Coal Seam Gas and the future of manufacturing in Australia

Seen as either environmental hazard or important source of energy, coal seam gas (CSG) development remains a controversial issue. Tim Mazzarol, Winthrop Professor at the University of Western Australia, explores the challenges the government, and Federal Industry Minister Ian Macfarlane in particular, are facing.

One of the issues likely to create headaches for the federal government in their first term is the thorny issue of coal seam gas (CSG) development in east coast Australia.

Federal Industry Minister Ian Macfarlane has recently become a passionate advocate for CSG production, with the Australian Financial Review citing him as describing CSG as “the most urgent resource issue facing the government”.

Yet he has been heavily criticised by New South Wales farmers’ groups who remain opposed to CSG development. Their concerns relate to the potential for such development to damage soil and ground water resources. According to the “Lock the Gate Alliance” there is insufficient research to support the claims by the proponents of CSG that it is safe for the environment. In response the CSG developers, such as Australia Pacific LNG, defend their industry and its environmental impact.

Policy backflips

Minister Macfarlane has been accused of doing a “backflip” over his position on CSG. While in opposition he defended the farmers’ right to protect their land from CSG development. He was joined in this by Prime Minister Tony Abbott, who as opposition leader backed farmers’ groups fighting to block CSG development projects.

In April 2013, prior to the federal election, Ian Macfarlane addressed a rally of farmers in southern Queensland stating that the coalition’s policy was: “that you don’t extract coal seam gas, and you certainly don’t mine this sort of country, unless the farmer says you can”. Two weeks later Tony Abbott, speaking on Radio 2GB, stated that he “absolutely” backed these views.

Now in government Minister Macfarlane has apparently changed his tune and is ramping up the rhetoric in support of CSG. In a presentation to an energy summit on 26 September, the Minister called for a streamlining of regulations relating to the exploration and production of CSG across state borders. He labelled opponents of CSG “anarchists” saying:

“They are anarchists. They don’t respect people’s property, they don’t respect people’s rights. They don’t respect the law of the land. They go out deliberately to break the law.”

Managing the “fracking” boom

CSG is now one of the main sources of energy across the world. Coal bed methane and the gas that can be generated from it has been found in many nations including the United States, China, Russia and the Middle East. One of the most important sources of CSG is shale formations which are found in these countries and also in Australia.

In a paper published in 2012 in the journal Environmental Chemistry, CSIRO scientists Graeme Batley and Rai Kookama discussed the CSG or “fracking” boom that has swept the world. As they explain, the process involved in the extraction of CSG – known as hydraulic fracturing or “fracking” – is one of the most contentious aspects.

A complex procedure, “fracking” involves use of water, sand and small amounts of chemicals, injected into the coal seams under high pressure. This cracks or fractures the seams for distances of up to 30 metres and allows the gas to escape and be recovered.

Key environmental management concerns associated with “fracking” relate to the recovery of water and salts. This highly saline water contains a variety of chemicals and minerals. Volumes of up to 100 kilolitres of such water can be generated each day in a typical CSG extraction process. A CSG operation might also take place over a period of around 10 years.

According to Batley and Kookama, in the United States the CSG industry has tended to re-inject this “fracking” water back into the ground with around 40% left in coal seams no longer able to generate gas. This process risks ground water quality and increased salinity of water resources. Use of above ground storage tanks for waste water is a short term solution. However, they note that this has been “abandoned at least in Queensland, Australia, largely because of seepage into soils”.

“Fracking” also makes use of a wide range of chemicals. The Australian Petroleum Production and Exploration Association (APPEA) lists at least 45 chemicals used in “fracking”. In the US this list contains around 750 chemicals. As noted by Bately and Kookama:

“A hazard assessment of what goes into the wells is relatively straightforward, in that the chemicals are in high concentrations. What comes out of the wells is more problematic.”

They also note in their paper:

“Currently there is very little understanding of the concentrations and especially the temporal variability of the potential contaminants that may be present in the produced water. Such data will provide the scientific evidence to address the uninformed concerns of opponents of coal seam gas extraction, and to ensure that the industry can be appropriately managed.”

So why the rush for CSG?

The CSG debate is therefore a contentious and complex one. It is clear that CSG offers some highly lucrative export opportunities for the developers, particularly as gas prices are currently high. Yet the risk to some of Australia’s best farming land continues to be a legitimate concern. What then can explain the sudden backflip by the Abbott government over CSG?

Part of the answer may be found in the concerns expressed by Manufacturing Australia’s CEO Sue Morphett. Speaking at a Committee for Economic Development of Australia (CEDA) conference in Melbourne on 20 August 2013, Sue Morphet highlighted the misallocation of CSG resources to Australia’s manufacturing sector.

According to Morphett there is a “gas supply crisis” on the east coast of Australia. This is despite the fact that there are an estimated 48,800 petajoules of known or proven CSG reserves in Australia’s east coast. Domestic demand for this gas from households and industry is estimated to be just over 700 petajoules per annum. This is less than 1.5% of proven or potential resources.

She noted that in the past 5 years a handful of multinational CSG developers have been granted licences to explore extract and export around 2,100 petajoules of gas from the Australian east coast. These licences were issued on the understanding that the development of CSG would be both effective and efficient. Further, it was not meant to have any negative impact on the supply of gas to local consumers.

