This chapter discusses the economic rationale provided by the Australian and Northern Territory (NT) Governments for developing a shale gas industry in the Beetaloo, including funding under the Beetaloo Cooperative Drilling Program (the BCD Program). In particular, this chapter:
outlines the projected economic returns from the BCD Program;
sets out the economic impacts that may result from the development at scale of a shale gas industry in the Beetaloo; and
the NT's current dependence upon the Commonwealth for financial support and the need for continued support to ensure the viability of the unconventional gas industry.
Projected economic returns
Proponents of the BCD Program point to a range of projected economic benefits, including the creation of more jobs and increased tax revenue for the Australian and NT Governments, as well as broader economic benefits consistent with the Gas-fired recovery plan (see Chapter 1).
A 2017 ACIL Allen study commissioned by the NT Government as part of the Pepper Inquiry (see Chapter 2), estimated that under the most optimistic scenarios (referred to as 'wind' or 'gale' scenarios), Beetaloo shale gas exploration could create between 252 and 524 jobs each year, including indirect employment. Under more modest scenarios (referred to as 'calm' or 'breeze' scenarios), exploration would lead to between 0 and 82 new jobs each year, including indirect employment.
According to the NT Government, these estimates would represent an increase of a maximum of 0.4 per cent of the territory's current workforce under a 'gale' scenario (approximately 126 180 workers).
A 2020 development study by consulting firm Deloitte Touche Tohmatsu (Deloitte) for the Department of Industry, Science, Energy and Resources (DISER) produced a higher estimate, predicting that petroleum exploration in the Beetaloo could result in a country-wide net benefit of between 0 and 1347 full time positions each year at its peak in 2040.
In its submission, Empire Energy Group Ltd (Empire Energy) cited an earlier study completed by Deloitte in 2015, which claimed that development of the Beetaloo could generate over 6000 jobs within the NT over the next 20 years. The submission neglected to mention, however, that the study described its modelling as the 'possible upper-bound economic benefits', referring to its estimate as an 'aspirational scenario'.
The Australia Institute's Research Director, Mr Roderick Campbell, cautioned that the 2015 Deloitte modelling was 'unrealistic' and assumed a cost of $3 per gigajoule—a figure well below the current market price as well as the Australian Government's own modelling, as detailed below.
Indeed, as Deloitte noted, the reported scenarios 'do not necessarily represent expected outcomes. Rather, they are intended to reflect economic benefits that may accrue if the underlying "upper-bound" assumptions materialise'.
Australian Parents for Climate Action, Darwin and NT questioned how long jobs generated by shale gas exploration in the Beetaloo would last. The group cited previous projects in which jobs had been created during the construction phase, but swiftly dried up, allegedly leaving local residents unemployed, driving down house prices, and undermining local communities and small businesses.
Australian Parents for Climate Action, Darwin and NT further argued that any economic benefits from the BCD Program would likely flow predominantly to men, given the small number of women within the gas industry.
Increased tax revenue
Proponents of the BCD Program also cite its benefits in terms of increased tax revenue. Several submissions, however, pointed to the NT's experience with offshore gas projects that have contributed little or no government revenue.
The Australia Institute contended that 'no royalties are paid by offshore gas projects in the NT'. The institute cited the NT Government's own budget papers detailing how the entire mining sector accounted for less than six per cent of revenue in the last financial year. Although a specific breakdown is not available, The Australia Institute estimated that contributions from the gas industry constituted 'a fraction of one per cent' of the territory's annual revenue.
Further, the Australian Youth Climate Coalition specifically pointed out that some oil and gas exploration companies—such as Santos—pay no company tax in Australia.
Indeed, Managing Director of Empire Energy, Mr Alex Underwood–thus far the only company to receive grant funding under the BCD Program–conceded, 'we've never generated profits in Australia, so there's no tax to pay… We've only ever generated losses'.
The Australia Institute's Ms Rhiannon Verschuer told the committee:
Northern Territory unconventional gas projects are evidently highly unlikely to ever pay any tax, as they are widely considered to be unviable without the large subsidies that we keep seeing.
Her colleague, Mr Campbell added:
It's absolutely the case in the Northern Territory that onshore gas has been costing the NT government quite a lot of money for quite a long time… Gas is an economic negative to the NT in most circumstances in recent years.
The broader economic benefits
Empire Energy in its submission to the inquiry cited the 2015 Deloitte study to suggest that development of the Beetaloo would inject up to $17 billion into the NT economy, with up to $1 billion of tax revenue.
As noted above, Deloitte's estimates were based on a 'success scenario' under which production costs were assumed to be well below current estimates.
