speech

APPEA 2015 Roy Krzywosinski Plenary Speech

     

Roy Krzywosinski

Managing Director
Chevron Australia Pty Ltd
APPEA 2015
20 May 2015

Roy Krzywosinski, Managing Director Chevron Australia
APPEA Plenary Session: Mega-Projects in Transition

Good morning everyone.

It is a pleasure to be here in beautiful Melbourne for this year’s APPEA Conference.
I would like to start by acknowledging distinguished guests, ladies and gentlemen… and also thank the Chair of this morning’s session, Mr. Peter Cleary, for his kind introduction. 
Today I would like to talk about some of the opportunities and challenges facing the industry as we transition from project construction to ongoing operations.
Currently Australia has only four operating LNG plants, if you look at North West Shelf, Darwin LNG, Pluto and QCLNG.
Today, we are seeing unprecedented growth in the LNG industry… almost a tripling of the number of LNG production trains from 8 to 21.i

 Chevron Australia Managing Director Roy Krzywosinski, far right, at APPEA 2015.

As Federal Treasurer Joe Hockey pointed out in his recent Budget Speech, Australia will soon become the world’s largest exporter of LNG.ii 
Never before has there been growth of this magnitude in an energy industry… anywhere in the world.
In the next 10 to 15 years, global LNG demand is projected to be 440 million tonnes per annum which is nearly double today’s production. 

This rising demand is driven by global economic growth and an appetite for cleaner burning natural gas, with Asia responsible for nearly 70 percent of this forecasted growth. 

And, we all know, Australia is ideally placed geographically to meet this opportunity…

When you take into account the existing supply gap that has already been filled, we estimate a supply opportunity in the order of 70 million tonnes per annum.iii This is equivalent to eight Wheatstone LNG projects.

Before we look ahead, however, it is important to recognize the enormous achievement we have made as a nation… and as an industry so far.
 
To this point, let me show you a video  [Gorgon Project Update Q1 2015 (4:01)] which demonstrates the significance of two nation-building projects, the Gorgon and Wheatstone LNG and domestic gas projects, which Chevron, with the help of its partners, are building in Western Australia today.

 

Together, Gorgon and Wheatstone will position Chevron as Australia’s largest LNG produceriv and Australia, as one of the world’s largest LNG exporters.
Gorgon and Wheatstone are just two of seven projects currently being built by our industry….the scale is simply enormous. This represents an important chapter in our national success story…And, one that should be celebrated.

What you just saw is Australia demonstrating its ability to bring together the technology, innovation and human energy, to deliver world-class projects….big projects, on a scale never seen before. 

Taking on these challenges is what our industry is known for… 

And in doing so, we have unlocked the resource, economic benefits, jobs and energy security, across half a century of operations…

That’s two generations of Australians… that is something to be proud of. So, what happens when we have completed construction on these seven new projects...

We need to ask ourselves and understand, what is it going to take to operate a world-class LNG industry? 

First – I will look at the current state of the industry;

Second – what is the opportunity before us to operate and maintain these world-class projects;

And finally – what can industry and government do to best position Australia to be globally successful. 

Australia’s amazing LNG success story is perhaps not well known or understood throughout the broader community.

The enormous impact of the industry’s investment is difficult to quantify. For example, back in 2011, Chevron commissioned an independent third-party study to demonstrate the economic benefits of the Gorgon and Wheatstone Projects. 

Just recently, we had the same independent organisation repeat the analysis based on current data as we move into the operational phase.

The preliminary findings indicate the earlier projections – notwithstanding their significant quantum – considerably underestimated the economic benefits.

I would like to share with you some of these new findings for the first time. And as I walk through the economic impact for Gorgon and Wheatstone, there is even a greater compounding impact from the other new LNG projects being built.