Yet these developers have not succeeded in meeting their original production targets. These firms are now exporting the bulk of CSG to international buyers due to the high prices found in international markets. This has pushed up the overall cost of gas to Australian industry and made it difficult for local manufacturing companies to secure long term gas supply contracts.

As stated by Morphet:

“Manufacturing Australia contends that the Australian government must ensure that 700 petajoules of gas for homes and businesses are excluded from export…the impact of unrestricted gas exports on Australia’s manufacturing industry is already devastating, but worse is yet to come.”

She noted that many major manufacturers such as CSR, Bluescope steel, Brickworks and Incitec Pivot were heavily reliant on gas for both direct feed stocks for their processing of plastics, fertilisers and chemicals, or as a source of energy. Australian manufacturers were now unable to secure long term contracts of gas at affordable prices.

According to Morphet, gas prices in Australia had skyrocketed by up to 200% due to the competition from overseas buyers. Australians were now paying the world’s highest prices for gas despite having such a large natural supply. She described the local gas market in Australia as “broken”.

She issued the following dire warning:

“What we are certain of, is that left unchecked this crisis will permanently push many manufacturing businesses over the edge, many manufacturing plants offshore, and it will cost the Australian economy 200,000 manufacturing reliant jobs and $28 billion in economic value.”

Finding a balance and quickly

Sue Morphet was keen to stress that Manufacturing Australia does not oppose the creation of an export-focused CSG industry. However, her concern was for the reservation of domestic gas supplies for local industry. She noted that Australia was the only gas rich nation in the world that does not have agreements with developers to reserve local gas supplies prior to export.

She commented that:

“Startlingly, unlike their counterparts in most of the world, Australia’s federal government and state governments, on the east coast, don’t think that there is a role for government in safeguarding domestic gas supplies.”

Morphet described the situation as a “national emergency”. It was an issue that Manufacturing Australia had been seeking to get government and opposition attention with via their “gas for jobs” campaign in the lead up to the federal election.

According to Morphet the “gas crisis” is a “once in a generation” structural shift in energy markets that cannot be resolved via market-based mechanisms. It required urgent intervention by both federal and state governments. She warned that the window of opportunity to fix the problem was probably not more than 2 to 3 years. It was a matter that needed to be addressed by the new federal government within the “first 100 days” following the election.

Building a sustainable Australian manufacturing industry

If we examine these dire warnings from Sue Morphet the “backflips” of Ian Macfarlane and Tony Abbott over the CSG issue become more understandable. However, the approach taken by the Minister to resolving the crisis seems at odds with the position taken by Manufacturing Australia.

Part of the proposals outlined by Manufacturing Australia in dealing with the “gas crisis” involved requiring all new CSG developments to allocate a proportion of gas to local markets. They also requested the creation of dedicated domestic gas tenements.

Other proposals by Manufacturing Australia include the immediate creation of a domestic gas task force, to comprise representatives from government and industry to work towards a resolution of the problem. There was also a call for the establishment of a National Gas Authority similar to the American Energy Information Administration dedicated to monitoring the Australian gas market.

Finally, there was a demand for a national gas policy designed to bring together all parties to create an effective gas market in Australia. This should aim to promote local domestic manufacturing and industries rather than the interests of multinational gas companies focused on export.

In their response to the CSG issue since the election Minister Macfarlane has seemingly ignored many of the recommendations from Manufacturing Australia. He has launched vigorous attacks on the Greens and other groups who wish to slow down CSG production on environmental grounds. As he was quoted as saying:

“I’m not interested in noisy protesters, minority groups, with no interest in the development of regional Australia and the economic progress of agriculture and mining together. They simply want to politicise this issue and tell lies.”

Yet there has been little discussion of the need to review the contracts for CSG production leases issued to the major multinational firms that are developing these resources. No declaration over the need to reserve a proportion of local gas production for domestic or even strategic purposes.

Given the need to protect Australia’s remaining manufacturing industries from unnecessary closure or offshoring this is surprising. However, if the federal government cannot provide guaranteed supplies of affordable gas to Australia’s manufacturers the consequences will be serious.

The challenge facing Macfarlane and Abbott is significant. They must re-negotiate contracts with major CSG developers that protect local gas supplies. At the same time they must implement policies that ensure the economic and environmental sustainability of the agriculture, oil & gas and manufacturing sectors.

Developing coherent strategies and negotiating with a wide range of stakeholders is likely to prove more useful than attacking opponents for being unlawful anarchists.

This article was first published on The Conversation and appears with the permission of the author.

Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand (SEAANZ), a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises. Tim Mazzarol is a Winthrop Professor in Entrepreneurship, Innovation, Marketing and Strategy at the University of Western Australia and an affiliate Professor with the Burgundy School of Business, Groupe ESC Dijon, Bourgogne, France. He is also the Director of the Centre for Entrepreneurial Management and Innovation (CEMI), an independent initiative designed to enhance awareness of entrepreneurship, innovation and small business management. He has around 20 years of experience of working with small entrepreneurial firms as well as large corporations and government agencies.