Is this Boom a Case of ‘Too Much Luck?’

1. Is this Boom a Case of ‘Too Much Luck?’ Presentation by Paul Cleary to Desert Channels Queensland

2. Traditional Custodians

3. Outline • Why this boom? • National and local economic impacts • CSG impacts on local and national economy

4. Why this boom? • 3x increase in commodity prices • First world country, third world rates of tax triggered an investment tsunami • Royalty-addicted state govts have approved risky projects on a large scale • Feds have followed suit under EPBC Act

5. Value of approved projects

7. High $A here to stay • $230bn in new investment, plus another $250bn could more than double current volumes of resources exports this decade • Even if prices come back by half, this will be more than offset by the volume increase

8. High $A here to stay • Iron ore exports now single-biggest, forecast to reach $65bn in 2011-12; volume could double this decade • Coal exports, forecast $55bn, volume could double this decade • LNG $10bn in 2010-11; five-fold volume increase to 2020

9. Resources sector dominates Latest Capex figures show: • 55% of all investment • 70% of building investment • Despite a 15% share of GDP

10. Flood & drought • Investment $ are finite • Surge in resources investment like a flood • This is causing a contraction in non-resource investment, or an investment drought, especially in construction • Public sector is contracting

11. National economic impact

12. National economic impact • Risks of resource dependency • Mining 3x increase as a share of GDP to 15 per cent • Resources 2x increase to 67pc of exports; could go even higher to 80-90pc • Jobs gained in mining, jobs lost in non-mining • ‘Hollowing out’, ‘Dutch Disease’ and the more benign 2-speed economy

14. Regional impacts • Insiders and outsiders • Mining drives up costs but benefits from higher prices • Non-mining also faces higher costs, no compensation

15. China First Waratah Coal’s ‘China First’ project gives a rare insight into the negative consequences: • Added pressure on $A will cost 3,000 jobs across Queensland and Australia, in manufacturing, agriculture and tourism.• $1.3 billion of manufacturing activity will be lost.• Inflation will rise.• Businesses hit with higher bills for payroll and rent. • Housing affordability to decline• Wealth will become less evenly distributed Similar national and regional effects already being felt

16. Tourism impact • Higher $A cuts non-mining export income • Mining boom means higher costs for doing business, labour shortage • Tourism in resource regions like NSW’s Hunter Valley being squeezed • Tourism suffering a triple effect – higher $A and wages, while its own product (rooms!) captured by the miners

17. Strength in diversity • ‘In this time of change we’ve got to be working with those sectors to make sure that they come through and we continue to have a diversified economy with lots of areas of strength.’ • PM Gillard, February 2012

18. ‘The inherent value of a diversified economy’ ‘National security’ case for maintaining a steel industry ‘We must be a country that continues to make things.’ Opposition leader, Tony Abbott.

19. CSG’s economic impacts

20. CSG economic impacts • Increased demand for labour during building phase • Sharp increases in localised business costs (rents, wages) • Similar macro effects to the modelling in China First • Potential for sharp increase in national and regional gas prices

21. CSG & gas prices • ‘Historically gas has traded around $4 a gigajoule. I’m absolutely convinced that we’re heading to a price regime of $6 to $8 a gigajoule. . . . with all of the debate that’s around coal-seam gas . . . that is simply going to put further upward pressure on prices.’ AGL chief executive Michael Fraser, ABC TV, late 2011 television interview:

22. ‘Hoovering up’ • “Gladstone is going to be like a giant vacuum cleaner for the east coast gas market, hoovering up all the gas it can get its hands on.” AGL managing director, Michael Fraser, SMH, April 20 2012

23. Policy reform

24. Tax Policy • Robust resource rent tax would moderate boom, generate windfall revenue • MRRT is in the low 30s for multinational, compared with 57% under RSPT, 70% in Norway

25. Savings policy • Invest proceeds in infrastructure and forex wealth funds • A rainy day fund (stabilistion). Chile 4x increase to $20bn last decade • A wealth fund for when the resources start to run out • Investing in forex puts downward pressure on the $A

26. Governance reform • The current regulatory model is surprisingly weak • Approval and monitoring should be stronger, independent and jointly managed • New statutory institution needed to evaluate and monitor projects - an ASIC of resource regulation

27. CSG – the risks

28. CSG – the risks • Approved projects already involve building up to 20,000 production wells • If all proposed projects go ahead, this could rise to 40,000 wells • This involves bringing billions of litres of water to the surface, and millions of tonnes of salt.

29. CSG – groundwater risks • Submission to Burke on APLNG cites advice from Geoscience Australia: that warned of: “high levels of uncertainty in the predicted impacts of CSG developments on groundwater behaviour and on EPBC listed ecological communities”. • “APLNG’s modeling requires further work to fully establish uncertainties.” • CSIRO briefing to Parliament:“The general principles of hydrology are well understood. Insights into groundwater behavior have been gained by analyzing the impacts of historical water extraction in the Great Artesian Basin.”

30. CSG – water extraction July 2010 advice to Peter Garrett: 18,000 production wells could extract “15,000 to 28,000 GL (possibly up to 45,000 GL) of groundwater”. “The proposals will also affect a significant number of stock and domestic users who rely on groundwater in the region, and have the potential to cause widespread subsidence on the land surface.” CSIRO: “Whether the process of water extraction poses a problem or not will depend on the interaction, if any, between CSG production and aquifer systems and on what is done with the produced water.”

32. CSG - salinity • Most of the water extracted is brackish. As a result, CSG projects could bring 30m tonnes of salt to the surface over their life. • Submission to Burke on APLNG:“APLNG does not have definite proposals for the management of CSG water on the surface.”

35. CSG – roads and pipelines Submission to Burke: Location of infrastructure “has not been determined with certainty, and the size of the gas fields area means that it is not possible to identify detailed environmental impacts with precision”.