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The Western Australia Resources Sector: Continuing Growth

Reg Howard-SmithChief Executive

The Chamber of Minerals and Energy of Western Australia (CME)11 May 2012

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About CMEVision: To champion the Western Australian resource sector and assist it in achieving its vision to lead the world in sustainable practice, through innovation, and continuing to underpin Australia’s position in the global economy.

•In operation for over 110 years.

• Over 200 members representing over 95% of resources production by value in WA.

• Represents both large and small companies – significant membership growth in gold, uranium and iron ore.

CME portfolio interests cover

•Infrastructure

•Environment

•Land Access

•People Strategies

•Occupational Safety and Health

•Economics & Tax

•Regional portfolios

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Iron Ore32%

Alumina11%Gold

21%

Petroleum8%

Nickel10%

Heavy Mineral Sands2%

Other15%

Minerals and Petroleum Employment 2010

Source: DMP and Petroleum Producing Companies

Map of Mineral Mines and Petroleum Fields

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WA Footprint of Mine & Gas Projects 2012

Region Region Area km²

Mining Area km²

Mining %area

Gas Area km²

Gas %area

Gascoyne 156,937 212 0.14 0 0

Goldfields-Esperance

782,175 786.5 0.10 0 0

Great Southern 41,823 14.5 0.03 0 0

Kimberley 465,644 290 0.06 3.0 0.001

Metro Perth 5,650 85 1.50 3.0 0.053

Mid West 471,150 320.5 0.07 10.0 0.002

Peel 5,648 330 5.84 0 0

Pilbara 527,670 1880 0.36 8.0 0.002

South West 26,579 221 0.83 1.0 0.004

Wheatbelt 157,520 343 0.22 3.0 0.002

WA 2,640,796 4,485 0.17 28.0 0.001

Source: DMP

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The Western Australian Minerals and Oil & Gas Industry

In CY2011, the Western Australian resources sector accounted for1:

• $107 billion in sales value

• 95% of the State’s merchandise export income

• 46% of National merchandise export income

• State royalties of ~$4.8 billion

• 101,100 people directly employed in mining + oil & gas [CY 2011]

Source: 1: Department of Mines and Petroleum (DMP) Resource Statistics Release September 2011, WA Treasury, ABS2: Deloitte Access Economics. Reserve Bank - MCA Quarterly Economic Brief, Winter 20112: Minerals industry tax data collection - survey results , 29 August 2011, Deloitte Access Economics

WA Minerals & Petroleum Exports 2010-11 ($101.2b)

Iron Ore - 57%Crude Oil and Condensate - 12%LNG - 9%Gold - 8%Nickel - 4%Alumina - 4%Others - 6%

Nationally, mining industry (excluding O&G):

• Estimated $24.4 billion in company tax/royalties 2010/112

• Average tax take for 2007/8 to 2009/10 period - 41.5%3

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Gas & LNG: 9 projects

- $133b

Iron ore: 16 projects -

$40b

Processing: 3 projects

- $7b

Port/rail/water: 2 projects - $5b

Oil:

3 projects - $4b

Other minerals: 3 projects

- $3b

Power: 3

projects - $2b

TOTAL: $202b

New Resource Projects in Western Australia

Photo courtesy of BHP Billiton Iron Ore

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• The workforce required for current

growth plans in the minerals and

energy sector is expected to reach a

peak of almost 119,500 persons in

2012

• This equates to an additional 30-

35,000 people in next 1-2 years

State Growth Outlook: People

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

0

10,000

20,000

30,000

40,000

50,000

60,000

Minerals & Energy Workforce Outlook(Headcount, 2009-2020)

Estimated available workforce (above 2009)Required minerals & energy workforce (above 2009)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 55

57

59

61

63

65

67

69

71

QLD WA Vic SA NSW TAS

2

3

4

5

6

7

8

9

Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

%

62

63

64

65

66

67

68

69

70

71%

Unemployment Rate (LHS)

Participation Rate (RHS)

