27 February 2013
DFAT_20130227
Thank you for the introduction. My name is Bruce Miller and I am the Australian Ambassador to Japan.
I have been asked to speak today on Australia's resources and energy policy and direction of the Australia-Japan relationship into the future.
History of Japan-Australia resources relationship
Of course, much of our relationship has been built on the resources and energy sectors, a past which is unique in Australia's history and underpinned much of the business relationship over the past 50 years plus. This followed the signing of the Agreement on Commerce between Australia and Japan in 1957, and Japan was designated a Most Favoured Nation.
Japanese investment and long term vision helped to develop the iron ore industry in Western Australia in the late 1960s, which is now Australia's largest export industry worth some A$62 billion (or around ¥ ) in 2011-12. Coal exports were worth A$47 billion in 2011-12, our second largest export. Japan is Australia's largest coal market, taking around 40% of total exports.
Supplies of Australian natural resources, such as iron and coal, helped Japan's industrialisation and economic boom in the 1960s. In 1968, Japan became Australia's largest export market, a position it held for 40 years and has only recently slipped to number two.
Trade between Japan and Australia increased four-fold in the ten years from the mid-1970s to the mid-1980s, much of it in resources and energy commodities. Over the last 10 years too, Australian exports to Japan have doubled, from A$24 billion in 2001 to A$50 billion in 2011. While trade has now diversified into other sectors such as food, education and tourism, energy and resources and related services will continue to be a very large share of this trade.
While the Government does not dictate what and where to export, we know that future resources and energy exports will go to Japan due to the sheer size of Japanese investment, as well as long term contracts for commodities such as LNG which are already in place. In fact, Japanese investment in Australia is worth A$123 billion, much of it in the resources sector. Japan is Australia's third largest foreign investor - behind the US and UK - and the largest Asian investor by a long way.
Government involvement in the resources and energy sector
While Australia is fortunate to have large reserves of natural resources, Australia's success in this area is also due to policies which allow foreign investment, minimising regulatory barriers and export policies which encourage open trade. For instance, Australia does not have export restrictions on any resource or energy commodity. (The only exception to this is uranium which requires export permissions for nuclear safeguards reasons.) Importantly, the Government does not get involved in approvals of prices of commodities, leaving this up to buyers and sellers to determine.
Energy White Paper
Like Japan, Australia is facing its own energy challenges, albeit under very different circumstances. But we are all a part of the global energy market which is evolving rapidly at the moment, including due to shale gas and in the transformation to a cleaner energy future.
In order to map out the future direction for Australia's domestic energy market and energy resources, last year the Australian Government released the Energy White Paper, titled 'Australia's Energy Transformation'.
This White Paper sets out four priority areas to guide the development of Australia's energy systems and the clean energy transformation over the next decade and beyond. These four priorities are:
- delivering better energy market outcomes for consumers, including through energy market reform;
- accelerating our clean energy transformation;
- developing our critical energy resources, particularly natural gas; and
- strengthening the resilience of our energy policy framework.
I don't want to go into too much detail on all of these actions, but I do want to relate how these priorities on Australian energy policy have implications for Japan.
Development of energy resources, particularly gas
Firstly, and most obviously, the further development of Australia's energy resources will benefit Japan. As our largest LNG customer, currently buying around 70% of Australia's LNG, Japan will benefit from the further development of LNG projects in Australia which are scheduled to come on line over the next five years.
IWhile several of these developments are offshore conventional gas fields, there are also three unconventional gas fields being developed in Queensland. From a virtually non-existent industry only 15 years ago, the coal seam gas industry is now booming. There are also prospects for developing unconventional gas - and oil - in both Queensland and other parts of Australia. This all bodes well for energy importers like Japan.
IAs in the US and other countries, community interest and concern over unconventional gas developments is active. In response, the Australian Government is working with state governments to develop a national harmonised regulatory framework for the coal seam gas industry. The Government is also working to build a better understanding of the direct and cumulative impacts of proposed coal mining and coal seam gas developments on groundwater and the environment.
