James Hunsaker, Director Gas & Power Marketing, ExxonMobil Australia
Speech to Australian Energy & Utilities Summit, Sydney
26 June 2006

Click here for PDF copy of slides

Slide 1 
Thank you for the introduction, and for your invitation to appear here today.

I am delighted to see how much public discussion there is around energy policy right now.

It's good to see that the Government has recognised the need to look at all the options open to us in considering how we meet the growing demand for energy.

Today I'd like to present what I believe is the best solution to the challenge of supplying the forecast growth in demand for power generation while limiting increases in greenhouse gas emissions.

Slide 2 - History in Australia

But first I'll explain a little about ExxonMobil and how we see the outlook for energy.

ExxonMobil has had a presence in Australia since before Federation.

In fact, we have been a part of the Australian community since 1895, when one of our heritage companies commenced selling lubricating oil from a store front in Collins Street, Melbourne.

We have about 1,700 employees in Australia and our major assets include a 50 percent interest in the Bass Strait Joint Venture, and a 25% interest in the proposed Gorgon LNG project on the Northwest Shelf. We also have approximately 40 percent interest in the PNG Gas Project, of which we are also the operator.

ExxonMobil’s downstream business in Australia operates under the Mobil brand where we are the owner and operator of the Altona Refinery and several distribution terminals.

In addition we supply a retail network of approximately 850 service stations across the country and market lubricants and chemicals throughout widespread distribution networks.

All this makes us the largest integrated petroleum company in Australia and as many of you would be aware we are also the world's largest private oil and gas company.

Our most significant activities in Australia and Victoria have certainly centred around our Gippsland operations.

In the '60s we discovered the world-class Bass Strait oil and gas fields.

Since then Bass Strait has produced two thirds of Australia's cumulative oil requirements and almost 30 percent of total gas.

The flow-on effects from this oil and gas production have contributed over $200 billion to Australia's Gross Domestic Product (GDP) over the last four decades, or some $2.2 billion per annum in nominal terms.

That doesn't include the $300 billion in federal government revenues in real terms - this is 2.1 per cent of all Government revenues collected in the period.

While our oil production declines, Gippsland’s future contribution will increasingly focus on the abundant remaining gas reserves we have.

So from my comments so far you can see we have a lot to do with the energy business in this country, and around the world.

And let's make no mistake about it, when it comes to sustaining our modern way of life, there is nothing more important than access to affordable, reliable energy – energy to fuel vehicles, electrify homes, prepare food, power factories and lift living standards in developed and developing countries alike. 

I'm sure it is well understood in this room, however, much of the public debate on this topic is taken up by those who clearly underestimate the size of the challenge we face in providing that energy.

Slide 3 - Energy Outlook: Challenges and Opportunities for Australia

Each year, ExxonMobil prepares a detailed, long-term energy outlook to help us plan our business and meet the energy challenge in front of us.

The Australian Outlook is outlined in this next chart and it is similar to the global picture.

Out to 2030 – we project energy growth of around 18% above current levels – much lower than the 50 percent increase expected globally.

While renewable energy has an important place in the overall energy mix again they are limited in scope and size in terms of the contribution they can make in the Australian context.

The right hand section of the chart looks specifically at wind and solar and their contribution to Australia's overall energy mix. 

Even though we expect there will be strong growth in wind and solar, their share of total energy demand will still be less than 1% of the total energy supply by 2030.

Looking back at the left hand side of the chart, you can see that gas, shown in red, represents the significant growth area in Australia. Currently it supplies around 20 percent of our energy needs. In 2030 we expect the gas use will double and make up about 40 percent of our energy needs.

Slide 4 - Australia Gas Demand

This chart shows this gas growth by industry segment.

We see gas as the fastest growing major energy source in Australia because it is both economically and environmentally attractive.

In particular this chart also says to me that power generation is a major growth opportunity for gas in Australia.

And the good news is that Australia has abundant gas resources for both the domestic market and exports. Our gas reserves are currently estimated to exceed 140 trillion cubic feet. 

To put that into perspective, this is about 25 times what has come out of Bass Strait in the last 40 years.

Slide 5 - Gippsland Gas

Now even though Bass Strait has supplied 30% of Australia's gas needs for over a third of a century we still have vast reserves left – somewhere in the vicinity of 7 trillion cubic feet.

