Analysis
Australia and the Strategic Challenges of Unconventional Energy
Byline: Mark Farrar / Canberra
Australian policy makers have not caught up with reality yet. Among the unhallowed (and cynics in Defence say unholy) halls of the Office of National Assessments and the Department of Prime Minister and Cabinet, the myths of decades of issue-motivated group (IMG) ‘catastrophe-propaganda’ still resonate.
Peak oil, limited resources, climate catastrophism and other oversold doomsday scenarios have stunted policy development, wasted public funds and damaged Australian strategic appreciation of the current strategic shifts.
For the catastrophists are quite wrong.
The abysmal quality of IMG and government catastrophist thinking in Australia has been clearly illustrated by a recent journalistic effort by the Australian Broadcasting Corporation, called ‘Coal Seam Gas: By the Numbers’. Nominally a fact-based discussion of development of a new resource, the tone of the article was that of an IMG polemic. The industry peak body (Australian Petroleum Production and Exploration Association or APPEA) promptly eviscerated it, demonstrating errors and delineating biases as only genuine subject matter experts can do. APPEA quickly uncovered about thirty significant to severe errors and mis-statements in the ABC’s work. This small matter indicates just how disconnected the mainstream is from reality. A laudable effort at ‘fact-based quality journalism’ was revealed to be so influenced by IMG biases and shibboleths that it was rendered worse than worthless.
The bald fact is that world is only at the start of the hydrocarbon fuel era. Australian ‘3P’ (1P proven, 2P probable, 3P possible) natural gas reserves have expanded from less than 50 trillion cubic feet (tcf) 30 years ago to over 300tcf now, and when shale gas estimates are added they expand again to over 600tcf. But the truth is that nobody knows how big the reserves are – these estimates are ‘soft’ and just keep growing. Many of Australia’s sedimentary basins remain poorly explored. The author recently met with senior South Korean gas company personnel. They said that their best guesses as to all actual global gas reserves (including abyssal clathrates ) at present rates of energy use expansion ranged from 3,000 to 25,000 years of supply. As one dryly noted, ‘that is probably enough time to develop fusion power to take over our baseload electricity supply’.
The facts are that the Indian, Malaysian, Indonesian, Philippines, Vietnamese, Thai, Taiwanese, South Korean, Japanese and Chinese governments have rejected the most recent outbreak of IMG catastrophism. Their strategic actions and their policy responses to the failure of the two recent so-called ‘climate summits’ prove this point. They want for their populations a modern, high quality, wealthy and industrialised standard of living. This is perfectly rational and valid intent – and in a resource constrained world it is a recipe for strategic instability, tensions and conflict. This is the strategic view of those Australian policy makers still influenced by the catastrophist IMG vision of the world being energy resource limited. This view would be correct if the resource base were shrinking: after all world energy demand increased 5.6% in 2010.
But what about a energy resource-rich world where these energy sources are not only growing but are also widely distributed? In such a world, there is just no need for major powers to compete for scarce energy resources concentrated in ‘energy nodes’ like the Persian Gulf. Such strategically vital ‘energy nodes’ become nothing more than just another regional point of supply. How far it is worth exporting that energy becomes a function of transport cost, not scarcity. This is the real world. Despite all the gas used since 1990, proven (1P) world gas reserves have grown from 4470tcf in 1990 to 6600tcf in 2010. This is does not indicate increasing energy scarcity: quite the opposite.
And with abundant energy at stable prices, the continuing absolute and relative reduction in human poverty underway since 1820 can accelerate as more countries industrialise.
Nowhere is the expansion in energy reserves better known than in the USA – so what are the strategic implications of that for Australia? It is arguable that US strategic policy has been distorted for decades by two things. The first was the USA underwriting the defence of Europe on one hand and South Korea-Japan on the other. The second was US, Japanese and European energy dependence on the ‘energy node’ of the Persian Gulf. If the US can obtain its imported energy from the Americas, South Korea and Japan from the arc bounded by Malaysia to Australia to Vancouver, and Europe from internal resources and a ‘top-up supply’ arc from South America through Africa to the Persian Gulf, what does that do to current perceptions of international strategic relations?
So a central factor in this strategic shift is what is really happening in the USA.
There is a quiet revolution occurring there: massive new reserves of gas, oil, and coal are coming into being. They are being either discovered or changed from known geological curiosities into resources by new technologies of exploration and locally-developed technologies such as horizontal drilling and ‘fracking’ (short for ‘hydraulic fracturing’), a process whereby dense (‘tight’) formations containing hydrocarbons are cracked by high-pressure water and the cracks held open with sand so as to allow the hydrocarbons to migrate out of the rock and be piped to the surface. This creates a viable resource from something of no value – it creates new wealth. What helped to develop these new resources was the end of the ‘cheap and easy’ oil era based on ‘energy nodes’. The end of this era pushed prices to over $100 a barrel and triggered the wildly successful search for new energy reserves. The end of this era also signals the end of the global influence of the countries forming the old ‘energy nodes’. OPEC is increasingly irrelevant.
