OPENING ADDRESS TO THE

ENERGY SECURITY IN ASIA PACIFIC POLICY FORUM

G’DAY LA AUSTRALIA WEEK 2006

ENERGY SECURITY IN THE ASIA PACIFIC REGION

LOS ANGELES, CA

18 JANUARY 2006

Introduction

It is a great pleasure to be here today as part of the G’day LA Australia Week programme.

Most of the programme for Australia week is about promoting Australian products here in LA. But today’s event is a unique opportunity for me to speak on the wider issue of energy security, primarily from an economic perspective.

Ensuring access to adequate, reliable and reasonably-priced energy is a key challenge facing the countries of the Asia-Pacific region, and indeed the whole world. For the Asia-Pacific, energy security is a key issue because we have large energy users without sufficient domestic reserves and large energy producers with surplus capacity. It is also an issue that has taken on added importance because of the success of Asia-Pacific economies – the rapid development of large parts of the region has brought future energy needs into economic and political focus.

The energy security strategies we choose to adopt will powerfully shape our region’s economics and geo-politics. They will either draw us together, strengthening regional cooperation, or pull us apart, risking conflict and instability.

In my remarks today, I want to draw attention to Australia’s capabilities as an energy supplier, the Asia-Pacific region’s long-term energy outlook and preferred ways of building regional and global energy security.

I believe that true energy security is not possible without effective energy markets, strong regional cooperation, and sound policy and regulatory frameworks. My vision is the creation of an ‘energy freeway’ linking energy suppliers and consumers across the Asia-Pacific region for the benefit of all.

Australia’s Capabilities as an Energy Supplier

Australia is a resource rich country, with extensive untapped reserves of coal, uranium and natural gas.

Chart 1 – Depletable Resources (in Australia) at Current Production Levels – Years of Supply

Source: Australian Government Energy Taskforce Securing Australia’s Energy Future (2004)

Australia has 8 per cent of the world’s total reserves of coal, around one third of the US’s coal reserves.

Despite this relatively small share of total reserves, Australia has been the world’s largest exporter of coal since 1986. In 2004, Australia accounted for 55 per cent of total world exports of metallurgical coal and 20 per cent of total world exports of thermal coal.

Australia has 2 per cent of the world’s natural gas reserves – the US’s share is 3.2 per cent.

Since 1989 Australia has emerged as one of the world’s largest exporters of Liquid Natural Gas (LNG).¹

By 2030, North America is expected to import 18 per cent of its natural gas requirements.² A number of proposals have been put forward for LNG import terminals along the North American west coast, many of which have an Australian connection. With their long and successful track record in the LNG industry, Australian companies have the expertise to develop and operate these terminals, should these projects proceed.

Australian firms have also emerged as significant long-term suppliers of LNG to China. Australia’s Northwest Shelf venture has been chosen by China to be the sole supplier of LNG to its first LNG project in Guangdong province. The contract will be worth between $A20 and $A25 billion – $US15 to $US18 billion – in export income for Australia. This is Australia’s largest single export deal.

Australia has 40 per cent of the world’s proven reserves of uranium, the largest share of any country. The US’s share, in contrast, is 3 per cent.

Australia is the world’s second largest uranium producer, accounting for 22 per cent of the world’s production in 2004, just behind Canada’s 30 per cent share. Australian uranium is exported under stringent safeguards to ensure that our exports are used for peaceful purposes. Australia’s reserves base means that it is well placed to benefit from any expansion in the global uranium market.

In addition to our resource wealth, Australia has several other key features that make it a valuable energy supplier and trading partner.

Australia’s political stability and economic strength help create the right conditions for smooth trade flows. According to the latest World Competitiveness Yearbook, Australia has the lowest risk of political instability in the Asia Pacific and the second lowest in the world. Australia ranked fourth in the world for the transparency of government policy.³

We also boast an open, efficient and transparent legal framework. And specific to energy, the International Energy Agency has commented that policies such as our tax uplift and geoscience surveys are a sound approach to attracting investment.⁴

Australia’s export capabilities are being boosted by significant production and infrastructure investment. In particular, around $A4 billion ($US3 billion) has been committed to improving port infrastructure and over $A20 billion (more than $US15 billion) is being invested in energy related projects, including nearly $A15 billion alone on the Gorgon LNG project off the west coast of Australia.

Before turning to the Asia-Pacific region’s long-term energy outlook, I want to say something about recent increases in the prices of key energy commodities.

Recent Developments in Energy Prices

Strong global demand is resulting in record prices for commodities generally. As a large exporter of commodities, Australia is benefiting from these price rises.

However, the energy market development that has received the most popular attention over the last year is the increase in the price of oil, as shown in Chart 2.

