In the world of energy, the narrative often paints a picture of private enterprise shouldering the burdens of risk and investment, while governments stand by, watching from the sidelines. But what if this narrative is a bit of a myth? What if the reality is more complex, and the lines between public and private are blurred? This is the story of Australia's oil and gas industry, where the lines between government support and private investment are not as clear-cut as the industry lobby would have us believe.
The Australian Energy Producers (AEP) have long argued that the country's oil and gas industry relies entirely on private sector investment, with the government playing no role in the development of these projects. But a closer look at the history of major projects like the North West Shelf reveals a different story. The AEP's claim that the private sector bears all the risk and up-front costs of these projects is a simplification, to say the least.
The North West Shelf project, Australia's largest oil and gas venture, is a case in point. In the 1970s and 1980s, the Western Australian government played a pivotal role in securing its development. Through agreements, financial assistance, and infrastructure provision, the state government laid the groundwork for the project's success. The 'take-or-pay' contracts, signed between the project joint venturers and the State Electricity Commission of Western Australia (SECWA), guaranteed long-term demand and financial robustness. The SECWA, a government-owned entity, promised to purchase all the project's early gas output, ensuring its economic viability.
But the story doesn't end there. The WA government's support extended beyond these contracts. The construction of the Dampier to Bunbury gas pipeline, at a cost of roughly $1.1 billion, enabled SECWA to deliver the gas to major markets in the southwest of WA. The state government also incurred costs for town site development, schools, hospitals, community facilities, and roads, directly associated with the project or arising from the economic and population growth it brought. Altogether, WA's expenditure in support of the North West Shelf project exceeded $8 billion in 2010 net present value terms.
The federal government also played a role in keeping the project afloat. In March 1985, the Commonwealth and WA governments, along with the joint venturers, agreed to 'share the pain' that was forecast to be borne by SECWA, to keep the project alive. This was a significant intervention, as the federal government agreed to forgo millions of dollars of royalties for a number of years.
So, who takes on the risk? Who pays the cost? The AEP's claim that the private sector bears all the risk and up-front costs is a simplification. While the private sector does invest billions of dollars and carries the full commercial risk of projects, the government's support reduces this risk significantly. By building pipelines, signing 'take-or-pay' contracts, and providing financial assistance, the government takes a large amount of risk off the gas industry, placing it on taxpayers' shoulders.
This raises a deeper question: what about the cultural, diplomatic, and environmental costs? When the North West Shelf site was being developed, ancient rock carvings were destroyed, and many others were relocated. The destruction of culturally significant rock shelters in WA's Pilbara by Rio Tinto, and the bugging of an East Timorese cabinet office during negotiations over shared access to the Greater Sunrise oil and gas field, are examples of the diplomatic risks and costs associated with these projects. As former Treasury secretary Ken Henry noted, the costs of burning fossil fuels are being worn by everyone through climate change.
In my opinion, the AEP's claim that the private sector bears all the risk and up-front costs is a simplification that ignores the complex interplay between public and private in the development of major energy projects. The reality is that the financial success of Australia's export industries depends on the social structures and conditions that allow such fortunes to be accumulated, and the government's role in reducing risk and providing support is significant. It's time for a more nuanced understanding of the role of government in the energy sector, one that acknowledges the complex interplay between public and private, and the broader implications of these projects.