Geologists have known of unexploitable hydrocarbon reserves for decades. Australia’s own North West shelf was known about for many years before the technology was invented to turn it from known but unexploitable reserve to a profitable resource. The Americans have known of such reserves in the Gulf of Mexico, off the California coast, in the American West and Alaska for years. The now-famous Bakken shale has been known for many decades. Mid-Western oil shales have been known for over a century. But what no-one knew was just how large the reserves were once the invention of technology to allow their exploitation eventuated. Then the end of the ‘cheap and easy’ oil era sparked more geological survey work. Vast new resources have been located across the USA, including in New York State, South Dakota, Pennsylvania and Ohio. Estimates suggest that the United States may have increased its hydrocarbon reserves by as much as five to ten times. US oil production peaked in 1972. But US oil imports peaked in 2005 and have since been declining. US oil production is rising fast, and may reach a new production peak as early as 2016. US oil production in the West Texas Permian Basin, South Texas Eagleford shale and North Dakota Bakken shale will increase by over two million barrels per day from 2010 to 2016. So much for the ‘peak oil and scarce energy’ catastrophists.
Energy independence helped the USA rise to world dominance in the early 20th century. The fiscal drain of paying for imported fuel and the strategic cost of maintaining maritime dominance over unstable areas like the Persian Gulf has cost the USA sorely in recent decades. But the United States will once more soon be able to supply its own domestic natural gas demand. This will continue for perhaps a century. The country has recently become a refined petrol and diesel exporter (although the current economic downturn played a role in this by reducing consumption). This has already cut US crude oil imports from OPEC nations by a million barrels per day, and this trend will continue, especially when the current US administration passes and US companies are freed from some of the current exploration and drilling restrictions.
At present the USA imports nine million barrels of oil a day. Increasing energy efficiency and local supplies may halve this by 2017. This could save up to US$200 billion per annum, add 1.5 million jobs and perhaps $900 billion to US federal income.
Goldman Sachs estimate that the U.S. may move from being the third oil producer behind Saudi Arabia and Russia to the leading world oil producer by 2017.The strategic and economic implications of this are staggering. Not the least of these is that OPEC will lose both influence and income from exports to the USA and Europe.
The strategic implications are reinforced by hydrocarbon discoveries also being so widely distributed. They occur from the Canadian Arctic to Brazil, Argentina and the Falklands. The Americas will soon be producing more energy than the Persian Gulf. If the US can get its energy from the Americas, and even local unstable spots like Chavez’s Venezuela lose influence by being reduced to regional suppliers, why should the USA not scale back or abandon expensive stability-enhancing efforts half a world away? What sense does a US presence in the Persian Gulf have if it becomes a regional supply for India and Europe rather than a global source of energy? The drivers that emerge there are to form an alliance with India and withdraw US forces from Europe.
Riyadh is already reacting; Saudi ARAMCO has noted that its dominant role in world oil supply has changed: there is already less urgency to further develop Saudi reserves. Their chief executive was the first major national oil company leader to acknowledge that unconventional hydrocarbons are changing the energy balance of power and slashing US dependence on Middle East oil.
Strategically and economically, this is good news for India and China. Despite their soaring demand, oil prices remain within an affordable range and gas prices are falling. As US demand for Middle-east energy declines, these two powers may become further dependent on this region for imported liquid hydrocarbons (their own unconventional gas reserves appear to be substantial). This may give India a strategic edge over more distant China – a significant shift in India’s favour.
Saudi ARAMCO’s Khalid al-Falih was reported in Reuters as saying that “Abundance isn’t limited to gas reserves, but is also the new headline when it comes to oil. …The abundance of resources and the more ‘balanced’ geographical distribution of unconventionals have reduced the much-hyped concerns over ‘energy security’ which once served as the undercurrent driving energy policies and dominated the global energy debate…” The Saudis are also exploring their own unconventional reserves.
What of Australia in this new strategic landscape? According to a June 2011 report commissioned by the U.S. Energy Information Agency, Australia has an estimated 396 tcf of technically recoverable shale gas. This equates to roughly 20 per cent of Canadian, Mexican and US resources combined. It exceeds the estimated recoverable reserves of coal seam gas in Australia, which are being monetised by the four LNG projects underway at Gladstone, Queensland, where eight LNG trains are now planned for an export capacity of about 32 million tons of LNG per annum. Additional projects are now being proposed in South Australia to export CSG from South Australian coalfields. Projects in NSW might follow.