The new study found, that last year nearly 19,000 people were employed on Gorgon and Wheatstone.v 

Across the life of the Projects, the preliminary results suggest the total contribution to Gross Domestic Product from Gorgon will be in the vicinity of 400 billion dollars… 
….and from Wheatstone about 150 billion dollars…

…A total of around half a trillion dollars of GDP contribution,vi equivalent to the size of the New South Wales’ economy.vii

It is worth noting, during the construction phase of Gorgon and Wheatstone already more than 40 billion dollars has been spent with more than 600 local companies… 
And, during operations we’ll continue to grow this good news story…

It is expected more than 80 percent will be spent with Australian suppliers. This will result in tens of millions of dollars spent with local businesses each month.

Already, an additional 80 operations contracts have been awarded to local companies.

So it is clear these projects have, and will continue to have, a massive and positive impact on the economy…

…And, across the broader industry, the multiplier effect will be even more profound. 

However; the landscape is changing…we need to recognise there has not been a final investment decision on an Australian LNG development since 2012. 

As many of us discussed, including at previous APPEA Conferencesviii , the second wave of LNG investment for Australia - which promised to deliver further benefits – is at serious risk of not happening, at least in the foreseeable future.

The reasons are many and complex, but as noted by a range of organisations, a major contributor is Australia’s falling international competiveness. This is against a backdrop of rising competition from other global LNG suppliers.

In the US alone, there are over 30 proposed LNG projects with 3 currently under construction totalling nearly 50 million metric tonnes per annum of liquefaction capacity.ix 

You may be familiar with research from the Business Council of Australia which found the cost of building a greenfield project in Australia was 40 percent more expensive than the US Gulf Coast. 

Irrespective of the current lower Australian dollarx , we can no longer rely on strong commodity prices to bail us out.

We need to remember…commodity prices are set globally – competitiveness is determined locally.

As we look ahead, we need to claw back that competitiveness and create the investment environment here in Australia that helped us harness the gas boom in the first place… 

…not only to be in the race to attract future projects, but also to ensure the success of the operation and maintenance of the Projects we are currently locked into.

This is the big opportunity before the LNG industry and nation today.

We must prove we can transition from construction to operations by providing operational predictability, reliability and competitiveness to meet our customers’ expectations. 

Ladies and gentleman, a new chapter is being written in Australia’s amazing LNG growth story.

Project builders are passing the baton to the operators, suppliers and those who will maintain these complex facilities for decades to come.

It is the LNG services industry that helps maximise the reliability and to help the operator extract maximum value from the resources. 

The services industry covers everything from camp services and logistics to plant maintenance, facilities management and subsea infrastructure just to name a few.

Much of the work is highly skilled, highly technical and highly specialised.

The industry’s capacity has never before been stretched or tested with the addition of 13 new gas trains.

I believe the most successful services companies over the long-term will be the ones who are flexible, adaptable and cost-competitive. This all underpinned by optimizing safety, efficiency and reliability of production.

And, do it in a way that demonstrates Australia has the capability and capacity to support a globally competitive LNG industry.

It’s important to recognize forging a successful services industry, is not just a matter for the services industry alone… 

It’s a matter for all of us- it requires all hands on the wheel- it is in Australia’s national interest.

And, this leads me to the final topic…

…that is, what the energy industry, in partnership with government, can do to maximise our chances of future success…

…the success of the services sector in our current projects, and for securing future investment and future projects.

I believe there are some key requirements:

• As I mentioned earlier, we need an attractive investment environment which fosters an open-for-business, entrepreneurial culture;

• A regulatory framework which encourages and doesn’t impede industry growth;

• A flexible and predictable industrial relations system encouraging a more direct employee-employer relationship, and one which supports and embraces competitiveness;

• A globally competitive taxation system; 

• And finally, government policy which supports research and development investment for large projects.

Investor confidence in making major capital investment decisions are underpinned by all of these key elements.

These investments are huge and the timelines intergenerational.

In 2009, when we took a final investment decision on the Gorgon Project, the capital cost was described by some as equal to the then Federal Government’s post-GFC economic stimulus package.xi

Some would credit Gorgon with playing a supporting role in turning around the economy at the time. 

With such great economic impact…Industry must continue working hand-in-hand with government to develop and implement policy that ensures we remain competitive in attracting future investment. 

The government understands the issues and is doing what it can in a tough political environment.

