sakhalin-2 has already signed free port of Murmansk on the Kola Peninsula. long term agreements for supply of LNG to Asia Gazprom, the sole owner of the Shtokmanovs- Pacifi c and north American markets (box 3). koye fi eld, plans to decide on an international project partner(s) this year, followed by supply Exports to north America deals later in 2005 and 2006 (Platts 2004). Start of production is currently scheduled for 2010, A major proposal for oil exports to north with the United States a primary destination for America involves constructing a pipeline with LNG supplies. a design capacity of 1.6 million barrels of oil a Another potential option to expand LNG day from West Siberia to the Murmansk port on supplies to north America is building an Barents Sea, or building a new port at Indiga on LNG terminal in the Gulf of Finland near St the Barents Sea as an alternative pipeline desti- Petersburg. Gazprom and PetroCanada signed nation (map 1). The north American project a memorandum of understanding to look at faces a number of counterarguments including the feasibility of constructing an LNG plant potentially insuffi cient reserves of light crude in the Leningrad region and the possibility of oil preferred by the north American market, lack LNG supplies to a terminal in Canada by 2009 (Gazprom 2004b). The Canadian terminal of support from the United States, and more could provide Gazprom faster access to the US importantly the need to compete with the higher market given the slow pace of approval of new quality oil supplies from the Middle East (Vain- LNG import terminals in the United States. shtock 2004), which could result in less favor- able prices for Russian oil exports. Although north America is considered the main market for the West Siberia – Barents Sea north American export projects appear to receive route, it could potentially become a more cost less priority compared with the Asia Pacifi c proj- competitive way of shipping Russian crude oil ects, perhaps as a result of lack of support from to closer European markets. This, however, may the parties involved. make it a potential competitor with the Baltic Pipeline System, Transneft’s current priority, partly explaining its willingness to put off the Conclusions project until later in the decade. Since the end of the 1990s the importance of the North American gas projects envisage LNG Russian Federation as a major world oil and gas supplies either from the port of Murmansk on supplier has increased. It is currently the world’s the Barents Sea or from an LNG terminal on largest gas exporter and the second largest oil the Gulf of Finland near St Petersburg (box exporter. Oil and gas supplies are backed by 4). Before the start of direct exports from the abundant indigenous reserves. Barents Sea, Gazprom plans to swap its pipeline The potential for future supplies of oil and gas exports to Europe with LNG to be shipped gas to the international market is signifi cant. to the United States, with shipments potentially Oil production is expected to continue to grow, starting as early as this year (Platts 2004). The although at a slower rate than over the past few
376 australiancommodities • vol. 12 no. 2 • june quarter 2005 russian oil and gas years, and to exceed 10 million barrels of oil a References day by 2020. Oil exports are projected to expand from 6.7 million barrels of oil a day in 2004 to BP 2004, BP Statistical Review of World Energy approximately 7.3 million barrels a day by 2010, 2004, BP, London. before declining slightly to 7.0 million barrels of Burg, G., Haine, I. and Maurer, A. 2005, ‘Energy oil a day by 2020. These projections are based outlook to 2010’, Australian Commodities, on the expectation that the recent spike in oil vol. 12, no. 1, March quarter, pp. 90–102. prices will be temporary. If, however, a sustained EIA (Energy Information Administration) 2004, period of high prices were to eventuate, higher Top Petroleum Net Exporters, 2003, US De- future Russian oil production and exports could partment of Energy, Washington DC, August be expected. (www.eia.doe.gov/emeu/security/topexp.html). Natural gas production and exports could —— 2005, Russia Country Analysis Brief, US reach 801 and 249 billion cubic metres a year by Department of Energy, Washington DC, Feb- 2020 up from 634 and 201 billion cubic metres ruary (www.eia.doe.gov/emeu/cabs/russia.html). respectively in 2004. The ability to reduce the Gazprom 2004a, Gas supplies to non-CIS coun- dominant share of natural gas in the domestic tries (in Russian), reference source, Moscow, primary fuel mix (currently over 50 per cent) 17 June (www.gazprom.ru/articles/ru/articles/ could free up more gas for export. article12545.shtml). The key barriers to future expansion of —— 2004b, Gazprom and Petro-Canada signed a export supplies include the signifi cant levels of memorandum on mutual understanding, press investment required in oil and gas exploration release, 12 October (www.gazprom.com/eng/ and production, the need to stabilise the busi- news/2004/10/14194.shtml). ness climate and improve the tax regime, and Government of the Russian Federation 2003, the ability to expand export infrastructure and Energy Strategy of the Russian Federation diversify export markets. Implementation of for the Period up to 2020, Ministry of Energy, these conditions could stimulate Russian energy Moscow. supplies to exceed the projected levels. Hardy, A. 2004, East Asians fi ghting over pea- At present, Europe remains the largest external nuts says IEA, EnergyReview.Net, Asper- market for Russian oil and gas. However, the mont Limited, Perth, 19 November. competitiveness of European energy markets IEA (International Energy Agency) 2002, Russia and aspirations for regional diversifi cation of Energy Survey 2002, OECD/IEA, Paris. supplies may reduce the future attractiveness —— 2003, Energy Balances of Non-OECD of the European market for Russian oil and gas Countries, OECD/IEA, Paris. exporters. —— 2004a, World Energy Outlook, OECD/ The Asia Pacifi c and north American regions IEA, Paris. are promising new markets for Russian oil and —— 2004b, Natural Gas Information, 2004 gas. Advancing these export directions requires Edition, OECD/IEA, Paris. building new lengthy and costly pipelines; —— 2004c, Key World Energy Statistics, signifi cant greenfi eld investments in the unde- OECD/IEA, Paris. veloped oil and gas resources in East Siberia, —— 2005, Oil Market Report, OECD/IEA, the Far East, and the Arctic Sea shelf; the devel- Paris, 11 April. opment of new products, including LNG; and IET (Institute for the Economy in Transition) strong commitment from the parties involved. 2001, Russian Economy in 2000: Trends and The ability to successfully resolve these chal- Perspectives, Issue 22, Moscow. lenges and address the earlier mentioned barriers —— 2003a, Tax Reform in Russia: Issues and will determine whether the Russian Federation Solutions, vol. 2, Moscow. can become a truly global supplier of oil and gas —— 2003b, Russian Economy in 2002: Trends and a new stabilising force in the world energy and Perspectives, Issue 24, Moscow. market. australiancommodities • vol. 12 no. 2 • june quarter 2005 377 russian oil and gas
—— 2004, Russian Economy in 2003: Trends for replacement, preservation and economic and Perspectives, Issue 25, Moscow. utilisation of the natural resources and devel- —— 2005, Russian Economy in 2004: Trends opment of mineral-raw base in the Russian and Perspectives, Issue 26, Moscow. Federation, Moscow, 11 February (www.mnr. IMF (International Monetary Fund) 2004a, Rus- gov.ru/part/?act=print&id=82&pid=11. sian Federation: Statistical Appendix, IMF OECD (Organisation for Economic Coopera- Country Report No. 04/315, Washington DC. tion and Development) 2004, OECD —— 2004b, World Economic Outlook Database, Economic Survey of the Russian Federation Washington DC, September 2004 (www.imf. 2004, OECD, Paris. org/external/pubs/pubs/ft/weo/2004/02/data/ Platts 2004, ‘Gazprom Sakhalin door ‘opens’’, dbginim.cfm). International Gas Report, Issue 509, New Krutikhin, M. 2005, ‘Balkan route: the oil York, 8 October. industry formulates conditions of Burgas- Rosneft 2004, Shtokmanovskoe gas-and-conden Alexandrupolis pipeline construction’ (in sate fi eld, Moscow (www.rosneft.ru/english/ Russian), RusEnergy, Moscow, 3 March. projects/stockmanovskoye.html). Lambert, T. and Woollen, I. 2004, ‘View of 12 RUSIA Petroleum 2004, Kovykta Project – Mar- million b/d Russian output by 2010 places kets, Irkutsk, Russia (www.rusiap.ru/kovykta/ focus on export limits’, Oil and Gas Journal market.html). Online, PennWell, Tulsa, Oklahoma, 26 July. Sakhalin-1 2005, Project Information – Overview, MEDT (Ministry of Economic Development Yuzhno – Sakhalinsk, Russia (www.sakhalin1. and Trade of the Russian Federation) 2005a, ru). Scenarios of the Social and Economic Develop- Sakhalin Energy 2004, Project Overview, Yuzhno ment and Main Indicators of the Consolidated – Sakhalinsk, Russia (www.sakhalinenergy.ru). Financial Statement of the Russian Federation Transneft 2004, Trans-Frakian oil pipeline is for 2006 and for the Period to 2008, Moscow, under development, Moscow, 28 May (www. April (www.economy.gov.ru). transneft.ru/Projects/Defaultasp?LANG=EN). —— 2005b, Program for Social and Economic Tutushkin, A., Levinsky R. and Bushueva, Y. Development of the Russian Federation for the 2004, Not the time for exploration (in Rus- Mid-term Outlook (2005-2008), Draft revised sian), Vedomosti, # 209 (1249), Business and submitted to the Government of the Rus- News Media, Moscow, 15 November. sian Federation on 5 February, Moscow. Vainshtock S. 2004, Speech of the Transneft’s MIE (Ministry of Industry and Energy) 2004, President S.M. Vainshtock at the presentation Speech of the Minister of Industry and Energy of the Centre for Strategic Research’s report of the Russian Federation Viktor Khristenko ‘About potential development trends of the at the IV annual Russian Oil and Gas Week, infrastructure for transportation of Russian press release, Moscow, 26 October (www.mte. oil’, Press release, Moscow, 12 November gov.ru/fi les/2166/2287.Doklad_VNNG.pdf). (www.transneft.ru/press/Default.asp?LANG Mironov, V. and Berezinskaya, O. 2004, Natural =RU&ATYPE=9&ID=7006). rent: oil industry freezes (in Russian), Vedo- White House 2005, Joint Statement by President mosti, # 214 (1254), Business News Media, Bush and President Putin on US–Russian Moscow, 22 November. Energy Cooperation, Washington DC, 24 MNR (Ministry of Natural Resources of the February (www.whitehouse.gov/news/releas Russian Federation) 2005, Minister of Natural es/2005/02/20050224-6.html). Resources of the Russian Federation Yuri World Bank 2004, World Development Indica- Trutnev made a speech on the actions taken tors database, Washington DC, August.