The US report only assessed four main basins in Australia, but more than 40 exist. Additional resources certainly exist, they just have not been discovered yet. The report assessed the Cooper Basin in South Australia and Queensland, the Maryborough Basin in Queensland, and the Perth and Canning Basins in Western Australia. The Canning Basin alone has about 229 tcf of recoverable gas. Yet despite these enormous resources, Australia only has a few advantages in a resource-rich world. The best of these is that Australia is already a major LNG supplier to countries without their own gas resources (Japan, South Korea) and has a proven record as a trustworthy supplier. Such a reputation takes a long time to develop and easy to lose – there is evidence in their recent actions that current policy makers in Canberra just do not understand this point. The second best of these is that Australia is somewhat ahead of the game. The first big unconventional LNG export hub is being built at Gladstone right now, the risk of that development was somewhat reduced when the success of earlier conventional LNG export hub at the North West Shelf facilities on the Burrup peninsula showed that Australia was a safe place to invest large sums for the long term.
In an energy resource-rich world, maintaining this reputation is a strategic imperative for Australia. There is little evidence that Canberra understands this.
Australia’s regional strategic situation is heavily influenced by the national energy security plans of Japan, South Korea and China. Only the latter has extensive internal unconventional gas and oil reserves. Japan and South Korea were attracted nearly a decade ago to Australia by their ability to acquire entire gas fields here, for Australia has no national energy company. INPEX (a company which acts almost as an arm of the Japanese government-industrial complex) led the charge when it acquired the great Ichthys gas field off Western Australia. The field was acquired as part of the Japanese government’s 100-year national energy security plan. They have since purchased equity in other large gas fields in Australia and Indonesia. South Korea is following this model: the Chinese have been later starters.
These activities reflect past perceptions of coming energy shortages, but (fortunately for Australia) they actually remain valid for countries which lack their own gas reserves and already depend on Australia for 20-40% of their baseload electricity generation through imported Australian LNG. This point cannot be overstated: these perceptions remain valid for South Korea and Japan as they have no hydrocarbon reserves of their own. So their activities in securing Australian hydrocarbons will continue. Therefore, the economies of Japan and South Korea are and will remain dependent on Australian LNG exports. Australia supplies much of their baseload power. There will be other possible spin-off benefits. For example, if the recently reported interest in Japan’s Soryu class diesel submarines were to deepen, it is unlikely that Japan would refuse to release the design to a critical partner in its quest for energy security.
This has critical strategic meaning for Australia. It means that Australia, Japan and South Korea are locked in to a strategic relationship based on energy. In turn, this has direct military implications. It is not a coincidence that Japan and South Korea have ambitious carrier programs, or that the small carriers they are building just happen to be good platforms for the anti-submarine side of trade protection in a region rapidly acquiring new submarine arms. Japan currently has two Hyuga class carriers; small ships (actually classified as ‘destroyers’) of 13,950 tons and able to support a maximum of 11 helicopters. They are to build two more, the ‘22DDH’ type; 19,500 ton ships able to support up to 14 helicopters and also called ‘destroyers’. South Korea is building four 14,300 ton Dokdo class LPH also able to support up to 10 anti-submarine helicopters. Australia is following the same path with its pair of 27,850 ton Canberra class LHD, able to support a mix of up to 24 helicopters and F-35B. The F-35B is not planned for the class, but the Spanish design was built to be able to accommodate it, and those features have not been removed from the Canberra class – responsibly, it was decided by the Howard government not to pay extra to remove capability that might just be needed one day during the 40 year life of these ships.
The Chinese are already surveying their own large scale unconventional gas reserves on-shore. To exploit them, they are purchasing mid-size US companies with horizontal well and fracking expertise. One economic foundation of their ambit claim to the South China Sea was the conventional gas reserves known to exist there. Their claims raised serious tension in South East Asia and helped to justify the arms buildup there. The Chinese government maintains their ambit claims, yet their rhetoric has calmed over the past three years.
The new strategic energy structure supports the notion of a more multipolar world, with the USA being able to abandon some of its more expensive commitments to protect ‘energy nodes’ as these are reduced from global to more regional suppliers. This will reduce American ‘imperial overstretch’ and allow them to concentrate in their most important strategic zone – the Pacific. As European relative decline accelerates it becomes less relevant to the USA, inevitably leading to US withdrawal.
A strategic ‘winner’ in this situation is actually India. It lies close to the Persian Gulf and its navy dominates the northern Indian Ocean. It is aware of and acting to break down the current Chinese encirclement, and conveniently has its boot on China’s liquid fuel supply route to its nearest source of plentiful oil – the Persian Gulf. South-east Asia starts to resume its ancient place in this relationship – the area between these two great Asian powers, but now itself increasingly wealthy and possessed of major energy supplies. That makes them useful allies of either India or China, and that jockeying is already well advanced, as India’s look east program and relationship-building with Vietnam and Singapore illustrates.
Australia lies on the furthest rim of this area – not quite close enough to be drawn in directly, and able to build strategic relationships (both military and economic) with both India and China, while reinforcing a powerful strategic relationship with South Korea and Japan, itself the vital part of the US strategic structure in the Pacific.
The major question for Australia lies internally – are the policy makers in Canberra able to rise to this complex and dynamic nested array of interlocking geopolitical, military and economic challenges? Or will they fall behind, still in the thrall of obsolete perceptions of an energy-scarce world?