Government - on behalf of all Australians - and the industry, have a shared interest to shape the investment environment that will secure the energy, revenue and jobs of the future.

I believe we can reach common ground on the right policy settings, but it will take political leadership and it will take political flexibility.

As I mentioned earlier, the benefit is great- with over half a trillion dollars in GDP contribution as generated by Gorgon and Wheatstone alone.

It is a national imperative we get the policy settings right to attract the next wave of investment. Some would say this represents a-potential 100 billion dollars waiting in the wings with the associated economic benefits.xii 

The industry needs to redouble its efforts to collaborate…and, learn from the past.

Co-operation in non-competitive areas can deliver shared benefits which can drive down costs.

For example, in the Gulf of Mexico and the North Sea, most logistics services are shared.

In Australia, there are too few examples of co-operation during the development and construction phases of projects, and we need to move to a more collective mind-set. 

A major opportunity during the operations phase is on plant turnarounds.

Turnarounds are like a major service on your car… except they can take thousands of people, last for weeks, and quite frankly, it is not a car… it’s a very big LNG plant. One that’s very complex. 

We need to work to optimize and grow the availability of the highly specialised skills needed to perform these turnarounds, predictably and safely across the industry.

In the area of safety, this is an example where industry is working together, and is seeing real results.

As Chair of APPEA’s Stand Together for Safety committee, safety is an area where collaboration needs to continue. It is an industry imperative.

In summary, we need to continue finding innovative solutions to drive down our costs.
Australia is home to a first-class education and training system.

It is a smart economy possessing innovation and skills. 

Our industry requires us to think big, but let’s think even bigger.

Together with world-leading academia and research and development, we can position Australia as a global LNG powerhouse… the Houston or Aberdeen energy hub of the Southern Hemisphere.

Ladies and gentlemen…

Earlier, I described Australia’s journey to become the world’s biggest LNG producer as a national success story.

But, it’s only half the story. 

The challenge now is to prove to the world that when it comes to operating and maintaining these facilities, we’re best in class.

Developing a capable and responsive world-class services sector will help us demonstrate Australia is investment ready for the next wave of opportunity, positioning us as the preferred global LNG supplier. 

For the most part, the fundamentals are good. 

Global demand for cleaner-burning energy continues to grow, Australia has an abundance of natural resources and its proximity to Asia positions us very well. 

If we get the policy settings right, apply a highly skilled services sector, and technology and innovation, the rest will follow.

If we look decades down the track, I see the legacy of Australia’s gas boom as a sustainable and world-class industry with benefits shared across the nation.

I would like to think Gorgon and Wheatstone would be seen as engineering wonders of the modern world, similar to Australia’s Snowy Mountains Scheme.

That would make it an international success story…one that we can all be proud of.

Thank you.

Accenture Report ‘Ready or Not’, May 2015.
ii According to Wood Mackenzie data, from 2019 Chevron will be Australia’s biggest LNG producer, helping transform Australia into one of the world’s biggest LNG producer.
iii Wood Mackenzie and Chevron analysis.
iv According to Wood Mackenzie data, from 2019 Chevron will be Australia’s biggest LNG producer, helping transform Australia into one of the world’s biggest LNG producer.
v ACIL Allen independent economic modelling, 2015: Gorgon and Wheatstone construction phase, includes the Chevron Australia Perth office.
vi Estimates calculated using a computable general equilibrium model, the federal government’s preferred method of modelling economic impacts.
vii http://www.smh.com.au/nsw/nsw-state-election-2015/nsw-economy-to-hit-the-halftrilliondollar-mark-20150216-13g09y.html
viii http://www.chevronaustralia.com/news/speeches/2014/04/07/appea-roy-krzywosinski-plenary-speech
ix IHS Report May 2015 .
Business Council report ‘Securing Investment in Australia’s Future- Report of the x Project Coast Task force’, August 2013 and predates the recent AUD fall to under US80c. 
xi http://www.dailytelegraph.com.au/kevin-rudd-announces-economic-stimulus-package/story-e6freuy9-1111118741737
xii APPEA Policy Priorities paper, 2013