IThe Government is aware that there are layers of regulation in the development of our energy resources, particularly between the levels of local, state and national governments. To this end, the national government is working with the states and territories and other stakeholders to streamline environmental regulations. They are also working to promote multiple land use to promote coexistence, rather than exclusion, for development of resources for instance with agriculture and other land uses.
Accelerating our clean energy transformation
IAs many of you would already be aware, Australia like Japan is seeking to expand the role of clean energy as much as possible. This includes expanding renewable energy in Australia through a number of measures including a Renewable Energy Target of 20% electricity by 2020. Japanese investors in Australia are assisting with increasing the share of renewable energy, particularly in solar but also wind power.
IThe clean energy transformation is also being driven by the introduction of a carbon tax on 1 July last year. Further, the Government is funding $17 billion (or ¥ ) worth of clean energy and clean technology support. This includes $10 billion (¥ ) for the Clean Energy Finance Corporation and $3.2 billion (¥ ) for the Australian Renewable Energy Agency.
IThe funding also includes $1.68 billion (¥ ) for carbon capture and storage, or CCS, which is something I know that Japan is working with Australia on, such as through the Callide A project. Japan and Australia are also working together through the Global Carbon Capture and Storage Institute (GCCSI). Being able to capture and store CO2 not only from coal but also gas fired power plants as well, will ensure that low cost thermal power will be available for use in the future in a carbon constrained world.
Better energy market outcomes for consumers - electricity and gas
II also wanted to mention the electricity market reforms which Australia has been working on and will continue into the future. I note that Japan is also considering further deregulation of its electricity market, and wanted to share where Australia is up to and some of the benefits we have observed as a result of the reforms to date.
The Australian Government is continuing to deregulate our electricity and gas markets, a process which we have been working on for nearly two decades. Central to these reforms has been the commitment to open and transparent markets. This ensures competitive pricing, efficient resource allocation and innovation.
Australia has the world's longest interconnected power system, stretching over 5000 kilometres along our east coast and around to South Australia. The Government is working to further integrate the electricity and gas markets across Australia. By ensuring consistent regulation across the country, this will create a level playing field that stimulates competition, innovation and consumer choice.
While the process has not been easy, because of these reforms, Australia now has one of the most competitive electricity markets in the world.
But, like Japan, we are also facing rising electricity prices. This is due to three key pressures: population growth, growth of energy exports (particularly to Japan), and the need to reduce our carbon emissions. Retail electricity prices have increased on average by around 40% over the last four years. The Government is working to improve regulatory efficiency. But another key area of work to reduce prices is allowing pricing structures which work to reduce inefficient peak demand. This is to avoid additional electricity capacity being built which might only be used for one per cent of the year. So customers will be provided more choice through flexible time-of-use pricing, including the use of smart meters to enable consumers' decision making.
We have found that short term fixes, such as governments intervening to hold down prices for temporary relief might be tempting, but it is not in the long term interests of consumers. This inevitably lowers investment, competition and standards of services. Most critically, it creates a larger shock to consumers when the price inevitably catches up with the real cost.
Like electricity markets, Australian domestic gas markets too are going through a dynamic period. The increased demand for Australian gas from overseas has lead to tightness, particularly in the east coast gas market due to coal seam gas and LNG developments. While we have sufficient gas to meet projected and domestic needs until at least 2035, increased demand is creating price pressures and tightening supply conditions.
Once again, it is the Government's view that this is best addressed by open and efficient markets, where price is allowed to balance the market and provide incentives for developing new supply. Interventions such as reservation policies to force price or supply outcomes are more likely to impede than promote supply. I note that the American shale gas boom was preceded by high prices that drove significant new investment, leading to the current low gas prices there.
Liquid fuel security
One thing that is rarely mentioned is that while Australia has abundant reserves of most resources, there is one which we have very little of and which we rely on imports for, and that is oil. Like Japan, Australia's refining industry is restructuring, faced with economic pressure from new Asian mega-refineries.
Of the seven major petroleum refineries operating in Australia, two will be closed next year, reducing our domestic refining capacity by nearly 30%. From 2014 Australian refineries will supply only around half of our refined fuel needs.