Chart 2 – Oil Prices and Contributions to Growth in Demand

Souce: IEA Oil market report, (December 2005); Datastream

This run-up in oil prices is unlike those we have seen before. In contrast to the supply shocks of the 1970s, the price rises have primarily been driven by increasing energy demand, mainly the rapid economic development of China and India.

However, high oil prices have had more limited impact on economic growth than was the case during the oil shocks of the 1970s because of the reduction in oil dependence of developed economies.

In addition, markets are more flexible and inflation expectations are better anchored than in the 1970s and early 1980s. This means that the second round effects of higher oil prices have not impacted on the world economy like they did in the past.

While high oil prices have not caused the economic damage and dislocation of the 1970s oil shocks, this is no reason to be complacent about the scale, urgency and complexity of our long-term energy supply challenge.

The Long-term Energy Needs of the Asia-Pacific

Let me now turn to the outlook for energy demand, particularly in the Asia Pacific region.

In 2002, the APEC region accounted for 56 per cent of world economic output and 58 per cent of world total primary energy consumption. In 2002, four economies – the United States, China, the Russian Federation and Japan – accounted for 45 per cent of world total primary energy consumption.

Chart 3 shows how world demand for some of our key energy sources has changed over the last 30 years and is expected to change over the next 30 years.

Chart 3 – Increase in World Demand for Energy by Fuel Over Time

Source: Australian Government Energy Taskforce Securing Australia’s Energy Future (2004)

Over the coming decades, the region’s energy requirements will grow strongly. Fossil fuels will play a large role in meeting these requirements, despite potential gains in energy efficiency and use of alternative fuels.

China will be the major driver of the region’s future energy demand. The Chinese Government projects a doubling in energy use between 2000 and 2020. This appears conservative given China aims to quadruple GDP over this period and energy use is now growing faster than GDP. For example, Chinese officials reported last year that China is expected to have 140 million automobiles by 2020, seven times more than now.

The US’s energy requirements will also be enormous. US energy consumption is projected to increase by close to one third by 2020.

The Asia-Pacific’s dependence on external sources of energy will increase. In APEC countries, the ratio of domestic production to consumption has declined from 96 per cent in 1992 to 91 per cent in 2002 and is projected to fall further to 79 per cent by 2030.⁵

The APEC region tends to produce slightly more coal and gas, and substantially less oil, than is consumed within the region. APEC economies’ oil self sufficiency has declined from 77 per cent in 1992 to 67 per cent in 2002, and is projected to fall to 38 per cent in 2030.⁶

Chart 4 gives you an idea of the dependence of key economies on foreign energy sources. It highlights that our region has some countries with extensive energy resources, while others are virtually totally dependent on imported energy.

Chart 4– Energy Self Sufficiency for Certain Energy Resources –

Domestic energy production as a percentage of consumption

Source: ABARE Energy Security in APEC (2005)

The Middle East will continue to supply a large part of the region’s oil, exposing the Asia-Pacific to developments in this region.

At the end of 2003, 72 per cent of the world’s proven oil reserves were located in the Middle East and Africa regions. According to the International Energy Agency, the share of the Middle East in world oil production is projected to increase to 46 per cent in 2030 from 30 per cent in 2003.⁷

As the Asia-Pacific region’s energy trade grows, so will its vulnerability to supply disruptions. Today, over 60 per cent of the world’s oil is shipped on 3,500 tankers through a small number of ‘chokepoints’ – straits and channels narrow enough to be blocked, and vulnerable to piracy and terrorism. These chokepoints are illustrated in Chart 5.

Chart 5 – World Oil Flows and Major Chokepoints

Source: IEA China’s scramble for energy security: an analysis of recent activities (2005)

By far the most important chokepoints are: the Strait of Hormuz (the entrance to the Persian Gulf from the Indian Ocean), through which 15.3 million barrels of oil are moved daily; and the Strait of Malacca, between Indonesia and Malaysia.

Thirty percent of the world’s trade and 80 per cent of Japan’s crude oil passes through the latter, including half of all sea shipments of oil bound for East Asia and two-thirds of global LNG shipments. The Malacca Strait is very shallow and only 500 metres wide at the narrowest point.

These chokepoints highlight the importance of regional and global co-operation to secure energy supply networks.

Responding to the Region’s Energy Supply Challenge

How do we respond to the challenges presented by this outlook? There are many different ways to answer this question, and no doubt the panel of experts here today will provide some alternative views.

Let me put forward a simple framework.

Energy security can be seen in one of two ways.

On the one hand, energy security can be seen as a race between nation-states to lock up and monopolise available energy supplies.