378 australiancommodities • vol. 12 no. 2 • june quarter 2005 food industry
AUSTRALIA’S FOOD INDUSTRY recent changes and challenges
Robert Delforce, Andrew Dickson and John Hogan • Australia’s agriculture and food industry is maximise returns, they are themselves respond- undergoing a period of rapid change. The in- ing to wider market pressures. dustry makes a major contribution to the Aus- In many respects the Australian food industry tralian economy but is particularly important is very dynamic and has a record of achieving to rural and regional economies. Accordingly, effi ciency and productivity improvements in many food producers and processors are keen response to international competition. Never- to understand the changes that are occurring theless, Australia’s food industry will need to now and where the Australian food industry is continue to develop and innovate in the face of heading. continuing competitive pressures if the industry is to continue to make a positive contribution to • In this article an overview of recent changes Australia’s rural and regional communities in in the Australian food industry — and in food the future. processing and retailing in particular — is presented, accompanied by a discussion of key issues and implications for stakeholders. Australian food industry snapshot A comprehensive list of food products and sectors within the food industry is provided in Introduction box 1. Food is defi ned to include a range of items At fi rst glance it might appear that change in from unprocessed (minimally transformed) agri- Australia’s food industry is being driven by the cultural and seafood products, such as grains, two largest supermarket chains, Coles and Wool- whole fi sh and shellfi sh, through to processed worths, attempting to reduce costs, increase (substantially and elaborately transformed) demand for wholesale and retail services, and products, such as biscuits and cakes. maximise shareholder values. While these goals As illustrated in fi gure A, the food industry may be supported by increasing the level of supply chain or value chain has four main integration in the food sector, the high levels of elements: the primary production of food market concentration in Australia’s food retail commodities; the processing of raw food sector, and in some parts of the processing sector, commodities for consumption; the retailing of and concerns about the level of competition in food products to consumers; and distribution the provision of retail and wholesale services, and wholesale networks linking the production, add fuel to the debate about change. processing and retailing components. However, the Australian food industry — In Australia the four supply chain elements producers, processors and retailers alike — com- have traditionally been separated or clearly petes within a global food market, and so while Coles and Woolworths are actively seeking to • Andrew Dickson • +61 2 6272 2173 • [email protected] australiancommodities • vol. 12 no. 2 • june quarter 2005 379 food industry A Food supply chain model
Primary production Distribution Food Wholesale Food of food processing retailing commodities network network (farm and seafood produced)
delineated in terms of ownership. However, this tation of the food supply chain is provided in environment is changing rapidly as the food fi gure B. supply chain is becoming increasingly vertically In 2002-03 (the last year for which compre- integrated (discussed further below). hensive statistics are available across all sectors), Detailed information and statistics on the total annual retail food turnover in Australia was Australian food industry are contained in estimated at $82 billion, which was almost half Australian Food Statistics 2004 (DAFF 2005a). of all retail turnover in Australia for that year. A summary of key statistics for the industry is Moving down the supply chain: value added by provided in table 1. A diagrammatic represen- the food processing industries was $17 billion;
Box 1: Products and sectors included in the food industry
In this article (and in DAFF 2005a), food is defi ned Processed seafood to cover products from unprocessed (minimally Pieces, fi llets, dried, canned, preserved fi sh and transformed) agricultural and seafood products, shellfi sh such as grain, whole fi sh and shellfi sh, through Dairy products to highly processed (substantially and elaborately Milk and cream processing transformed) food products, such biscuits and Ice cream cakes. A comprehensive list of products and sectors Other dairy products – butter, cheese, milk powders included in the defi nition of the food industry is etc provided below. Processed fruit and vegetables Canned, bottled, dried, juiced, preserved, frozen etc Minimally transformed Oil and fat Live animals – cattle, sheep etc exported for Canola oil, sunfl ower oil, cottonseed oil, lard etc consumption in countries of destination Flour mill and cereal food Fish and shellfi sh – live, fresh, chilled and frozen Flour mill products Fresh/chilled horticulture Cereal food and baking mix Vegetables Bakery products Fruit and nuts Bread, cakes and pastries Grains – wheat, barley, corn, oats, sorghum etc Biscuits Oilseeds – canola, soybeans, sunfl ower etc Other food Other unprocessed food not elsewhere Sugar classifi ed Confectionery Other processed food not elsewhere classifi ed Substantially and elaborately transformed Beverages and malt Processed meat Soft drink, cordial and syrup Beef, veal, sheep, lamb, goat, pig meat etc Beer and malt Poultry – chicken, duck, turkey, geese etc Wine Bacon, ham and smallgoods Spirits
380 australiancommodities • vol. 12 no. 2 • june quarter 2005 food industry 1 Selected Australian food industry statistics
1992 2002 2003 -93 -03 -04 Farm and fi sheries sector Value of production nominal $b 18.7 27.7 32.1 real a $b 24.7 28.3 32.1 Food processing sector Sales and service income nominal $b 36.2 65.9 na real a $b 47.9 67.5 na Value added nominal $b 12.9 16.6 na real a $b 17.1 17.0 na Employment ’000 156.5 183.0 171.0 Value added per employee nominal $’000 82.2 90.5 na real a $’000 108.8 92.6 na Sales and service income per employee nominal $’000 231.5 359.9 na real a $’000 306.2 368.4 na Food and liquor retail sector Turnover nominal $b 44.4 81.9 88.7 real a $b 58.7 83.8 88.7 Trade Value of food exports nominal $b 12.2 22.3 22.3 real a $b 16.1 22.8 22.3 Value of food imports nominal $b 2.7 5.9 5.9 real a $b 3.6 6.0 5.9
a 2003-04 values. na Not available. Source: DAFF (2005a).
B Value chain for food in Australia, 2003-04 Food processing Farm and fish food production (2002-03 data) Retail food sales $32.2 billion $65.9 billion $88.7 billion Meat Other Supermarkets and Seafoods 6% Grains 23% 33% grocery stores 28% 62% Other 23% Other food retailing 9% Milk 9% Dairy 14% Flour and Horticulture 7% cereals 6% Liquor Cafes and Meat 34% Wine, retailing 6% restaurants 13% beer and Takeaway spirits food outlets 10% 17%
Exports Imports $22.3 billion $5.9 billion Meat 26% Beverages 19% Other 29% Other 63% Horticulture 3% Seafood 3% Grains 21% Seafood 15% Wine 11% Dairy products 10%
australiancommodities • vol. 12 no. 2 • june quarter 2005 381 food industry food processing sales and service income was The impact of the sharp appreciation of the $66 billion; and farm and fi shing food produc- Australian exchange rate in 2002-03 and 2003- tion was valued at $28 billion. 04, in addition to the 2002-03 drought, is also In 2003-04 the value of retail food turnover evident in the data presented in fi gure C. increased to $89 billion and the value of farm and fi sheries production rose to around $32 billion. Nationally the Australian food industry em- Key issues and challenges ployed over 1.5 million people, or nearly one in In identifying key issues and challenges facing six employees Australiawide, in 2003-04. This the Australian food industry, and the food pro- included around 375 000 people in agriculture cessing and retail sectors in particular, a reason- and fi sheries production, 171 000 people in food ably well defi ned set emerges (AEGIS 2001; processing and 1 million people in the food Allen Consulting Group 2004; DAFF 2002, wholesaling, retailing and service sectors (ABS 2005b; David Milstein and Associates 2004; 2005). Mellentin 2005; Sleep 2005). These include: The total value of food exports in 2002-03 • the adequacy of investment in innovation and exceeded $22 billion and provided an annual net research and development (R&D); trade surplus (over food imports) of $16 billion. • the extent of competition within the food Values in 2003-04 remained around these levels. industry, and particularly in the provision of The food sector is one of the few sectors in retail and wholesale services; Australia, outside of mining, to generate a trade • concerns about rapid industry rationalisation account surplus. and integration across the supply chain and In the decade to 2002-03 the value of food the impact that these developments might production from Australian farm and fi sheries have on small producers and processors; industries grew by approximately 15 per cent in • concerns about the impact that ‘private labels’ real terms. Over the same period, the value of may have on brand competition and the allo- Australian food exports increased by over 40 per cation of shelf space; cent (in real terms), refl ecting the impact of the • concerns about food safety and quality; sharp depreciation of the Australian exchange • the potential environmental impacts of food rate in the late 1990s and increased export production, processing and handling prac- volumes. However, while export income growth tices; has occurred across most sectors, growth in all • evolving consumer tastes and preferences sectors has not been consistent. for healthier and more lifestyle-compatible A detailed overview of Australian food meals; exports and imports, by sector, over the period • changing labor requirements in the food 1989-90 to 2003-04 is provided in fi gure C. processing, distribution and retailing sectors; The industries that have contributed signifi - and cantly to the absolute growth in Australia’s food • potentially heightened biosecurity risks and export earnings include grains, meat, wine and the integrity of Australia’s pest and disease dairy products (fi gure C). In addition, growth in free status. the value of exports of live animals, fresh chilled The Australian food industry — producers, seafood, fresh chilled horticulture products, processors and retailers alike — exists within oilseeds, dairy products, fl our mill products, a global economic food market. Many of the confectionery and wine has been notable. recent changes evident in the industry and the In contrast, sectors that have experienced developments that are now unfolding refl ect increased competition from imports include this. For example, producers and processors processed seafood, processed fruit and vege- compete in global export markets as well as with tables, oil and fat, bakery products, soft drink, importers in the Australian domestic market. The cordial and syrup, and beer, malt and spirits emergence of China over the past two decades (fi gure C). as a competitor in processed food markets, in