While the Government is closely monitoring Australia's liquid fuel security, we recognise that over 80% of Australia's crude oil and other refinery feedstock is already imported. And in turn we export about 80% of our domestically produced oil and condensate to Asia, where its high quality means it can be made into higher value products, thereby maximising the return to Australia. Once again, the Government's objective is to ensure well functioning, open and transparent markets as the key to energy security, rather than protectionist measures.
LNG Prices
Turning away from the Energy White Paper now, I wanted to touch on another topic which is being hotly debated in Japan at the moment, and that is the price of LNG.
As some of you may have heard our Resources and Energy Minister Ferguson say last year at the LNG Producers and Consumers Conference here in Tokyo in September, the Australian Government's view is that the market should be left to dictate prices. This will encourage investment, leading to increased supply, and therefore a more competitive market and lower prices.
Any assistance by the Japanese Government which leads to increased supply, such as through JOGMEC or JBIC funding, will help in expanding supply and ensuring there is sufficient gas in the market for all.
The Australian Government is working to remove barriers to investment and project development, including some of the ways I mentioned before. The Government is very aware that Australia is a high cost environment - and there are some good reasons for this - and is working to reduce costs where possible.
For instance, we have a shortage of skilled labour in the resources sector, partly due to the location of the work which is a long way away from where the bulk of our population lives in the south east. Skills Australia has estimated that mining operations across Australia will need an additional 89,000 workers in the five years to 2016 to meet expected construction and operation of new projects.
To address the skills shortage, the Government has a National Resources Sector Workforce Strategy which is a partnership between governments, industry, training organisations and other stakeholders.
The Resources Workforce Strategy contains 31 actions divided into seven areas:
- workforce planning and information sharing;
- training more tradespeople;
- training more graduates;
- immigration initiatives;
- workforce participation;
- linking education and industry; and
- affordable housing and infrastructure.
The Government is working to ensure that local people, including Indigenous people and women, are in the best place to apply for jobs, by providing training and opportunities to move into the resources sector. There is also a fly-in fly-out scheme to encourage workers from other areas of Australia to work in areas where resources projects are located.
However, the Government also recognises the Australian labour market will not always be able to meet peak workforce demands. The Government has introduced two resources-specific initiatives to help facilitate skilled migration. The first is the fast-tracked processing of completed applications for subclass 457 visas.
The second is the introduction of Enterprise Migration Agreements, or EMAs. These are a custom designed, project-wide migration arrangement uniquely suited to resources industry requirements during the construction process. They apply to projects with capital expenditure of more than $2 billion and a peak workforce above 1500. Contractors are also able to sign template labour agreements that sit under these EMAs.
While Australian employees have the first opportunity to fill vacancies, EMAs ensure that the shortfall in labour can be met from overseas. Agreements also require that companies implement training commitments that contribute to the future skills needs of the resources sector. The first EMA was approved in May last year for an iron ore project in Western Australia.
Even with these efforts, the Government is cognisant that Australia will continue to be relatively high cost, in part due to the strong Australian dollar, as well as the remoteness and technical challenges which accompany the development of many of our resources.
Technological advances in the future will help to reduce some of these costs. It will also open up new areas and fields for discoveries of further resources, as well as make some currently known resources economically viable to develop. We have seen the dramatic change in the US and the impact on the world energy market from the development of technology to recover unconventional gas and oil.
We are also seeing it in floating LNG - or FLNG - technology. The world's first FLNG development is in Australia and is scheduled to commence production around 2016. Of course, Japan is part of this development through INPEX. If FLNG can be developed successfully and at a competitive price, there are a whole series of fields which this technology could be applied to, not only in Australia but elsewhere as well.
Free Trade Agreement
I wanted to mention one other thing on the economic relationship between Australia and Japan. As you would be aware, we commenced negotiations on a bilateral free trade agreement in 2007. The agreement is absolutely essential to take full advantage of the economic complementarities that exist between our two countries and expand the scope of possibilities for both nations.
The conclusion of a bilateral FTA will reduce barriers to trade and investment, leading to more trade in goods and services as well as increased investment between our two countries. A comprehensive and high-quality FTA will bring about even closer integration of our economies, with the feasibility study conducted jointly by the Japanese and Australian governments estimating the likely benefits for Japan to exceed 2.3 trillion yen over 20 years.