On the other hand, energy security can be viewed as a joint project to build open and efficient energy markets, remove impediments to exploration and development, promote energy-conserving technological change and – at the national level – to put in place sound regulatory and policy frameworks. This project, if realised, would create an ‘energy freeway’ linking suppliers and consumers with benefits for all.

The first approach to energy security might have some attraction, but cannot succeed in meeting the region’s long-term energy requirements. It views energy security as a zero-sum game: an inevitable struggle over limited resources with a winner-takes-all outcome. It is not hard to see how this approach can lead to confrontation and conflict.

Price signals in an efficient open market will promote new and more efficient investment, give incentives for further exploration and promote more efficient extraction and use of key resources. As prices rise the incentive to improve the efficiency with which we use scarce resources becomes stronger. And alternative fuels become more commercial.

True energy security on a long-term basis can best be achieved through concluding long-term, commercial contracts with reliable suppliers – contracts that are enforceable, with clear legal title and certainty.

A market based solution will give the right signal to producers and to consumers. It will make clear the opportunity cost of using energy resources, thereby encouraging more and better investment in additional sources of supply and improving the efficiency with which they are used. That has to be good for both producers and consumers and better for the environment.

A market based approach based on long-term contracts would help us build an ‘energy freeway’ – which links energy suppliers and consumers – to ensure energy security.

This energy freeway must be built on strong foundations, identified by APEC energy ministers at their meeting in October 2005.

These foundations include:

• the creation of transparent and efficient energy markets, including the removal of domestic price subsidies and price controls, provision of high quality market data, and effective mechanisms to respond to short term supply disruptions;
• removing regulatory, legal and other barriers to expanded energy trade;
• the removal of impediments to exploration, development and investment;
• promotion of greater energy efficiency through the adoption of new and cleaner technologies; and
• measures to attract finance for energy projects and support energy diversification.

This is an ambitious agenda, requiring a substantial commitment to co-operation at a regional and global level, and difficult, sometimes sensitive, reforms in many of our economies.

While some promising progress has been made in realising these ambitions, much more needs to be done.

In Australia, some of our key priorities include: mapping and assessing the supply chain vulnerabilities in each of the electricity, gas and liquid fuel energy sectors; identifying infrastructure that is critical to the supply of energy; and analysing contingency planning for each energy sector.

Australia is playing an important role in shaping the regional and global approaches to energy security and sustainable development.

Australia is a founding member of the Asia-Pacific Partnership on Clean Development and Climate which hosted its inaugural meeting in Sydney last week.

The Partnership will promote the deployment of promising technologies that reduce the intensities of air pollution and greenhouse gas emissions. Access to a diverse range of reliable and affordable energy sources, and efforts to reduce the greenhouse intensity of a wide range of fossil fuels, can provide an important energy security benefit to us all.

The Partnership is well placed to meet many of these challenges for the Asia Pacific, with representation by China, India, Japan, South Korea and the United States – equating to half of the worlds’ energy consumption.

Australia will also play a lead part in the energy security dialogue through its role as chair of the Group of Twenty (G-20) in 2006. Under our broad host year theme of ‘Building and Sustaining Prosperity’, issues the G-20 is likely to consider include: assessing the macro-economic impact of changing demand and supply patterns for resource commodities and energy; improving the efficiency, transparency and predictability of markets; and exploring the impact of resources on economic development.

Conclusion

There are several key messages I would like to leave with you today, in addition to the fact that Australia should be seen as important supplier in world energy markets.

First, energy security is not a zero-sum game. It should not be viewed as an inevitable conflict over scarce resources, but as an opportunity to foster closer economic integration.

Second, energy security is not possible without effective energy markets, strong regional cooperation, and sound policy and regulatory frameworks at the national level. If we can build an ‘energy freeway’ linking energy suppliers and consumers across the Asia-Pacific, this will provide a powerful spur to development and sustainable growth in our region.

Third, Australia intends to play a key role in the energy security debate, not only as an energy supplier, but as a source of ideas and leadership through forums such as the G-20, APEC, and the Asia-Pacific Partnership on Clean Development and Climate.

Finally, there is considerable good will in regional and global fora to work towards their goals, goals that are quite achievable and essential for our long term stability and prosperity.

¹ Australia’s LNG production capacity is 11.7 million tonnes per year, Indonesia’s is 29.4 million tonnes and Qatar has a 20 million tonne production capacity. Russia is also entering the market with Sakhalin ramping up to full production of 9.6 million tonnes by 2008.

² IEA World Energy Outlook (2004)

³ World Competitiveness Yearbook (2005)

⁴ IEA Energy Policies of IEA Countries – Australia – 2005 Review (2005)

⁵ ABARE Energy Security in APEC (2005)

⁶ ABARE Energy Security in APEC (2005)

⁷ IEA World Energy Outlook (2005)