382 australiancommodities • vol. 12 no. 2 • june quarter 2005 food industry
Australian food exports and imports, by sector C In 2004-05 dollars Live animals Fresh/chilled seafood
1000 Exports 800 Exports 800 Imports Imports 600 600 400 400 200 200 $m $m
Fresh/chilled vegetables Fresh/chilled fruit and nuts 250 600 200 150 400 100 200 50 $m $m
Grains Oilseeds
800 6000 600 4000 400 2000 200
$m $m
Other unprocessed food Meat
200 6000 150 4000 100 2000 50
$m $m
Processed seafood Dairy products 1000 3000 800 600 2000 400 1000 200 $m $m 1991 1994 1997 2000 2003 1991 1994 1997 2000 2003 -92 -95 -98 -01 -04 -92 -95 -98 -01 -04 australiancommodities • vol. 12 no. 2 • june quarter 2005 383 food industry
Australian food exports and imports, by sector C In 2004-05 dollars Processed fruit and vegetables Oil and fat
800 Exports Exports 300 Imports Imports 600 200 400 100 200
$m $m
Flour mill products Bakery products
800 200
600 150
400 100
200 50
$m $m
Sugar Confectionary 300 2000 250 1500 200 1000 150 100 500 50 $m $m
Other processed food Soft drink, cordial and syrup 1000 500 800 400 600 300 400 200 200 100 $m $m
Beer, malt and spirits Wine
400 2500 2000 300 1500 200 1000 100 500 $m $m 1991 1994 1997 2000 2003 1991 1994 1997 2000 2003 -92 -95 -98 -01 -04 -92 -95 -98 -01 -04
384 australiancommodities • vol. 12 no. 2 • june quarter 2005 food industry
Australia and elsewhere, has not changed the In response to this the Australian Government nature of these markets; producers and proces- launched the National Food Industry Strategy sors still ultimately compete on delivered costs in 2002, a fi ve year (2002–07) $102 million and quality. program to increase investment in innovation, However, the emergence of China and other increase export growth, and improve produc- exporting countries like China has increased the tivity, effi ciency and skills in the Australian food intensity of competition. This is forcing pro- industry. ducers, including those in Australia, to achieve However, many of the companies involved in yet further productivity improvements and cost Australia’s food sector, particularly in wholesale reductions in response. This is not least of all and retail services, are multinationals. Accord- because the average wage rate in China is around ingly, it is not obvious that investment in R&D US60 cents an hour compared with over US$15 necessarily needs to occur in Australia. Rather, an hour in Australia (Penm 2005). the important issue is the access that Australian Recent trade policy developments in Australia companies have to new information and tech- are also relevant. In addition to pursuing multi- nologies, and the degree and speed with which lateral trade reform through the auspices of the Australian companies adopt and/or adapt inno- World Trade Organisation, Australia is pursuing vations to remain internationally competitive. bilateral trade reform agendas with a number of key trading partners (McDonald, Nair, Rodri- Competition guez and Buetre 2005). Free trade arrangements Primary food production in Australia is charac- have already been signed with Singapore, Thai- terised by a large number of relatively small land and the United States and are in various fi rms. It is estimated that in 2001-02 there were stages of development with China, Malaysia and approximately 120 000 commercial (predomi- the ASEAN group as a whole. nantly family based) livestock, cropping and These agreements have the potential to deliver horticultural farms, and about 5000 commercial benefi ts to Australian food exporters through fi shing fi rms in the food production industry preferential or expeditious trade arrangements. (DAFF 2005b). However, it also follows that for some indus- The food processing sector is made up of tries, domestic producers or processors may 3400 various sized fi rms (DAFF 2005b) or 7774 face increased competition from imports. This is ‘manufacturing management units’ (Australian particularly likely in the case of an arrangement Bureau of Statistics’ Business Register). How- with China where, as already mentioned, labor ever, the largest twenty food processing fi rms rates are lower than in Australia. are estimated to account for almost half of total industry turnover (DFAT 2005). Nevertheless, Research and development across different food processing sectors the In an environment where international food number of suppliers varies considerably. For markets are increasingly interdependent, the example, in the poultry meat processing sector development of new processes and technologies there are three large processors accounting for or innovative solutions to problems is critical most of the industry’s output, while in the red to the future prosperity of the agriculture and meat sector there are in excess of thirty proces- food processing sectors. However, according sors. to BIS Shrapnel (2003), in the four years to In the food retailing sector, supermarkets 2000-01, expenditure on R&D by the Australian dominate trade and are estimated to have ac- processing sector declined by 2.9 per cent a year, counted for 62 per cent of total Australian food compared with an increase of 3.3 per cent a year and liquor sales in 2003-04 (table 2; ABS 2004). across all other industries, which has caused According to Soler (2005), this balance across some industry observers to be concerned about the food retailing sector is not unusual in global underinvestment in new technology (Smith and retailing. However, the Australian supermarket Napier 2002; NFIS 2005). segment itself is relatively concentrated by australiancommodities • vol. 12 no. 2 • june quarter 2005 385 food industry world standards. Currently the Australian food products, while not traditional household brand retail market comprises fi ve major supermarket names, are generally of a high quality. chains (Coles, Woolworths, Foodland, IGA and Despite the success of ALDI, concerns still ALDI) and a large number of smaller indepen- persist about industry concentration in the food dent retailers (corner stores, farmers markets retail sector and the potential for abuse of market etc). According to ACNielsen (2004) the largest power. Some empirical support for the presence two fi rms (Coles and Woolworths) account for 62 of market power in Australian cereal, fl our, beer per cent of total grocery sales. NARGA (2002) and malt markets is provided by O’Donnell, estimates this fi gure to be 76 per cent. However, Griffi th, Nightingale and Piggot (2005). How- Dimasi (2004) estimates the two fi rm level of ever, evidence for market power more generally concentration in the food, liquor and grocery in the Australian food market is inconclusive. market to be as low as 51 per cent. For example, while Whitehall and Associ- Among other OECD countries, comparable ates (2004) found that a high level of industry market shares (50–70 per cent) are typically concentration in the food retail sector provides only reached when the sales of the fi ve largest retail chains with more bargaining power in food retailers are aggregated. For example, the supply negotiations, they found no evidence of fi ve largest food retailers account for 80 per cent abuse of market power to the detriment of food of total retail food sales in France, 64 per cent in product suppliers. the United Kingdom, 62 per cent in Germany, While there is no fi rm rule about the number 58 per cent in Spain and only 32 per cent in the of suppliers necessary for a market to be compet- United States (Soler 2005). itive, a rule of thumb commonly used is that fi ve However, as there are no barriers to entry to suppliers of roughly equal size is the minimum the Australian food retail sector, new entrants number to ensure suffi cient competitive pres- can and do provide effective competition to sure to constrain any market power of fi rms in incumbent retailers. The arrival in Australia in a market. However, the applicability of this rule January 2001 of the German based global food of thumb will depend on the technologies in use, retail chain, ALDI and its subsequent expansion the size of the market and the barriers to entry. is a case in point. ALDI, has been able to exert competitive pressure on Australian food retailers Rapid industry changes through a low cost, no frills business model, It is also the case that retailers such as Coles and based around a limited range of basic food Woolworths compete in a global market, as do items. Costs of in-store staff, product storage, producers and processors, and they need to be handling and presentation are minimised and the equally responsive (as producers and processors are) to international as well as local trends and developments. Australian food retail market share, by As a generalisation, food retailing in Australia 2 outlet category, 2003-04 may be described as a high volume, low margin business. As indicated in table 3, the large Market supermarket chains in Australia are estimated Outlet category Turnover share to operate on a gross margin (that is, net earn- $m % ings before interest and taxation as a proportion Supermarkets and of total sales revenue) of less than 5 per cent. grocery stores 55 136 62.1 Cafes and restaurants 11 634 13.1 Accordingly, even small reductions in total costs Takeaway food outlets 8 556 9.6 can have a large effect on fi nal margins and it Other food retailing a 8 087 9.1 is this fact that encourages retailers to focus Liquor retailing 5 322 6.0 particularly on cost reductions as a means of Total food and liquor retailing 88 735 – increasing their profi t margin. a Mainly delicatessens, butcher shops and greengrocers. Recently, however, Australian food retailers Source: ABS (2004). have been particularly dynamic and retailer
386 australiancommodities • vol. 12 no. 2 • june quarter 2005 food industry
Gross margin comparison of the big retailers increasingly assume direct responsi- 3 four retailers in Australia, 2003-04 bility for managing and developing the distribu- tion and wholesaling processes. For example, Total after several years of experimenting with out- Sales cost sourcing, both Coles and Woolworths have