Workforce Participation

Source: ABS Cat.: 6202.0 Labour Force, Australia, Labour Force Status

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• Northam and Wheatbelt 12 jobs

• Geraldton, Gascoyne and Midwest 175 jobs

• Kalgoorlie, Goldfields and Esperance 901 jobs

• Port Hedland, Karratha and Pilbara 1,476 jobs

• Bunbury and South West 98 jobs

• Broome and Kimberley 70 jobs

• Albany and Great Southern 13 jobs

Seek.com.au Job Comparisons

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Job Adverts on seek.com.au in WA last week

• Engineers (all disciplines) - 1,719

• Geologists - 240

• Metallurgists - 22

• Surveyors - 104

• Welder - 120

Occupations in Demand

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FIFO: Bringing About Choice for a

Sustainable Workforce

Census data shows in 1921, the population living in metropolitan Australia increased from 43% to almost 70% in 2010.

With most resource projects operating or under development in regional and remote Australia, resource companies are working against this long term trend in sourcing a skilled workforce.

FIFO employment offers companies individuals the spatial and temporal flexibility necessary to develop the resources industry and WA’s continued economic growth.

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Source of FIFO

Gascoyne. 2%

Great Sth/Sth

West. 4%

Mid West. 2%

Perth/Peel. 81%

Interstate. 11%

Source of New FIFO: 2010-2015(By place of residence, incremental to 2009) It is expected that 81% of the total

additional FIFO workforce will choose to be based in the Perth/Peel region.This represents an increase of over 17,000 employees per year over the period. Of the FIFO workforce, 4% is to be based in the Great Southern/South West. The 2% FIFO sourced from the Mid West predominantly constitutes workers who will FIFO (and drive-in-drive-out) of Geraldton.

The survey highlighted a large number of interstate FIFO workers are expected (11% of total), or around 2,200 per year.Queensland, NSW and Victoria were identified as the main sources of interstate FIFO. The ability to rely on interstate FIFO as a source of employment is likely to become increasingly difficult with the increased demand for construction workforce as Queensland rebuilds.

Source: CME State Growth Outlook 2011

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Construction Workforce FIFO vs. Local Resident

2010 2011 2012 2013 2014 2015 (5,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1,200

17,500

32,200

12,800

-200 -1,200

Construction Workforce Breakdown(Headcount incremental to 2009)

FIFO Local Resident Total

As can be seen in the workforce breakdown (left), the majority of incremental construction workforce is to be met through FIFO arrangements (92%).

At the height of demand for construction workers there will be an additional 29,600 FIFO construction workers (92%), and 2,700 local resident construction workers (incremental to 2009).

The remoteness of projects often makes it difficult to establish a residential workforce. FIFO also remains a popular lifestyle choice, which suits many workers and their families.

The short term nature of the required construction workforce will mean that a FIFO arrangement will be most appropriate for the majority of employees, companies and towns during the construction period.

FIFO replaces the need for major coordinated investment and construction in areas of high workforce demand. It allows companies to be agile as long lead times associated with accommodating local residents (vs. FIFO) are not required.

Source: CME State Growth Outlook 2011

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Operations Workforce FIFO vs Local Resident

2010 2011 2012 2013 2014 2015 0

5,000

10,000

15,000

20,000

25,000

30,000

Operations Workforce Breakdown(Headcount incremental to 2009)

FIFO Local Resident

The operating workforce in WA will continue to grow as new assets are commissioned, with the expectation of an additional 27,000 operations personnel required in the industry by 2015.

The largest year on year increase in workforce is expected to occur in 2013, with an additional 5,600 operations employees required in this year over the previous year. This corresponds to the largest drop in construction workforce.

Whilst the additional operations workforce required over the next 5 years will largely be FIFO, there is a much greater proportion of local residents (23%) than is planned for the construction workforce (8%).

The more permanent nature of this workforce better supports the provision of housing and associated amenities required in a permanent place of residence.

