Australia's Next-Generation Gas Projects at the Turning Point

By Richard H. Matzke, Vice Chairman
Chevron Corporation

Brisbane, Australia

It was almost half a century ago that Chevron made its first oil discovery in Australia. That was at Rough Range, and we've been a part of the upstream industry "down under" ever since. And we recently reaffirmed our commitment by becoming the operator for the West Australia Petroleum oil and gas assets, and by bringing the 250 employees of those operations into the Chevron family.

Of course, our total regional role is much larger. Chevron holds about 20 percent of the known gas in the North West Shelf catchment area. And we're the operator for the Papua New Guinea (PNG)-to-Queensland gas pipeline project. We're also a proud sponsor of the historic sailing vessel Duyfken, built in Fremantle, which today visited Dampier and our North West Shelf liquefied natural gas (LNG) project, and will call here in Brisbane sometime later this year.

I see that, in addition to earth science, you have included some management science on your program. It reminds me of a talk I gave to the American Association of Petroleum Geologists several years ago. At the time, I felt that geologists should be thinking less about stratigraphy and more about strategy.

The reason was the business climate. Flat oil prices, which we all hoped would be a temporary trend, had turned into business-as-usual. Every dollar and every well mattered more as exploratory budgets got tighter. Fierce competition made restructuring and staff cuts a way of life.

So even though I love prospecting as much as any other geologist, I said almost nothing about the fun parts of our work. Instead, I focused on the harder parts. Dealing with change. Meeting new demands on our professional skill set. Adding business value and seeking it as well. And embracing an expanded role in solving all those business problems that don't show up on the well logs.

Today, as we celebrate the 40th anniversary of the Australia Petroleum Production and Exploration Association, it is again the broader challenges that confront us. We have before us a new generation of natural gas projects. I have a keen interest in two of these: the PNG-to-Queensland pipeline and the LNG expansion in Western Australia. And they now require our leadership and personal commitment to succeed.

Ten good years of domestic gas and LNG development on the North West Shelf have delivered a host of shared benefits to Australia and to Australian industry: jobs and paychecks for workers and families; royalties and taxes to support government; world-class technology put to work and continuously improved.

We've seen new efficiencies tested and applied. Billions in energy investments -- plus the associated purchase of Australian goods and services -- and the ripple effects of each new dollar moving through the economy: pride in our operations, and more than 1,100 LNG cargoes safely loaded and delivered.

Our industry's work has brought cleaner energy and economic growth not just to Australia but to her trading partners -- particularly Japan, and especially in the future, we hope, Korea, China, India and Taiwan.

Ten years from now, will our LNG industry be a going concern or a fond memory?

So let's raise a glass today to this decade of shared enterprise and benefits. But let's also ask ourselves: Ten years from now, will our LNG industry be a going concern or a fond memory? Will PNG gas be providing Queensland with a cleaner and more efficient energy mix? Will we have reason to look back and celebrate? Or could we find ourselves with nothing to toast at all?

Our next generation of gas projects has reached a turning point. All of us involved in the Australian upstream are in the same boat. And when I say "us," I mean companies, customers, landowners elected leaders, regulators and workers -- all stakeholders. We all have a stake in a successful voyage. But some of us are rowing one direction, and some are rowing the other.

Going in circles should be unacceptable to all of us, because we're not alone in this race. World LNG markets are growing and should keep growing. But Australia isn't the only gas-rich country that wants a bigger share. We know that world LNG capacity will probably exceed demand for most of our lifetimes. And new gas-pipeline projects will want a share of the total gas market as well. So we should make no mistake here: Other countries can and will take opportunity and future benefits away from Australia's gas industry if we let them.

The theme of this year's conference is "innovation." That means mostly technology. But at this turning point, we also need other kinds of innovation.

Let's start with what we might loosely describe as extended family relations or stakeholder relations. Either way, it's the universal "we" I mentioned a moment ago. And certainly a big part of this is partner relations: how well the companies get along. Don't get me wrong, mates -- we don't have to remember each other's birthdays. But we need to see our common ground clearly and work together to create competitive advantage for West Australian LNG, for Queensland gas imports and for other projects that can help Australia benefit from its energy endowment.

Queensland, Australia and Papua New Guinea all need proactive policies to help make the PNG pipeline project a reality. And as for LNG, the "haves" on the Burrup Peninsula and the "have nots" on the frontier have far more to gain together than separately. They share a very high-cost drilling and operating environment and a tremendous inventory of future energy, but they've had to forego a prompt return on investment.

This is not a defensible situation in today's gas industry. Not even the fuel of the future can defy the laws of enterprise. Let's face it – we're boxed in. We've got to be more globally competitive, first, to capture the benefits from the capital we've committed, and second, to create solid reasons to keep investing in the Australian upstream. If we can't do that, neither Australia herself, nor the companies in this room today, can win this game. The truth is that not even the proven reserves of the North West Shelf project can be certain of a secure home in the competitive LNG market of the new decade.

Not even the fuel of the future can defy the laws of enterprise .... we've got to be more globally competitive ....

We need innovative partner relations to ensure a future for all our opportunities. It might be project management tools that bring out the difficult, nontechnical issues from the start. It might be structures that involve all stakeholders on the front end and at the same table. Or it might be improved joint-venture rules that reward action and make sure that nobody "steps on the hose."