Retailer turnover of sales EBIT a Margin b now resumed direct control of their distribu- $m $m $m % tion centres as the distribution centres are now Woolworths 21 998 21 056 942 4.3 considered too critical to the effi ciency and Coles 17 969 17 291 678 3.8 Foodland 6 026 5 769 25 4.3 timeliness of supply to outsource to a third party Metcash IGA 7 174 7 011 163 2.3 (Wright and Lund 2002, p.19). Combined big Food retailers are also extending contrac- four retailers 53 167 51 127 204 3.8 tual arrangements downstream and developing exclusive supply arrangements directly with a Earnings before interest and taxation. b Calculated as EBIT divided by sales turnover. farmers, processors and distributors to facilitate Source: Foodbiz, vol. 2, issue 3, December 2004. greater control over stocks as well as the quality and price of products (Wright and Lund 2002). As a result of these improvements being rationalisation and cost cutting is reshaping achieved in the retail and distribution sectors, the entire food value chain (Whitehall Associ- processors now face a demand to reduce the time ates 2004). Signifi cant structural and opera- taken to replenish orders as well as increased tional rationalisation has occurred, focused on volatility in orders. As a result, labor fl exibility reducing costs along the entire food supply chain is now critical to the competitiveness of food as a means of increasing profi tability. processors. In particular, signifi cant labor savings have Changes in workplace arrangements have been achieved through the process of supply chain allowed food processors to better match labor integration or ‘cross-enterprise rationalisation’, which is now the centrepiece of large Austra- lian food retailer operations (Wright and Lund 2002). Supply chain integration is described in Box 2: Supply chain integration more detail in box 2. Supply chain integration is a ‘whole of chain’ According to Wright and Lund (2002, pp. 7– reform that promotes increased industry and 8), supply chain integration is now at a level of fi rm level competitiveness through the func- sophistication in the Australian food sector that tional integration of production, manufac- allows large food retailers to: turing, distribution and retailing. Critically, the • identify optimum product mixes for indi- key operational elements of the industry are linked into close long term supply relationships vidual supermarket stores based on precise through the application of advanced information point of sale and demographic information; networking technology. These computer based • automate store stock ordering, with reference networks are designed to minimise costs across to delivery data and sales forecasts; the entire system and introduce signifi cant fl ex- • streamline delivery of food (particularly ibility into the business model (Cox 1999). perishable) products; and This facilitates smoother fl ow of products • ensure the automatic replenishment of high throughout the food supply chain and allows turnover stocks. food retailers to optimise stockholding and ‘Just in time’ stock models have now given keep high-turnover stock continuously on their way to a model that delivers ‘perfect orders on supermarket shelves. Moreover, computerisa- time, accurate and complete every time’ (Wright tion and monitoring of operations across the entire system facilitates the identifi cation and and Lund 2002, p. 7). better management of ineffi ciencies throughout Supply chain integration is also being com- the chain. bined with increased vertical integration as major australiancommodities • vol. 12 no. 2 • june quarter 2005 387 food industry with fl uctuating labor demand and thereby labels from around 10 per cent to 30 per cent by largely eliminate the costs associated with 2007-08 (Shoebridge and Whyte 2005). Coles’s underemployed labor. Key among these changes strategy is based on a quality–price graduation were: the introduction of more fl exible working that is aimed at offering a range of qualities hours; the negotiated removal of labor overtime across a particular product line at a price discount and penalty clauses; a reduction in permanent compared with proprietary brand products. employees and a parallel increase in casual staff; What the impact of a signifi cant expansion and the increased outsourcing of casual staff in ‘private labels’ would have on the Australian requirements to third-party labor hire fi rms. retail food market it not clear. The adoption of similar labor and functional Under normal circumstances the emergence reforms in food distribution and warehousing of a new branded product that competes success- has facilitated 24 hours a day, seven days a week fully with an existing product — because of a response capability to meet retailer orders for more competitive pricing structure or innova- stock (Wright and Lund 2002). tive marketing strategy — would provide little There is necessarily a tension between cause for concern. Sellers would have (as a rule) greater integration across the food supply chain equal access to shelving space and the process of (through supply chain integration, contracts and competition in any market is one of both creation vertical integration) and competition issues (in and destruction. The value created and estab- the ACCC sense of competition). This is particu- lished in a brand (or any market valued asset) larly the case with the levels of concentration is always able to be challenged. In the long run, that exist in the retailing and processing sectors the suppliers that satisfy, and continue to satisfy, in Australia. However, it still remains to be seen customer preferences succeed and the value of whether any additional government involvement their brand (or asset) is preserved. is necessary or cost effective. However, allowing Australia’s two largest food retailers to establish a cache of private Private labels brands with which to challenge established ‘Private labels’ or house brands are another brands in their own supermarkets, potentially emerging trend in the Australian food industry. changes these dynamics. Private labels are brands owned and produced Of particular concern would be any appre- on behalf of the retailer. When fi rst introduced ciable reduction in brand competition or the in Australia, house brands were perceived by essential price discovery process that currently consumers as predominantly less expensive occurs in retail markets, leading to an increase and often lower quality alternatives to propri- in prices being paid by consumers. Another etary brand products. However, Australian food concern relates to how shelving space is allo- retailers are now embracing the concept of cated and what checks and balances might be ‘premium private labels’. According to Ambler needed to monitor noncompetitive practices. (2004), these offer consumers a quality equiva- lent to alternative proprietary brand products, Other issues and provide the retailer with greater product The Australian Government already plays a margins. signifi cant role in the Australian food sector. Both Woolworths and Coles plan to signifi - For example, Food Standards Australia and cantly increase their number and range of New Zealand already addresses food safety and premium private labels, encouraged by the labeling issues. The Australian Quarantine and success of the concept in overseas markets Inspection Service is responsible for dealing (Bazoche, Giraud-Heraud and Soler 2005; with disease, Biosecurity Australia is respon- Bonanno and Lopez 2005; Bontemps, Orozco, sible for biosecurity risk issues and the Austra- Requillart and Trevisiol 2005). For example, lian Competition and Consumer Commission Coles has the aim of increasing the share of total (ACCC) maintains a watch on market power and packaged food sales accounted for by its private product claim and labeling issues.
388 australiancommodities • vol. 12 no. 2 • june quarter 2005 food industry
Nevertheless, some commentators have sug- System in Australia, University of Western gested that there is also a role for government Sydney. to address alleged undesirable consequences Allen Consulting Group 2004, Environmental for small farmers and food processors of the Sustainability in the Australian Food Industry: changes in the food industry described here The Commercial Opportunities, Report to the (Adamson and Hunt 2005; Hunt 2005; Jimenez National Food Industry Strategy Limited, 2005; Mudgil 2005; Perrett 2005; Shoebridge Canberra. and Whyte 2005; White 2005). However, what Ambler, C. 2004, ‘What’s in store for supermar- the role of government might be in these circum- kets?’ Foodbiz, vol. 2, no. 3, pp.1–4. stances, other than as it relates to food safety, Bazoche, P., Giraud-Heraud, E. and Soler, L. G. competition policy or disease and biosecurity 2005, ‘Premium private labels, supply con- risks, is not clear. tracts, market segregation, and spot prices’, Journal of Agricultural and Food Industrial Organisation, vol. 3, no. 2, article 7 (www. Concluding comments bpress.com/jafi o/vol3/iss2/art7). Australian food producers and processors BIS Shrapnel Pty Limited 2003, National Food compete in a global food market. With interna- Strategy: Quantitative Analysis, Report tional markets becoming more interdependent, prepared for the National Food Industry Australian producers and processors are increas- Strategy, Canberra. ingly coming under pressure from international Bonanno, A. and Lopez, R. 2005, ‘Private label competitors. Inevitably, innovation and adop- expansion and supermarket milk prices’, tion needs to be central to any industry response Journal of Agricultural and Food Industrial strategy. Organisation, vol. 3, no. 2, article 2 (www. The Australian retail food sector is also under- bpress.com/jafi o/vol3/iss2/art2). going rapid change that is having dramatic impli- Bontemps, C., Orozco, V., Requillart, V. and cations across the entire value chain. Advanced Trevisiol, A. 2005, ‘Price effects of private information networking technology is allowing label development’, Journal of Agricultural the functional integration of production, manu- and Food Industrial Organisation, vol. 3, no. facturing, distribution and retailing. This is lead- 2, article 3 (www.bpress.com/jafi o/vol3/iss2/ ing to signifi cant improvements in fl exibility and art3). reductions in costs. Australian retailers are also Cox, A. 1999, ‘Power, value and supply chain further exploring ‘private brands’, which might management’, Supply Chain Management: be seen as a logical extension of the supply An International Journal, vol. 4, no. 4, pp. chain integration concept moving further down- 167–75. stream. DAFF (Department of Agriculture, Fisheries and Forestry) 2002, National Food Industry Strategy: An Action Agenda for the Australian References Food Industry, Commonwealth of Australia, ABS (Australian Bureau of Statistics) 2004, Canberra. Retail Trade, cat no. 8501.0, Canberra. —— 2005a, Australian Food Statistics 2004, —— 2005, The Labour Force, Australia, cat no. Commonwealth of Australia, Canberra. 6291.0, Canberra. —— 2005b, Australian Agriculture and ACNielsen 2004, ACNielsen Grocery Report Food Sector Stocktake, Commonwealth of 2004, ACNielsen Australia, Macquarie Park, Australia, Canberra. Sydney (www.acnielsen.com.au). David Milstein and Associates 2004, What’s Adamson, K. and Hunt, P. 2005, ‘Cheap imports Hot in Food? A Review of Trends and Issues fl ood supermarkets’, Weekly Times, 20 April. Affecting Food Consumption in Australia and AEGIS (Australian Expert Group in Industry Globally, Melbourne. Studies) 2001, The Processed Food Product australiancommodities • vol. 12 no. 2 • june quarter 2005 389 food industry