Source: CME State Growth Outlook 2011

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People for the Future

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Local Industry Participation

• The development of a high quality and competitive local supplier industry is of vital importance to the WA resources industry.

• The resources industry advocates the policy of full, fair and reasonable opportunity for competitive local suppliers to participate in WA resource projects.

• CME is supportive of the majority of both the State and Federal Government new and existing initiatives:

- WA Governments Local Industry Participation Framework.

- Federal Governments Buy Australian at Home and Abroad Initiative.

- ICN, Enterprise Connect.

• CME and its members are proactively engaged in the above programs.

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Levels of Local Industry Participation for WA Projects

• Proportional spending on the construction phase of oil & gas projects has shifted towards overseas suppliers over the last 30 years.

• However, there continues to be a very high level of local industry participation in WA resource projects.

• CME/APPEA Local Content Study (2011)1:

• WA Government Local Content Report – November 20112

• Publically announced local contracts July 2011 to March 2012 = $15.5 billion3

Sector Construction Operations

Mining 86% 95%

Oil & Gas 58% 83%

Sector Construction Operations

Mining, Oil & Gas 74% 100%

Sources:1: CME/APPEA Local Content Study 20112: Government of Western Australia, Department of Commerce, Local Content Report 2011 – figures for period 1/1/2011 though 30/9/20113: Media Statement, 8 March 2012, Minister for Commence, Hon Simon O’Brien

Core Issues Affecting Local Industry Participation

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Scale Schedule Price

• Scale requirements are greater than ever before:

• Scale confers many advantages:- Purchasing power- Ability to meet any schedule- Ability to retain full-time specialists- Spreads overheads- Constant work maintains skills

• Australian suppliers lack scale compared to overseas competitors:- i.e. AMC Kwinana (multiple users) vs

Hyundai Heavy Industries, Korea

• Ability to achieve schedule is driven to some extent by scale

• A delay of one year effectively delays a unit of production to the end of project life – a huge impact on NPV

• Inability to achieve required schedule is commonly cited by primary contractors when employing overseas suppliers (other reasons being access to proprietary technology, price etc)

• Price differences are driven by differing cost bases for local vs overseas suppliers - Australian labour is

significantly more expensive as comparable labour rates overseas

- Materials are often 10% cheaper for scale purchasers in low-cost countries

- Overheads are likely to be cheaper in low cost countries

- Freight over longer distances is more expensive, but the magnitude of this cost is small*

95-00 00-05 05-10 10-15

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122 140

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Expansions of WA iron ore productionUnit: Additional million tons iron ore

Largest iron ore expansion ever, over twice the expansion seen during prior periods

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Local Industry Participation - Recommendations

Key resource industry recommendations from the broader challenge of increasing local industry participation are:

• Support a real dialogue between government, opposition and the resources sector regarding opportunities, competitiveness and outcomes.

• A broader approach to the definition of local benefit and of the number of companies reporting.

• Guide government investment in common user infrastructure:

- Development of the marine based common user facilities in the Pilbara.

- Expansion of high-wide load network which would enable local fabricators and equipment suppliers to transport more efficiently.

• Get into higher value areas in supply chains by building on R&D capacity e.g. sub sea maintenance in the oil & gas industry.

• Protect and strengthen the role of Industry Capability Network (ICN).

• Industry and government to continue to invest is initiatives to address the skills shortage

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CME State Growth Outlook

• 2012 update, for release in Q4 2012.

• Demand side data sourced via industry survey. Supply side data sourced from State Government agencies.

• Provides an integrated demand and supply outlook and gap analysis on key resource sector inputs for:

• People

• Energy

• Water

• Ports

• Airspace

• Study informs key decision makers of expected demand arising from growth in the mining and resources sector through to 2025.

• Provide a basis for identifying other implications that current growth plans may have for Western Australia, including productivity.

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Thank You

The Chamber of Minerals and Energy of Western AustraliaLevel 7, 12 St Georges Terrace

Perth WA 6000T 08 9325 2955F 08 9221 3701

E chamber@cmewa.comW www.cmewa.com.au