In fact we have 70% of the gas reserves in eastern Australia - adjacent to most of the country’s major industrial customers.

Gippsland gas is well placed to continue to be a source of energy for new large projects in south eastern Australia and we believe we will continue to underpin economic activity as we are identifying more gas all the time.

For example: in the last year alone we have added 700 billion cubic feet to reserves in Gippsland – enough to power a city of a million people for 15 years.

And today we are out there looking for more gas - recording a 500 square kilometre 3D seismic survey over our Bream field.

And while gas will increasingly be a key fuel source in meeting future energy demand its potential for growth particularly in new base load power generation is a terrific opportunity for our industry, ExxonMobil but also for the broader community.

Indeed by using more gas in power generation we could significantly enhance our ability as a nation to meet our increasing energy needs but at the same time minimising greenhouse emissions – as gas can produce up to 70 per cent less emissions than coal when used to generate power.

In this context I note that the Federal Resources Minister, Ian McFarlane, has launched a government and industry strategy (led by APPEA) aimed at ensuring a greater role for gas fuelling the Australian economy.

I applaud the Minister for embracing the challenge to promote gas into power generation at significantly higher levels.

Slide 6 - Tax Comparisons

So what is it that impedes gas from taking an even larger share of domestic power generation?

To understand this we must first start with an examination of our tax arrangements – in particular how we tax offshore gas in comparison with other energy sources in this country.

This chart shows the patch work of fiscal arrangements that applies to the energy sector.

These figures were published by APPEA in a document called NatGas, the industry's first national strategy document for the development of Australia's natural gas industry.

We have updated the brown coal figure following 2005 tax changes in the Victorian State budget.

As you can see, the various energy sources are operating under vastly different tax regimes.

In fact what this chart says to me is that offshore gas could compete much more effectively into domestic power generation on price today if it was treated equally from a resource taxation standpoint.

The most effective policies are those that help create a business environment that invites investment and stimulates competition.

Clearly the current system of fiscal arrangements between the state and federal governments is restricting competitive market forces and effectively pricing offshore gas out of fair competition for base-load power generation.

This is not a level playing field and it is also preventing us from gaining substantial, low-cost greenhouse gas reduction benefits.

In fact I would go so far as to say that the biggest near term opportunity for greenhouse gas reductions in Australia can be achieved without high cost carbon taxes and emissions trading schemes but by simply leveling the playing field on tax and encouraging more gas in base load power generation.

Slide 7 - Our Proposal

One way to do this would be to offer a rebate to gas fired power generators.

The rebate could be the proportion of the PRRT revenue collected from producers that is greater than the state based royalty.

As you can see from this chart, the long run marginal cost facing new investors in power generation differs between coal and gas by about $1.20 a GJ – roughly the equivalent of the tax distortion created by PRRT on offshore gas versus coal.

Therefore harmonizing the fiscal regimes would make gas very competitive with coal as a fuel for base load power generation. 

If this strategy were pursued it would have minimal impact on the overall market price for gas and also have the potential to accelerate investment in major projects because gas-fired power plants are less costly and quicker to build than coal-fired plants. 

By offering the tax rebate to the generator, additional tax revenue would still be raised from the petroleum liquids produced with the gas.

This may in the long run make such a policy change revenue neutral from a federal budget perspective.

So it doesn't mean that we the producers would pay less tax, in fact, it would result in us contributing more tax.

Slide 8 - Conclusion

To sum up, the main points I would like to leave you with today are as follows.

As we project out into the future, energy demand will double globally by 2030 and will increase in Australia by almost 20 per cent.

Conventional energy - primarily oil, gas and coal - will still be delivering over 90 per cent of Australia's requirements in 25 years' time and gas will be the fastest growing source of conventional energy.

Australia is blessed with abundant gas resources and power generation provides the major growth opportunity with significant environmental benefits.

Therefore we urge policymakers to address the relative tax burden applied to gas as compared to coal.

This is not a plea for special treatment but a request for equal treatment - removing a source of competitive disincentive in the domestic power generation sector so different energy sources can compete fairly.

I appreciate your attention today and I'll now be pleased to answer any questions you have.