Dimasi Strategic Research Pty Ltd 2004, Latest Perrett, J. 2005, ‘Supermarkets begin to wield retail market share data released, Sydney their muscle’, The Age, 22 April. (www.woolworthslimited.com.au/resources/ Scott, R. 2005, U.S.–China Trade, 1989–2003: retail%20competition) Impact on Jobs and Industries, Nationally DFAT (Department of Foreign Affairs and and State-by-State, Economic Policy Institute Trade) 2005, Australia Now: Australia’s Food Research Report Prepared for the U.S.–China Industry, Canberra (www.dfat.gov.au/foodin- Economic and Security Review Commission, dustry.html). Washington DC. Hunt, P. 2005, ‘House brands muscle in’, Weekly Shoebridge, N. and Whyte, J. 2005, ‘‘No names’ Times, 20 April. winning battle of the brands’, Australian Jimenez, K. 2005, ‘Supermarkets turn screw Financial Review, 7 April, pp. 1, 60. with own brands’, Australian, 23 April. Sleep, C. 2005, Key Food and Health Trends McDonald, D., Nair, R., Rodriguez, G. and for 2005, Aroc Limited, Worcestershire, Buetre, B. 2005, Trade fl ows between Austra- England. lian and China, ABARE paper presented at Smith, P. and Napier, K. 2002, ‘Food processing: the 49th Conference of the Australian Agricul- innovation in the industry’, Australian Food tural and Resource Economics Society, Coffs Statistics, Canberra, pp. 10–19. Harbour, New South Wales, 9–11 February. Soler, L-G. 2005, ‘Retailer strategies in the food Mellentin, J. 2005, A Tipping Point for Health marketing chain: introduction to the special and a Turning Point for Functional Foods: issue’ Journal of Agricultural and Food In- Ten Key Trends for 2005, New Nutrition Busi- dustrial Organisation, vol. 3, no. 2, article 1 ness, London. (www.bpress.com/jafi o/vol3/iss2/art1). Mudgil, V. 2005, ‘Coles’ house brand strategy White, L. 2005, ‘Savagery on the shelves’, Food axes existing private labels’, Retail World, Week, no. 1775, 18 March, p. 1. 4–15 April, vol. 58, no. 6, p. 5. Whitehall Associates 2004, Price Determination NFIS (National Food Industry Strategy Inc) in the Australian Food Industry: A Report, 2005, Innovation, Canberra (www.nfi s.com). Report prepared for the Department of Agri- NARGA (National Association of Retail Grocers culture, Fisheries and Forestry, Canberra. of Australia) 2002, NARGA Issues Pack 2002, Wright, C. and Lund, J. 2002, Supply chain Sydney (www.narga.com.au/docs/NARGA_ rationalisation: management strategy and ISSUES_2002.doc). union adaptation in the Australian food and O’Donnell, C., Griffi th, G., Nightingale, J. and grocery industry, Paper presented to the Inter- Piggott, R. 2005, Food Processor/Retailer national Industrial Relations Association/ Market Power in Input Markets: The Austra- Canadian Industrial Relations Association lian Grains and Oilseeds Industries, RIRDC 4th Regional Congress of the Americas, June, Publication no. 05/019, Canberra. Toronto. Penm, J. 2005, ‘Economic overview’, Austra- lian Commodities, vol. 12, no. 2, June quarter, pp. 269–82.
390 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects
MINERALS AND ENERGY major development projects — April 2005 listing
Ian Haine and commodity analysts, Commodity Forecasting Group • As outlined in this article, the record num- the ABS survey of expected expenditure for bers of minerals and energy projects that January–June 2005. have been recently completed, and the record numbers currently committed to or under con- Expenditure up in 2004-05 struction, will add signifi cantly to the sector’s Total Australian minerals exploration expendi- production and export capacity in the short to ture in 2004-05 is estimated to rise by 23 per cent medium term. to $2.13 billion. In real terms, estimated expen- diture in 2004-05 was the highest since 1997-98 • In addition, the signifi cant number of large and was equal to the average annual expenditure scale projects at less advanced planning stag- on minerals exploration in the past 24 years. es that are under active consideration for de- All major commodity categories, except gold, velopment is expected to provide a fi rm plat- recorded expenditure in 2004-05 above their form for future growth in the medium term 24 year averages. The substantial number of and beyond. minerals and energy projects in ABARE’s April 2005 project list will ensure continued robust growth in the mineral resources sector’s produc- Exploration expenditure tive capacity over the medium term. Sustaining It is important to recognise that the ability of exploration expenditure at around 2004-05 levels Australia’s minerals and energy sector to sustain is likely to be necessary to secure a suffi cient its recent strong growth and expand its contri- bution to national economic performance in the medium and longer terms depends critically on Australian private minerals exploration the amount of investment in minerals explora- A expenditure In 2004-05 dollars tion. Most of the strong growth in the minerals 3.5 Other and energy sector of recent years, and most of Base metals the expected growth implicit in ABARE’s list of 3.0 Gold Other energy planned projects, is underpinned by exploration 2.5 Petroleum that was undertaken over the past decade. 2.0 Australian minerals exploration expenditure, in real terms (2004-05 dollars), for the period 1.5 1980-81 to 2004-05 is shown in fi gure A. The 1.0 2004-05 data are estimates based on actual data 0.5 from the Australian Bureau of Statistics for July–December 2004, combined with data from $b 1984 1989 1994 1999 2004 • Ian Haine • +61 2 6272 2031 • [email protected] -85 -90 -95 -2000 05 australiancommodities • vol. 12 no. 2 • june quarter 2005 391 development projects resource base to enable continued sectoral However, short term oil prices are only one growth over the longer term. factor in determining exploration expenditure in In 2004-05, all major commodity categories any particular period and a range of other factors recorded increases in estimated minerals explo- are also expected to have had a signifi cant ration expenditure. bearing on exploration expenditure decisions. Petroleum exploration expenditure is esti- These include factors such as: longer term oil mated to rise by 18 per cent in 2004-05, to price trends; Australia’s relative prospectivity for around $1115 million. In real (2004-05 dollar) petroleum; the prospects for Australia’s future terms, this is 9 per cent higher than the annual share of the growing global LNG trade; the need average expenditure over the past decade ($1024 for long term planning, particularly for relatively million) but remains below the high expenditure expensive offshore petroleum exploration; and years of 1997-98 and 2000-01 ($1184 million the concurrent commitment of resources (funds, and $1155 million respectively). equipment and labor) to other activities such as The expected increase in petroleum explo- project development. ration expenditure in 2004-05 is likely to have Expenditure on gold exploration is estimated been encouraged by a signifi cant rise in world to rise by 3 per cent in 2004-05, to $408 million. oil prices during the year. However, in real terms, estimated expenditure in
ABARE’s list of major minerals and energy development projects
The full list which typically has a relatively large number ABARE’s listings of major minerals and energy of smaller projects. For gold, the expenditure projects expected to be developed over the medium threshold for inclusion in the table is $15 million. term are compiled every six months. Information In general, projects identifi ed are at relatively contained in the lists spans the mineral resources advanced stages of planning. That is, for new sector and includes energy and minerals commodi- projects, stage of planning categories range from ties projects and minerals processing projects. The ‘feasibility study underway’ through to ‘under information comes predominantly from publicly construction’. available sources but, in some cases, is supple- Projects are listed by the principal mineral mented by information direct from companies. commodity to be produced, under the broad head- The lists are fully updated to refl ect developments ings: ‘Mining projects – energy’, ‘Mining projects in the previous six months. – minerals’ and ‘Minerals processing facilities’. The table includes new greenfi elds projects as well What’s in the list as expansions of existing projects. The latest projects list contains information on 229 projects, providing the following details: Where to get the list • project name Up to December 2001, the lists were released in • proponent company or joint venture conjunction with each June and December issue • location of Australian Commodities. Since June 2002, the • project status complete lists (around 12–14 pages) have been • expected startup date released separately. Commencing in 2003, the lists • additional output capacity have been released around May and November • capital cost of the project each year. The lists are available only as an elec- • additional employment, where available. tronic products. With one industry exception, ABARE’s listing The list can be downloaded from ‘Publications’ provides details of announced projects for which at www.abareonlineshop.com total capital expenditure is expected to exceed enquiries: [email protected] $40 million. The exception is the gold industry, or phone +61 2 6272 2010.
