AUSTRALIAN ENERGY AUSTRALIAN ENERGY SUMMITSUMMIT

IIR ConferencesIIR ConferencesSydney, March 2005Sydney, March 2005

Keynote Address:Keynote Address:

World Energy Market World Energy Market Developments and Their Impact on Developments and Their Impact on AustraliaAustralia

Robert PritchardRobert Pritchard

ResourcesLaw InternationalResourcesLaw International

ResourcesLaw: What We ResourcesLaw: What We DoDo (1) (1) We work on policy, strategy, We work on policy, strategy,

opportunities, transactions and risks opportunities, transactions and risks across the energy sector and the across the energy sector and the dynamics of the interplay of these dynamics of the interplay of these issues on investment decisionsissues on investment decisions

Half of our work is offshore, half of it Half of our work is offshore, half of it onshoreonshore

Half of our clients are public sector, Half of our clients are public sector, half of them privatehalf of them private

ResourcesLaw: What We ResourcesLaw: What We Do (2)Do (2)

Our practice covers all energy forms: oil, Our practice covers all energy forms: oil, gas, coal, nuclear, hydro, biomass, wind gas, coal, nuclear, hydro, biomass, wind and solarand solar

We factor sustainability and climate risk We factor sustainability and climate risk into all of our thinkinginto all of our thinking

We maintain extensive international We maintain extensive international networks through the World Energy networks through the World Energy Council and other affiliationsCouncil and other affiliations

We are affiliated with the Piper Alderman We are affiliated with the Piper Alderman law firm, with offices in Sydney, law firm, with offices in Sydney, Melbourne, Brisbane and AdelaideMelbourne, Brisbane and Adelaide

The Four Energy GodsThe Four Energy Gods

MonopolusMonopolus

CompetitusCompetitus

RegulatusRegulatus

SustainabusSustainabus

The 3 Current “Big The 3 Current “Big Picture” Issues in Picture” Issues in World EnergyWorld Energy1.1. Energy SecurityEnergy Security

2.2. Climate ChangeClimate Change

3.3. Growing Energy DemandGrowing Energy Demand

The First “Big Picture” The First “Big Picture” Issue in World Energy: Issue in World Energy: Energy SecurityEnergy Security

Main Causes of Energy Main Causes of Energy Supply InsecuritySupply Insecurity

1.1. Over-dependence on any single form Over-dependence on any single form of primary energyof primary energy

2.2. Over-dependence on any single Over-dependence on any single sourcesource

3.3. Over-dependence on any single Over-dependence on any single energy infrastructure facilityenergy infrastructure facility

NOT a shortage of resources!NOT a shortage of resources!

The Myths of “Peak The Myths of “Peak Oil” and Peak Other Oil” and Peak Other Fossil FuelsFossil FuelsReserves-to-Production RatiosReserves-to-Production Ratios

Oil: Oil: 41 years41 years Gas: Gas: 67 years67 years Coal: 192 yearsCoal: 192 years

Source of data and graphs in this presentation: BP Source of data and graphs in this presentation: BP Statistical Statistical

Review 2004Review 2004

Oil Reserves-to-Oil Reserves-to-Production (R/P) ratiosProduction (R/P) ratios

Natural Gas Reserves-Natural Gas Reserves-to-Production (R/P) to-Production (R/P) ratiosratios

Where Are the Where Are the Energy Security Energy Security Risks?Risks?

Increasing reliance on imports of oil, Increasing reliance on imports of oil, largely driven by demand from US and largely driven by demand from US and ChinaChina

Increasing dependence on Middle EastIncreasing dependence on Middle East Doubts about production capacityDoubts about production capacity Decreasing value of IEA emergency Decreasing value of IEA emergency

stockpiling systemstockpiling system Transport fuels are 95% dependent on oilTransport fuels are 95% dependent on oil

Where Are the Energy Where Are the Energy Security Risks? (contd)Security Risks? (contd)

Increasing dependence on reliability of Increasing dependence on reliability of transportation and storage infrastructuretransportation and storage infrastructure

Terrorism / maritime terrorism Terrorism / maritime terrorism (especially in Strait of Malacca)(especially in Strait of Malacca)

Modern emphasis on efficient use of Modern emphasis on efficient use of capital / “just-in time” management of capital / “just-in time” management of inventory costs (NB: this is a self-inventory costs (NB: this is a self-imposed risk)imposed risk)

The Second “Big The Second “Big Picture” Issue in World Picture” Issue in World Energy: Climate Energy: Climate ChangeChange

Conclusions of World Conclusions of World Energy Congress, Sydney Energy Congress, Sydney 20042004

The “new renewables” will be The “new renewables” will be inadequate*inadequate*

* * Wind power is the star performer and Wind power is the star performer and recently achieved 47,000 MW worldwide recently achieved 47,000 MW worldwide installed capacity. However, the WEC 2003 installed capacity. However, the WEC 2003 Survey of Energy Resources predicts that the Survey of Energy Resources predicts that the new renewables will only have achieved a new renewables will only have achieved a total share of primary energy of 5% by 2030.total share of primary energy of 5% by 2030.