An FTA could also help secure Japan's energy and minerals supply well into the future. It could enhance the role of the market by binding Australia and Japan to open, non-discriminatory trade in energy and minerals and by liberalising investment arrangements to facilitate greater Japanese involvement in the sector.
The potential inclusion of a chapter on energy and mineral resources in the FTA is a strong recognition of the important role that these commodities play in the economic relationship between Japan and Australia. Concluding an FTA would introduce a new mechanism to consult on energy and mineral resource issues.
'Australia in the Asian Century' White Paper
Let me now turn to Australia's relationship with Asia, and in particular Japan. Last October, our Prime Minister released the 'Australia in the Asian Century' White Paper. The purpose of this White Paper was to look at the opportunities in the Asian region and to ensure that Australia was positioned to make the most of these opportunities. The goal is to secure Australia as a more prosperous and resilient nation that is fully part of our region and open to the world.
Our close relationship with Japan is a model for the relationships we want to build across Asia.
The 'Asian Century' White Paper is a list of objectives for Australia to achieve by 2025 and it lays out a roadmap to enable Australia to succeed amid the multitude of changes occurring in the Asian region.
Specifically, it includes a comprehensive examination of five key areas: strengthening the economy, building capabilities, connecting with growing Asian markets, building sustainable security and developing deeper and broader relationships.
The White Paper identifies specific domestic policies that must be implemented as part of this process, including in education and training, infrastructure, tax and innovation in science and technology.
On education and training, one goal for the Asian Century is to achieve significant gains in the level of Asian literacy and Asian language skills of Australian students. All students will have the opportunity to study an Asian language through to the end of year 12, with Japanese being one of the four priority languages. Japanese is already the most widely studied foreign language in Australia's schools and universities.
At the university level too, the White Paper includes a new 'AsiaBound' initiative which will assist more than 10,000 Australian students to study in Japan and other Asian nations. For Australian business, there is an objective to have one-third of board members of our top 200 publicly listed companies and Commonwealth bodies having deep experience in and knowledge of Asia. This is underpinned by a business engagement program.
Australia will have an innovation system, in the top 10 globally, that supports excellence and dynamism in business. Both Japan and Australia are very strong in science and research. Australian universities will continue to work with and build on the existing links with Japanese institutions.
On infrastructure, the Government is working with our states and territories and the non-government sector to expand existing infrastructure plans to create a long term national infrastructure strategy. This will increase private sector investment and involvement in new projects and consider alternative ways to speed up project delivery.
But The White Paper also asserts that there is much more that Australia can do to strengthen the relationships with other countries in the region, improve regional security and promote the free exchange of goods and capital, people and ideas. Australia currently works together with a number of countries, including Japan, at forums such as the East Asia Summit, APEC and the G20. These activities form the foundation of our partnerships with other countries and are essential for Australia to implement bilateral initiatives through our diplomatic network and free trade agreements.
Reflecting the importance of Japan, the White Paper identifies Japanese as one of four priority Asian languages. The Government has also announced that it will grant 12,000 Asian Century Scholarships over the next five years to increase the number of Australian students studying abroad in Asia.
The importance of the strategic partnership
Finally, I would like to speak briefly about the strategic partnership between Japan and Australia - another important pillar of the bilateral relationship.
Japan and Australia are both key allies of the United States, sharing common values such as democracy, the rule of law and economic liberalism. Both countries have worked tirelessly to ensure prosperity and stability in the Asia-Pacific region and peace throughout the world.
As the global balance of power changes the geopolitical and strategic environment in our region, it is essential for Japan and Australia to work together to maintain and consolidate the stability of the region. From this perspective, the bilateral strategic partnership is more important than ever.
Conclusion
In conclusion, I would like to reiterate that Japan and Australia have had a complimentary and special relationship for more than 50 years not only in resources and energy, but in other areas as well. Japan and Australia will continue to enhance the bilateral partnership that has been built over so many years to make the most of opportunities and I am certain that our efforts will lead to a prosperous and progressive future.
Thank you.