The Australia Competitive Energy forum has been a very good start. These and other initiatives can move us toward open minds and constructive attitudes. They can encourage fresh perspectives so that we might create a common vision to make global competitiveness the foundation for future growth.

We're going to need the executive support of the participating companies and the commitment of top leaders in the involved governments. And to the extent that guys in positions like mine back at headquarters are part of the problem, we need to address that too.

Let's turn now to another area in need of innovation: the marketing of gas. We're off to a great start in Western Australia with the creation of the company Australia LNG just last year. It was a shock to all of us when the competitive world decided that the cozy, long-term, fixed-price LNG contract was a concept that may not survive in the market of the future.

Deregulation, new kinds of customers, new suppliers, new risk -- all have transformed the LNG market. LNG consumers will always need stability just like suppliers do. But no piece of paper can ever again protect us from a world where everything's negotiable, where big contracts fluctuate and where spot markets are a fact of life. This is why we need to pull together -- government, industry, labor -- to give Western Australia a clear, fighting chance to capture a bigger share of the world LNG market.

Queensland's gas market potential deserves the same fighting chance. In the old days, gas projects were reserves-driven, and it was all about taking markets. Now it's about making markets and serving customers -- especially in the Queensland case.

... we've got to market not just our gas but also out image as a unified industry with world-class technology, finance, stability and flexibility.

Again, it's up to us to keep the benefits of gas development flowing to Australia in the decades to come -- through imports, exports and domestic sales. To make that happen, I believe we've got to market not just our gas but also our image as a unified industry with world-class technology, finance, stability and flexibility.

Of course, government plays a key role in creating our positive image by creating an attractive business climate, especially in tax policy. I hope that elected leaders will choose the path of partnership with industry, because that is the path to the future.

Energy investment capital is not without limit, and it will continue to shop the world for the best opportunities. As the Caspian, Latin America and the Middle East attract more dollars, the stakes will only get higher for Australia. The business climate down under must be a magnet, not a barrier, to investment.

Australia has a unique opportunity through innovative policies to secure long-term growth and stability. Without these policies, major new projects can't proceed because they can't compete -- especially the next generation of energy projects and particularly those within the LNG and domestic gas industries.

Lastly, environmental policy is a big part of business climate. The issue of global climate change requires a clear and credible response from industry. And the North West Shelf Venture has made some very positive steps in that direction by way of technology and new operating practices.

The Gorgon and PNG-to-Queensland projects have made constructive policy proposals as well. Look closely at what industry has either done or suggested, and you can see clearly that Australia has the capacity to combine innovation with regulation. We can find flexible solutions and mechanisms for the greenhouse gas issue. Indeed, growing Australia's gas industry can be part of the environmental solution rather than the problem.

Just to give you a quick idea, the Queensland pipeline will deliver enough gas to reduce the state's carbon dioxide emissions by 5 million to 10 million tons per year. That's possibly as much as 10 percent of the total reduction Australia must achieve.

Australian gas could become part of the world response, not merely the national response, to climate change ...

Australian gas could become part of the world response, not merely the national response, to climate change by helping to cut smog and greenhouse emissions in other countries. Exporting 4 million tons of LNG per year to China, for example, would displace enough coal to cut the world's annual greenhouse-gas output by a net 10 million tons per year. And crediting that back to Australia could chop almost another 10 percent off the national greenhouse-gas target.

Maybe it sounds too good to be true, but Australia's gas industry is in a rare position to set an example here. We can slow greenhouse emissions down, while at the same time helping to heat the economy up. Australian gas can be both an environmental treasure and a greater economic one for tomorrow. But it's going to take innovative greenhouse-gas policies that value both imports and exports of energy. It's going to take a universal appreciation of the fact that that gas – whether it's coming or going -- is a critical part of the solution, not the problem.

We'll need innovative policies that mandate gas in the energy mix. We'll need to protect Australian projects against greenhouse-gas control costs, because competing projects in other countries do not face these costs. And we'll need to require mechanisms that win for Australia and its projects the credits for contributing to global reductions.

Innovative technology; innovative relationships and partnerships; innovative marketing; a magnetic business environment; innovative environmental regulations -- each of these is a challenge in itself. But I saved the really hard part for last: We have to achieve all of these at the same time.

The next generation of world-class gas projects is worth nothing if we can't make them work for Australia, for Australian workers, for ourselves and for our customers.

The next generation of world-class gas projects is worth nothing if we can't make them work for Australia, for Australian workers, for ourselves and for our customers. And future petrochemical and gas-to-liquids projects in Australia face the same situation.

The rules of the evolving marketplace are identical whether you're trying to compete in America, Argentina, Azerbaijan or Australia. Time and the marketplace wait for no one. So it is up to us -- all of us here together in industry and government -- to make sure that Australia gets its share.

A decade from now, on the 50th anniversary of your association, the Australian oil and gas industry and the nation's extended energy family will come together again. Let's make sure that on that day, we can look back and see the benefits of taking the hard but necessary path when we reached this turning point in the year 2000.

Let's make sure we have good reason to raise a toast not just to a thriving Australian energy sector but to ourselves as well.

Updated: May 2000