Kyoto will not have a material effect on Kyoto will not have a material effect on emissions reductionemissions reduction

All energy options must be kept open All energy options must be kept open and no technology should be idolised and no technology should be idolised or demonisedor demonised

Conclusions of World Conclusions of World Energy Congress, Sydney Energy Congress, Sydney 2004 (contd)2004 (contd)

The Third “Big Picture” The Third “Big Picture” Issue in World Energy: Issue in World Energy: High Energy PricesHigh Energy Prices

Effect of High PricesEffect of High Prices

In 2004/05, the price hike has been In 2004/05, the price hike has been very much demand-driven (mainly the very much demand-driven (mainly the US and China)US and China)

Since 1973, every sustained oil price Since 1973, every sustained oil price hike has lowered global GDP growth hike has lowered global GDP growth and reduced energy intensity for the and reduced energy intensity for the following 2 yearsfollowing 2 years

Source: WEC

Current high prices are a spur to cross-Current high prices are a spur to cross-border coal and gas trade (especially border coal and gas trade (especially LNG trade)LNG trade)

Nonetheless, there is nothing to prevent Nonetheless, there is nothing to prevent an energy price-induced economic an energy price-induced economic recession - this is not yet predicted but recession - this is not yet predicted but it is not entirely fanciful to imagine one it is not entirely fanciful to imagine one eithereither

Effect of High Prices Effect of High Prices (contd)(contd)

How is Our Part of the How is Our Part of the World Organising its World Organising its Response to the 3 “Big Response to the 3 “Big Picture” Issues in World Picture” Issues in World Energy?Energy? OPEC (Indonesia will have to quit)OPEC (Indonesia will have to quit) IEA (stockpiling only a temporary solution)IEA (stockpiling only a temporary solution) IEF (new producer-consumer dialogue)IEF (new producer-consumer dialogue) APEC Energy Security Initiative (emphasis APEC Energy Security Initiative (emphasis

on expanding LNG trade but nuclear power on expanding LNG trade but nuclear power also back on the agenda)also back on the agenda)

ASEAN Energy Cooperation (“ASEAN ASEAN Energy Cooperation (“ASEAN Vision 2020” and the second 5-year Vision 2020” and the second 5-year energy plan)energy plan)

ASEAN + 3 (includes China, Japan and ASEAN + 3 (includes China, Japan and Korea)Korea)

ASEAN + 3 + 2 others (includes ASEAN + 3 + 2 others (includes Australia and New Zealand)Australia and New Zealand)

How is Our Part of the How is Our Part of the World Organising its World Organising its Response …? (contd)Response …? (contd)

How Should Australia as a How Should Australia as a Nation Respond to the 3 Nation Respond to the 3 “Big Picture” Issues in “Big Picture” Issues in World Energy?World Energy?1.1. Reaffirm our commitment to open Reaffirm our commitment to open

global energy marketsglobal energy markets

2.2. Adopt a diversified portfolio of Adopt a diversified portfolio of interchangeable energy forms and interchangeable energy forms and energy supply sourcesenergy supply sources

3.3. Increase interconnection of energy Increase interconnection of energy systemssystems

How Should Australia How Should Australia as a Nation Respond …? as a Nation Respond …? (contd)(contd)

4.4. Encourage timely investment in Encourage timely investment in energy production, transportation energy production, transportation and storage facilitiesand storage facilities

Note: An ABARE/ResourcesLaw International study for the APEC Energy Working Group on the costs of energy supply disruptions will be released in May 2005

Finally, How Should Finally, How Should Australian Businesses Australian Businesses Respond?Respond?1.1. Don’t rely on financial hedgesDon’t rely on financial hedges2.2. Consider investment in inventory - Consider investment in inventory -

weigh up the possible cost of being weigh up the possible cost of being caught short against the actual cost of caught short against the actual cost of the sunk capitalthe sunk capital

3.3. Look at alternatives (dash for gas, look Look at alternatives (dash for gas, look at renewables and practice DSM)at renewables and practice DSM)

4.4. Prepare your contingency plans for a Prepare your contingency plans for a possible oil price-induced recessionpossible oil price-induced recession

5.5. If you are an exporter of energy, lock in If you are an exporter of energy, lock in your markets for as long as you canyour markets for as long as you can