392 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects
2004-05 is virtually steady compared with the adversely affected by rising industry costs (such previous two years. The relatively lacklustre as for labor, fuel and other inputs) as refl ected in performance of gold exploration in the past two cost increases and delays at several gold mine years partly refl ects the decline in domestic gold developments recently completed and currently prices since 2003, despite a strong increase in under way (see box 1). US dollar denominated gold prices. In addition, In real terms, estimated expenditure on gold exploration expenditure decisions may have been exploration in 2004-05 is less than half the level
Box 1: Project cost increases and delays
The current period of intense project development under construction, has also risen signifi cantly in Australia has resulted in a signifi cant increase partly because of increased labor and materials in demand for resources such as skilled labor and costs. construction materials. Anecdotal evidence indi- Gold projects whose development has been cates that this has resulted in shortages, particu- recently deferred include View Resources’ larly of skilled labor, especially in regional areas proposed Bronzewing redevelopment and where there is a high degree of minerals and energy Tanami Gold’s proposed new Coyote mine, both project developmental activity. in Western Australia. With domestic Australian Labor costs have increased substantially, as dollar gold prices having declined since 2003 developers compete for scarce resources. At the (despite a strong increase in US dollar denomi- same time, the costs of some of the key material nated prices), substantial increases in develop- inputs to project development, such as diesel fuel ment costs are likely to reduce potential rates of and steel, have risen sharply in line with world return on gold projects to a greater extent than for prices. other commodities. These factors have resulted in a growing number While most aspects of the Bronzewing fi nal of instances of project cost increases, delays to feasibility study were in line with previous project project completion schedules and, in a couple of estimates, mining contractor costs had increased instances, deferrals of project development. by around 30 per cent, resulting in the project’s A number of gold projects have been delayed or deferral. had costs increase above initial estimates in the six Similarly, the Coyote project has been deferred months to April 2005. For example, the commis- because of substantial increases in (unspecifi ed) sioning of Newcrest’s large Telfer gold mine in the development costs. The company has indicated Pilbara was delayed and capital costs increased, that it would examine the feasibility of developing partly because of a shortage of skilled labor. Simi- a higher grade underground section of the Coyote larly, Barrick Mining reported that the construc- deposit in a bid to provide higher margins. tion cost of its Cowal project in New South Wales Newmont Mining recently indicated that rising has risen because of increases in labor costs and in materials prices will increase development costs commodity and consumable prices, and the fi rst and reduce the potential rate of return on the gold pour from Perseverence Corporation’s Foster- proposed $750 million Boddington gold project, ville project in Victoria was reported to have been currently undergoing a feasibility study update. delayed because of a shortage of skilled labor. A decision on developing the Boddington project Projects other than gold have also experienced will be made early in 2006. substantial cost increases. Wesfarmers reports that With an exceptionally large number of minerals the capital cost of its completed Curragh North and energy projects currently committed or under coal mine expansion in Queensland rose by $70 development in the next two years, cost pressures million to around $360 million, mainly because on developments are unlikely to ease in the short of an increase in construction costs, particularly term. This makes it likely that the feasibility of the steel component. The capital cost estimate for many less advanced projects will need to be re- Caltex Australia’s Clean Fuels project, currently examined.
australiancommodities • vol. 12 no. 2 • june quarter 2005 393 development projects in 1996-97 ($878 million). In 2004-05, gold metals are expected to fall in 2006, prices are exploration expenditure is estimated to account still expected to be signifi cantly stronger than in for 47 per cent of total nonenergy exploration 2002 and 2003 and may provide some further expenditure, compared with its share in 1996-97 impetus for exploration expenditure increases, of 68 per cent. although expenditure decisions may also be Base metals exploration expenditure is esti- affected by movements in the US dollar/Austra- mated to rise by 57 per cent to $238 million in lian dollar exchange rate. Other important factors 2004-05. This expected increase is mainly attrib- are expected to be: the apparent trend toward utable to strong rises in expenditure on nickel company rationalisation of exploration capaci- and copper exploration (up 67 per cent and 77 ties (not only in Australia but also globally); per cent respectively) and refl ects the substantial expectations of the future strength (or otherwise) rises in global prices in the past two years and, of Chinese demand for base metals; assessments importantly, a positive outlook for Australian of the development potential of several known dollar denominated prices in the short term. (but as yet undeveloped) base metals deposits in Estimated expenditure on base metals in Australia; and Australia’s relative attractiveness 2004-05, in real terms, is the highest it has been for exploration. since 1997-98. Apart from the main exploration sectors re- ferred to above, three other commodities — iron Capital expenditure ore, coal and uranium — are expected to have Data from the ABS surveys of new capital ex- signifi cant expenditure increases in 2004-05. penditure in the mining and metal products Spending on iron ore exploration is expected to industries give an indication, in aggregate terms, double to an estimated $128 million, refl ecting of the pace and scale of development in the a positive outlook for China’s demand for minerals and energy sector, both historically and this commodity. Uranium expenditure is also in the short term. expected to double to an estimated $21 million, Based on ABS survey data, new capital expen- stimulated by signifi cant rises in world spot diture in the mining industry is estimated to be prices in the past eighteen months. Expenditure $10.1 billion in 2004-05, 9 per cent higher than on coal exploration is expected to rise by over 40 in 2003-04. In real (2004-05 dollar) terms, esti- per cent to around $117 million, refl ecting high mated new capital expenditure in 2004-05 is the global demand and substantial price increases, highest since 1998-99 (fi gure B) and around 32 particularly for coking coal. per cent above the average annual expenditure Over the medium term, exploration expendi- ture in each of the main exploration sectors is expected to be infl uenced by a different set of New capital expenditure factors. B In 2004-05 dollars In the petroleum sector, Australia’s prospec- tivity for crude oil together with the long term 14 Metal products Mining outlook for global oil prices will be key factors 12 in determining future levels of exploration activity and expenditure. For gold, factors such 10 as the US dollar/Australian dollar exchange rate 8 and movements in global equities markets and 6 their infl uence on the outlook for gold prices will be important. 4 In the base metals sector, the price outlook 2 will clearly be important, as demonstrated by $b the recent rises in nickel and copper explora- 1981 1985 1989 1993 1997 2001 2005 tion expenditure. While world prices for base -82 -86 -90 -94 -98 -02 -06
394 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects
for the past 24 years ($7.6 billion). The scale of decrease by around 4 per cent to about $9.7 estimated expenditure in 2004-05 and its order billion. of increase is consistent with the development Capital expenditure in the metal products trends shown in ABARE’s April 2005 list of sector, which includes the minerals processing major minerals and energy projects (see fi gure activities covered in ABARE’s projects list, is H later). estimated to be around $3.2 billion in 2004-05, However, there are indications that capital 20 per cent above 2003-04 expenditure. In real expenditure on mining will ease in 2005-06. terms, estimated expenditure in 2004-05 is about Based on industry intentions canvassed in the 48 per cent above the 24-year annual average March quarter 2005, ABS data indicate that of $2.19 billion (in 2004-05 dollars). Surveyed capital expenditure on mining in 2005-06 may industry intentions suggest that metal products
Major mineral resource developments – projects completed, November 2004 to 1 April 2005
Capital Commodity Project Location Company expenditure $m Mining – energy projects Black coal Dendrobium underground NSW BHP Billiton 267 Mandalong longwall NSW Centennial Coal 219 Curragh North Qld Wesfarmers 360 Eaglefi eld opencut Qld Peabody Energy 195 Petroleum Minerva offshore gasfi eld Vic BHP Petroleum/Santos 222 Moranbah gas project Qld CH4/BHP Billiton 61 Mutineer-Exeter oilfi eld WA Santos/Kufpec/Nippon Oil/Woodside 440 Telfer gas pipeline WA GasNet Australia 114 Mining - minerals projects Copper Tritton NSW Tritton Resources 40 Whim Creek WA Straits Resources 23 Gold Cracow Qld Newcrest/Sedimentary 89 Daisy-Milano WA Perilya na Fosterville Vic Perseverence 99 Stawell expansion Vic Leviathon Resources 10 St Ives WA Gold Fields Australasia 125 Telfer redevelopment WA Newcrest 1 400 Iron ore Mining Area C expansion WA BHP Billiton 152 Lead/zinc/silver Black Star openpit Qld Xstrata 28 Magellan lead project (St 1) WA Magellan Metals 48 Nickel Black Swan WA LionOre 55 Bauxite Weipa expansion (NeWeipa) Qld Comalco 232 Minerals processing projects Alumina Comalco refi nery (CAR St 1) Qld Comalco 1 500 Crude iron HIsmelt iron plant WA Rio Tinto/Nucor/ and steel Mitsubishi/Shougang 400 Total capital expenditure 5 812
