The WA Parliament received a report into Floating LNG earlier this year. While it recognised a number of opportunities for Western Australia arising out of the development of FLNG, the Committee which prepared it was broadly pessimistic about the impact on the WA economy. This article briefly summarises its conclusions and recommendations.
In May 2014, the Economics and Industry Standing Committee of the WA parliament tabled its report on ‘The economic impact of floating LNG on Western Australia’ (Report). The aim of the Committee’s inquiry was to examine the impact of the use of floating LNG (FLNG) technology on WA industry, on the supply of domestic gas for WA and on state government revenue.
The Report noted by way of overview that:
- the production of natural gas from offshore reserves is of particular importance to the WA economy,
- the majority of Australia’s petroleum reserves are located off the coast of WA and the development of these reserves generates substantial export revenue, numerous employment opportunities and a reliable supply of natural gas to the domestic market, and
- natural gas has historically been processed onshore, but the trend is beginning to change, with Shell commencing construction of its Prelude FLNG unit and Woodside announcing that FLNG is its preferred development concept in respect of the Browse joint venture.
The Report made a number of findings and recommendations, concluding that the development of FLNG technology in WA would likely have a negative impact on WA’s economy. These impacts include reducing government revenue, reducing domestic natural gas supply and reducing local job opportunities. However, it also identified that FLNG could provide an opportunity for Perth to become ‘an engineering and design hub or centre of excellence’ and that there may be other opportunities for WA business to provide ancillary services and support during the operations phase of FLNG projects.
Impacts of FLNG technology on the WA economy
Impact on local employment
Both the Commonwealth and the states have local content policies and initiatives which relate to domestic industry participation in major investment projects. The Committee found that WA’s local content policies were developed before FLNG technology became a reality and that the current policies may not best maximise Australian content on FLNG projects or even apply to these projects at all.
As a matter of priority, the Committee has recommended that the Minister for Commerce review and amend WA’s local content policies to ensure their application to FLNG developments.
From a Commonwealth perspective, the Australian Jobs Act 2013 (Cth) (AJA), which commenced in December 2013, requires proponents of major projects in Australia to prepare and implement an Australian Industry Participation Plan. The Committee identified that there is currently uncertainty as to the application of the AJA and that this is adding to the perceived risk of doing business in Australia by major oil and gas companies.
The Report recommended that the WA government work with the Commonwealth to provide certainty in relation to the AJA and its implementation.
Impact on industry and state revenue
The Committee found that the introduction of FLNG is likely to reduce Australian manufacturing and fabrication opportunities, compared with onshore developments. Resources companies are increasingly using EPCM contracting arrangements for large-scale industrial projects and this presents a major challenge to Australian industry because the world’s largest EPCM companies are all headquartered overseas. FLNG is also likely to reduce the number of construction opportunities available to local companies.
The Report concluded that the loss of opportunities in these major sectors of the economy will impeded the economic development of the state and result in a significant loss of revenue for the government.
Impact on domestic gas supply
The Report found that the demand for natural gas supply in WA is high, with natural gas providing more than 40% of the state’s energy. The permissions granted in respect of each of the current major natural gas projects were conditional upon a percentage of the gas produced from these projects being supplied to the WA domestic market. The Report identified that the same gas commitment would not be a requirement for FLNG projects. Additionally, the FLNG process will only be able to produce natural gas in LNG form and will only be suitable for export.
The Report concluded that the use of FLNG technology is likely to reduce the amount of natural gas available for domestic supply by a significant amount and that this will likely impede the economic development of the state.
The requirement for clarification on Joint Authority decision making
In December 2013, the former Commonwealth Minister for Resources and Energy, Gary Gray, approved the removal of the condition on 5 Commonwealth Browse Retention Leases which required onshore processing at James Price Point, paving the way for the use of FLNG technology. At the time that the Retention Leases were granted, there was an agreement between the WA and Commonwealth Joint Authority delegates that the 5 Commonwealth, and 2 state, Browse Retention Leases would be progressed together and would be subject to the same conditions. Up until December 2013, all decisions in respect of the 7 Browse Retention Leases had been made by the Joint Authority, in consultation between WA and the Commonwealth.
The Committee criticised the Commonwealth Minister’s unilateral decision, and highlighted the need for greater clarity in Joint Authority decision making. The Committee stated that it was not convinced that the Browse decision had been made in accordance with the Joint Authority Guidelines and that it had been made without fair and reasonable consideration of WA’s position. The Committee recommended that the WA Minister for Mines and Petroleum take the necessary steps to affect the amendment of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) to ensure greater transparency of, and adequate consultation time in, the Joint Authority process. It also recommended that the Minister of State Development take appropriate action to ensure that the Commonwealth government complies with the Joint Authority Guidelines and any other established working arrangements between Joint Authority members.
Overall, the Committee found that the effect of FLNG technology on WA’s economy would be a negative one. However, the Committee did express the view that the technology could provide opportunities for Perth to become ‘an engineering and design centre of excellence’ and for WA business to continue to develop its world class workforce development and training industry. Despite this, the Report is likely to strengthen the WA state government’s preference for onshore processing and its opposition to FLNG technology.