australiancommodities • vol. 12 no. 2 • june quarter 2005 395 development projects expenditure could fall by about 4 per cent in Alumina Refi nery – Stage 1) at Gladstone. 2005-06, to around $3.1 billion. The project was developed at a capital cost of In 2005-06, if the expenditure intentions for $1.5 billion and, at full capacity, will produce both the mining and metal products sectors are 1.4 million tonnes a year of alumina for export. realised, total capital expenditure in the mineral China is expected to be a major market for the resources sector could fall by around 6 per cent refi nery’s output. CAR 1 is the world’s fi rst in real terms. greenfi eld alumina refi nery to be built in twenty However, beyond the short term, there is some years. Consideration is currently being given to evidence to suggest that there is potential for doubling the refi nery’s capacity to 2.8 million further growth in resource sector capital invest- tonnes by building a duplicate plant (CAR 2) ment. This assessment is based on the observation that could be completed in 2007. that there are a signifi cant number of advanced A project associated with the CAR 1 devel- projects in ABARE’s project list (particularly a opment — Rio Tinto’s $232 million Weipa number of high expenditure petroleum develop- bauxite mine expansion (the NeWeipa project) ments), and that there now exists a number of in far north Queensland — was also completed large scale, but less advanced, projects that may in the six months to April 2005. Output from the be developed in a longer timeframe. expanded mine will provide feed for the CAR 1 refi nery and, potentially, for the proposed CAR 2 development. Recently commissioned projects The second ‘billion dollar’ project completed In the six months ended April 2005, 23 major in the period to April 2005 was Newcrest’s $1.4 minerals and energy projects with a combined billion Telfer gold mine redevelopment in the capital expenditure of $5.81 billion, were Pilbara region of Western Australia. Telfer’s full completed. These completed developments will add signifi cantly to the sector’s production and export capacity in a range of commodities, Completed projects, June 1998 to including coal, petroleum, gold, base metals 2 April 2005 and alumina. Summary details of the completed projects are shown in table 1. Capital cost of projects The project completion rate in the six months Number to the end of April 2005 is higher than in any of projects Total Average similar period in the past seven years (table 2; no. $m $m fi gure C). While the average value of projects Six months ended completed in the period to April 2005 ($253 June 1998 3 415 138 December 1998 18 3 500 194 million, in nominal terms) is lower than in the June 1999 19 6 500 342 two previous six month periods, it is above the December 1999 16 4 300 269 average value in the past seven years ($235 June 2000 9 1 800 200 million). Looking ahead, ABARE’s project list December 2000 9 1 700 189 indicates that the rate of project completions is June 2001 5 282 56 December 2001 5 262 52 likely to be maintained in the short term, with June 2002 10 1 082 108 around thirty major projects scheduled for December 2002 10 2 110 211 completion in the remainder of 2005. Four months ended April 2003 4 400 100 Major completed projects Six months ended Among the major projects completed in the October 2003 6 937 156 six month period ended April 2005, two were April 2004 13 4 956 381 ‘billion dollar’ developments. The largest in October 2004 9 3 328 370 terms of capital cost was Comalco’s new green- April 2005 23 5 812 253 fi eld alumina refi nery — CAR 1 (Comalco Total 159 37 384 235
396 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects
Completed projects million Mandalong underground longwall expan- C sion, south west of Newcastle. Dendrobium will Total capital produce both coking and thermal coal while cost of projects Average capital Mandalong will produce only thermal coal. cost of projects 6 300 In Queensland, Wesfarmers’ Curragh North expansion near Blackwater was completed at a capital cost of $360 million (an increase of $70 4 200 million on the original cost estimate mainly because of construction cost increases), while Peabody Energy’s new Eaglefi eld opencut mine, 2 100 north of Moranbah, cost $195 million to develop. Curragh North will produce both coking and $b $m thermal coal; Eaglefi eld will produce only hard JDJDJDJDJDAprOct Apr Oct Apr coking coal. All up, these four developments 1998 2000 2002 2003 2004 2005 will add over 10 million tonnes of coal produc- tion capacity. Apart from the Telfer gas pipeline, there were capacity output will be 800 000 ounces of gold three other petroleum developments commis- a year, making it one of the largest gold mines sioned in the six months to April 2005. in Australia. The mine will also produce around The largest of these was the Santos led Muti- 30 000 tonnes of copper in concentrates a year. neer-Exeter offshore oilfi eld development in The Telfer project experienced some cost over- the Carnarvon Basin. The $440 million project runs and delays because of a shortage of skilled was completed three months ahead of schedule labor and the effects of a major cyclone in 2004. and around 10 per cent below the original cost A project linked to the Telfer redevelopment estimate. Full capacity output from the fi eld is — GasNet Australia’s $114 million Telfer gas expected to be 100 000 barrels a day of high pipeline from Port Hedland to Telfer — was also quality crude. completed in the six months to April 2005. In the Otway Basin, BHP Petroleum and Apart from Telfer, there were fi ve other gold Santos brought the $222 million Minerva off- projects completed in the six months to April shore gasfi eld into production. Output capacity 2005. These were: Goldfi elds Australasia’s $125 is expected to build to 150 terajoules a day of million St Ives expansion in the lake Lefroy natural gas and 600 barrels a day of condensate. region of Western Australia; Perseverence Cor- The Moranbah Gas Project, at Moranbah in poration’s new, $99 million, Fosterville mine Queensland, is based on coal seam methane gas in Victoria; Newcrest/Sedimentary Holding’s and was completed in early 2005 at a capital cost new Cracow mine in Queensland, developed of $61 million by CH4 and BHP Billiton. The at a capital cost of $89 million; Perilya’s new prime user of the gas is the Yabulu power station Daisy-Milano mine near Kalgoorlie; and Levi- in Townsville. athon Resources $10 million expansion of its Stawell mine in Victoria. Collectively, these fi ve Smaller projects mines will add around 435 000 ounces a year to Five relatively small base metals projects were Australia’s gold mine production capacity. commissioned in the most recent period. Four coal mine developments, two in New In copper, Tritton Resources commenced South Wales and two in Queensland, were mining at its new $40 million Tritton mine near completed in the six months to April 2005. Girilambone in New South Wales and Straits The New South Wales projects were BHP Resources brought its new $23 million Whim Billiton’s new Dendrobium underground mine Creek mine in the Pilbara region of Western west of Wollongong, developed at a capital cost Australia into production. The Tritton mine of $267 million and Centennial Coal’s $219 will produce 24 000 tonnes a year of copper in australiancommodities • vol. 12 no. 2 • june quarter 2005 397 development projects concentrates a year at full production capacity, Minerals and energy projects while Whim Creek is expected to produce 16 000 tonnes a year of copper cathode. Advanced projects In lead–zinc, production has commenced at At the end of April 2005, there were 74 projects Xstrata’s new $28 million Black Star openpit at advanced stages of development included in mine at Mount Isa and Magellan Metals has ABARE’s project list (fi gure D) — that is, proj- completed stage 1 of its $48 million Magellan ects that are either committed or under construc- Lead project. The Magellan project is located tion. This is one more than the previous record near Wiluna in Western Australia and is based on number of advanced projects (73) included in the lead carbonate ore. At full production capacity, October 2004 list. This means that all 23 proj- the Magellan mine will produce 100 000 tonnes ects completed in the six months ended April a year of lead in concentrates and is expected to 2005 (which no longer appear on the project list) become one of the top three lead mines in the have been replaced by others that have reached world in terms of annual output. advanced development stages as at the end of In nickel, LionOre’s Black Swan openpit mine April 2005. expansion was commissioned at a capital cost of The announced capital expenditure of the 74 $55 million. The additional output from Black advanced projects at the end of April 2005 sums Swan, near Kalgoorlie in Western Australia, is to $22.6 billion (table 3). expected to be 6500 tonnes a year of nickel. However, it should be borne in mind that even Two other major projects were completed projects that have reached the committed stage in the six months to April 2005. The largest of may be deferred, modifi ed or even cancelled if these, Rio Tinto’s new $400 million HIsmelt economic or competitive circumstances change iron plant at Kwinana in Western Australia, is suffi ciently. expected to produce 820 000 tonnes a year of The 74 advanced projects as at April 2005 pig iron at full capacity. The other is BHP Billi- indicate continued expansion across most of ton’s major expansion of its Mining Area C mine the minerals and energy industry spectrum. (MAC) in the Pilbara region. The capital cost of However, in terms of capital expenditure, there the MAC expansion was $152 million for addi- is a slight weighting toward petroleum and coal tional output of 8 million tonnes a year of Marra projects. Mamba ore. Proposed energy developments account for Having come on stream, the above projects no 49 per cent (36) of the 74 advanced projects but longer appear in ABARE’s project list. account for 52 per cent (or $11.8 billion) of the
3 Committed projects, April 2005 — number and estimated capital cost, by state
Minerals Energy projects Mining projects processing Total Number Cost Number Cost Number Cost Number Cost no. $m no. $m no. $m no. $m New South Wales 8 1 030 3 548 3 348 14 1 926 Victoria 5 1 887 3 680 0 0 8 2 567 Queensland 15 3 417 5 390 3 548 23 4 355 Western Australia 6 1 987 17 5 527 2 696 25 8 210 South Australia 0 0 1 250 0 0 1 250 Tasmania 1 450 0 0 0 0 1 450 Northern Territory 1 3 000 0 0 1 1 860 2 4 860 Australia 36 11 771 29 7 395 9 3 452 74 22 618
398 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects estimated capital cost of $22.6 billion for all billion; and the $1.1 billion Otway Gas project in advanced projects (table 3). Three large petro- offshore Victoria, aiming for completion in mid- leum developments account for over half of the 2006. The twenty-one coal projects listed have a total value of energy projects. The largest of these combined capital cost of $4 billion. is ConocoPhillips’ $3 billion, 3.5 million tonnes In the past six months there has been a fall in a year capacity Darwin LNG plant, scheduled the number and value of minerals mining proj- to be completed early in 2006 and which will ects currently committed. At the end of April use ‘recycled’ Bayu/Undan gas as feed. The 2005, there were 29 advanced minerals mining recycled gas is natural gas that has been stripped projects valued at $7.4 billion, compared with of its liquids (condensate and LPG) during the 33 projects valued at $8.3 billion at the end of fi rst phase of the Bayu/Undan project (the Gas October 2004. This fall partly refl ects the rela- Recycle project, completed in March 2004) tively high rate of minerals mining projects that and reinjected into the reservoir. The two other were completed in the six months to April 2005 major petroleum projects are both Woodside — thirteen of the total of 23 completions in this operated: the Enfi eld oilfi eld scheduled to be period were minerals mining projects. Never- developed late in 2006 at a capital cost of $1.48 theless, a signifi cant number of those completed
Advanced minerals and energy projects Capital expenditure D April 2005 $0–100m Alcan refinery $101–500m expansion $501–1000m Darwin LNG plant (alumina) >$1000m Processing Mine/ Hamersley mines expansion facility platform (iron ore) Weipa (bauxite) Rapid growth Darwin Mt Garnet (zinc) Rio Tinto rail duplication project (iron ore) (stage 2) (iron ore) Yabulu refinery (nickel) Perseus (gas) Townsville zinc refinery Goodwin A LPT (gas) Ellendale (diamonds) BMA coal expansion Newlands Northern (coal) John Brookes Charters Towers (gas) Mt Isa smelter (copper) (gold) Hail Creek (coal) Burrup Northern 3500 orebody Dalrymple Bay Fertilisers coal terminal (ammonia plant) (copper) Twin Hills (gold) (copper) Carborough Downs (coal) Blackwater Nifty (coal handling Yandicoogina (iron ore) Moranbah (Millenium) (coal) and processing) Enfield Red Mountain JV (coal) (oil) West Angelas (iron ore) Dawson Grasstrees (coal) Complex (coal) Paulsens Minerva (coal) Rolleston (coal) Lytton (gold) (coal) Magellan (lead) (stage 2) Kogan Creek refinery (petroleum) Roma to Brisbane gas pipeline Mt Gibson (iron ore) Perseverence (nickel) Brisbane Mt Owen (coal) Cliff Head (oil) Project Magnet Ashton (coal) Tomago Koolyanobbing (iron ore) (iron ore) Wambo rail (coal) (aluminium) Maggie Hays (nickel) Gingin Ulan (coal) Kurri Kurri (minerals sands) Perth Flying Fox (nickel) Ridgeway Deeps (gold) (aluminium) Gincko (mineral sands) Austar (coal) Kwinana refinery Cowal Sydney (diesel) Adelaide (gold) Douglas Wambo opencut (mineral sands) Canberra (coal) Pinjarra refinery Ravensthorpe Kurnell refinery (alumina) (nickel) Melbourne (petroleum) New Bendigo (gold) Worsley refinery Port Kembla hot (alumina) Ballarat East (gold) strip mill (steel) Casino (gas) Camden (gas) Otway (gas) Basker and Manta (oil) Yallourn (coal) Altona refinery (petroleum) BassGas (gas) Hobart australiancommodities • vol. 12 no. 2 • june quarter 2005 399 development projects projects were replaced by projects newly Value of committed projects committed in the past six months. E by commodity, April 2005 Projects aimed at producing commodities where the current global outlook for demand and $22.6 billion prices is particularly strong — such as iron ore Other 11% and nickel — account for a signifi cant propor- Petroleum 35% tion of the minerals mining category. Of the 29 Iron ore 14% minerals mining projects in total, twelve (or 41 per cent) are iron ore or nickel projects and together these account for almost two-thirds (or Nickel 7% $4.8 billion) of the total capital expenditure in this category. Three large projects, all in Western Gold 4% Australia, make up almost half of the total value of advanced minerals mining projects — BHP Alumina 11% Coal 18% Billiton’s $767 million Rapid Growth (iron ore) Project 2, with an expected startup of mid-2006; Rio Tinto’s $1.25 billion Yandicoogina iron ore mine expansion, scheduled for completion later currently under construction and expected to be this year; and BHP Billiton’s $1.4 billion green- commissioned late in 2007. fi elds Ravensthorpe nickel mine, expected to be Figure E provides a breakdown of proposed commissioned in 2007. In the case of iron ore capital expenditure on advanced projects, by and nickel, the impetus for development has major commodity grouping. Figure F shows the come mainly from China’s burgeoning demand estimated total capital cost on a state basis. for materials to meet its steel making require- The number of advanced projects now sched- ments. uled to be completed within the next fi ve years At the end of April 2005, there were nine (74) is a new record, being one more than the advanced minerals processing projects, one less number recorded in October 2004 (fi gure G). than the ten committed at the end of October However, the total value of advanced projects 2004. Three alumina projects together contribute in April 2005 (in 2005 dollars) is just below the almost 75 per cent of the total of $3.5 billion record established in October 2004 (fi gure H). in capital expenditure for advanced minerals The real average value of advanced projects processing projects. The largest, in terms of at the end of April 2005 ($306 million) is 15 per capital cost, is Alcan’s $1.86 billion refi nery expansion at Gove in the Northern Territory. The expansion is expected to add 1.7 million tonnes Value of committed projects a year to Australia’s alumina capacity following F by state, April 2005 commissioning in 2007. $22.6 billion Natural gas is expected to replace fuel oil as the main energy source for the expanded opera- tions at Gove if fi nal commitments are made Northern New South Wales 9% Territory 22% to develop Woodside’s Blacktip gasfi eld in the Victoria 11% Bonaparte Basin and to build the 1000 kilometre Trans Territory gas pipeline from Blacktip to Tasmania 2% Gove. (The capital cost of these two proposed South Queensland developments is expected to exceed $1 billion). Australia 1% 19% In Townsville, QNI’s $467 million expansion of its Yabulu nickel refi nery — a development linked to BHP Billiton’s Ravensthorpe nickel mine development in Western Australia — is Western Australia 36%
400 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects
Number of committed projects cent less than the average for all years since 1995 G ($358 million) (fi gure I). Minerals processing Less advanced projects Minerals 60 Projects in the less advanced planning category Energy are either still undergoing feasibility study (in some selected cases, prefeasibility study), or 40 no defi nite decision has been taken on develop- ment following the completion of a feasibility study. Some of these projects cannot proceed 20 for several years and may confront changed economic or competitive conditions, or may be 0 targeting the same emerging market opportunity, 1996 1998 2000 June Dec AprOct AprOct Apr necessitating rescheduling. In addition, securing 2002 2003 2004 2005 fi nance for project development — even for high quality projects that have a high probability of success — can present problems, particularly in periods when there is perceived to be excess Value of committed projects global supply and/or an uncertain demand H In 2005 dollars outlook. However, despite the uncertainty that attaches Minerals processing 20 to projects at these earlier stages of consideration, Minerals they provide a useful indication of the nature and Energy 15 extent of the platform for future development of the Australian minerals and energy sector. 10 Of the 229 projects in total (a record) in ABARE’s April 2005 project list, two thirds (155 projects) remain uncommitted. Table 4 contains 5 a summary of the numbers and commodity distribution of the 155 uncommitted projects $b together with their potential capital expenditure. 19961999 2002 2005 The potential capital expenditure data should be used as a rough guide only. This is for two main reasons: fi rst, many of the projects included under the one commodity heading are effec- Average value of committed projects tively competing with one another and in most I In 2005 dollars cases market conditions will preclude some from proceeding, at least in the timeframe speci- fi ed; second, capital expenditure data for many 400 early stage projects are either not yet available or, if available, will change signifi cantly if they 300 do proceed to development. However, most of the projects that will ulti- 200 mately proceed to development in the medium term are included in ABARE’s current list of 155 100 less advanced projects. Some of the more notable large scale proj- $m ects in ABARE’s April 2005 list that are still 19961999 2002 2005 undergoing feasibility studies include: Chevron australiancommodities • vol. 12 no. 2 • june quarter 2005 401 development projects
Texaco’s proposed $11 billion Gorgon LNG Projects new to ABARE’s list development on Barrow Island; Exxon Mobil/ Oil Search’s longstanding $2.1 billion PNG to There are 47 projects at less advanced plan- Queensland gas pipeline proposal that has now ning stages that are new to ABARE’s list since progressed to the FEED (front end engineering October 2004. In the previous six month period and design) stage; WMC Resources’ proposal (to October 2004) there were 32 projects new to further expand its Olympic Dam copper/ to the list. The number of newly listed projects uranium mine, to more than double its current in this twelve month period (79) is very high output capacity, at a capital cost of $2–4 billion; compared with earlier periods and is another and Hancock Prospecting/Kumba Resources’ indication of signifi cant investment interest in $2.2 billion Hope Downs iron ore development the mineral resources sector. Figure J provides a in the Pilbara. summary of numbers of newly listed projects in the six months ended April 2005 by commodity category.
4 Number of less advanced projects, April 2005
Potential capital NSW Vic Qld WA SA Tas NT Aust expend no. no. no. no. no. no. no. no. $m Mining – energy projects Black coal 13 0 12 0 0 0 0 25 4 214 Petroleum 0 2 2 9 0 0 4 17 38 074 Uranium 0 0 1 0 1 0 0 2 44 Subtotal 13 2 15 9 1 0 4 44 42 332
Mining – minerals projects Copper 0 0 5 2 3 0 2 12 3 624 Gold 4 0 0 12 1 0 1 18 1 097 Iron ore 0 0 0 13 0 0 0 13 12 547 Lead-zinc-silver 3 0 2 1 2 1 1 10 1 288 Mineral sands 3 3 1 3 1 0 0 11 623 Nickel 0 0 1 8 0 1 0 10 4 039 Rare earths 0 0 0 2 0 0 0 2 124 Tin 0 0 0 0 0 1 0 1 53 Other commodities 1 0 3 10 0 0 1 15 5 453 Subtotal 11 3 12 51 7 3 5 92 28 848
Minerals processing Alumina 0 0 2 1 0 0 0 3 2 800 Aluminium 3 0 2 0 0 0 0 5 4 800 Crude iron and steel 2 0 1 0 0 0 0 3 1 450 Magnesium 1 1 0 0 0 1 0 3 2 465 Nickel 0 0 0 2 0 0 0 2 341 Titanium minerals 1 0 0 2 0 0 0 3 720 Subtotal 7 1 5 5 0 1 0 19 12 576
Total 31 6 32 65 8 4 9 155 83 756
402 australiancommodities • vol. 12 no. 2 • june quarter 2005 development projects
Given the particularly strong prices and Of the seven iron ore projects new to the list, robust demand for commodities such as coking three are already committed, a refl ection of the coal, iron ore and petroleum, it is not surprising current rapid pace of iron ore developments. that projects in these commodity categories Three of the fi ve petroleum projects new to the account for the majority of projects new to the list are located in offshore Western Australian list. One of the more signifi cant coal based proj- petroleum provinces. They are the Angel gas ects newly listed is Macarthur Coal’s $1 billion production platform and the Stybarrow oil and Queensland Coke Project, near Rockhampton. gas fi eld, both in the Carnarvon Basin, and the The project is currently undergoing feasibility Pluto gas fi eld in the Browse Basin. studies; however, if it proceeds, output of coke (primarily for export) could ultimately reach 3.2 million tonnes a year.
australiancommodities • vol. 12 no. 2 • june quarter 2005 403