Ms Verschuer gave evidence that projected economic returns of this scale appear to have been based on production costs that were assumed to be well below the $7 to $10 per gigajoule actual costs anticipated in DISER's own study, as detailed below.
Mr Campbell agreed with this assessment, saying 'there just aren't any analysts publicly saying that they expect gas to be that cheap'.
DISER claimed that development of the Beetaloo will lower national energy prices. Yet the remote nature of the sub-basin and associated increased costs of production call into question the veracity of these claims. As noted by Protect Country Alliance:
The gas in the Beetaloo Sub basin will be some of the most expensive gas in the world and there is no way it can be used to build an economic future, especially in a world where demand for gas is reducing which will keep prices low.
Ms Vershuer told the committee that 'it's expensive to do anything [in the Beetaloo]. It's expensive to get a product to market, and it's difficult to commercialise anything in those circumstances'.
Further, it is not even clear that any of the gas that comes out of the Beetaloo would be destined for domestic markets. In a recent statement to the ASX, Santos explained that its Beetaloo assets support exports through Gladstone and Darwin. If Beetaloo production is intended for the more lucrative export markets, then there is little prospect of domestic gas prices being lowered through exploiting these gas fields.
With respect to projected energy prices, Mr Campbell argued:
…the idea that expensive gas coming out of the NT could somehow lower gas prices for the rest of Australia seems pretty contrary to most analysts' expectations and to economic logic.
Protect Country Alliance warned of the potential harm to the broader national economy if an onshore shale gas industry proceeds in the Beetaloo. It suggested such projects would likely prompt the European Union and others to impose a carbon levy on Australian imports, potentially damaging other sectors like agriculture.
Professor Andrew Blakers and Ms Anna Nadolny, based at the Australian National University, projected a decline in the economic viability of gas relative to renewable energy sources. Professor Blakers and Ms Nadolny argued:
Electricity is cheaper for heating water and air and for cooking in residential buildings and even with a higher purchase price, electric appliances have a lower total cost of ownership than gas.
Protect Country Alliance summarised the economic case for subsidising exploration in the Beetaloo Basin as follows:
From an investment perspective it is a huge gamble for…a very small return—a miniscule number of jobs, an unverified claim that domestic gas prices will come down and relatively small returns on resource taxes.
Professor Blakers and Ms Nadolny's submission similarly criticised the economic case for the BCD Program, concluding that 'it would be unwise to pick gas as a winner. The best approach is to let the market sort it out'.
Financial support for the NT's onshore gas industry
The Australian Government has contributed significantly to propping up the NT's onshore gas industry, with the BCD Program another such example of Commonwealth subsidisation of the industry.
The Australia Institute submitted that the NT Government has overseen nearly $10 million worth of subsidies for the onshore gas industry each year over the last decade. An additional $4 billion was committed by the government for the Blacktip offshore gas project, with over $1 billion more in subsidies allocated for transporting gas from the project.
As detailed by DISER and Geoscience Australia, the Australian Government has budgeted a further $175.8 million in related subsidies for the NT, consisting of road upgrades to support the development of gas reserves in and around the Beetaloo ($173.6 million) and support for land use agreements to accelerate exploration in the sub-basin ($2.2 million).
The Australia Institute summed up the situation in its submission: 'throughout the last decade, the NT gas industry has benefited from large public subsidies and contributed little in return'.
Making these subsidies all-the-more problematic, modelled costs of exploration in the Beetaloo suggest that the onshore shale gas industry is unlikely to ever be commercially viable and will require ongoing federal subsidies to remain operational.
A study commissioned by the Australian Energy Market Operator from independent energy and resource market advisory firm, Core Energy and Resources, placed the extraction costs of gas in the sub-basin at between $6.80 and $9.90 per gigajoule—before transport costs.
The 2020 Deloitte study concluded that if the cost of extracting gas in the sub‑basin was at or above $7 per gigajoule, 'it is unlikely that it will be a competitive source of supply without some form of government subsidy or incentive'.
The ACIL Allen study casts further doubt on the viability of gas extraction in the Beetaloo, in which the most likely scenario was identified as one in which gas production would be too modest to commercialise.
Citing these studies The Australia Institute argued:
Development of the Beetaloo Basin is likely to require not just the $50 million Beetaloo Drilling Program subsidy and the other $175 million in [road construction] assistance in the current budget, but ongoing subsidisation.
The Australia Institute estimated that these subsidies would run to the billions or tens-of-billions of dollars in Commonwealth funds over the lifetime of unconventional gas development in the Beetaloo.
Indeed, Empire Energy claimed that exploration and development of the Beetaloo is 'critical to the enduring gas supply challenge Australia faces', but requires government support to bring gas to market.
The Protect Country Alliance argued that fracking remains financially unviable worldwide and cautioned that subsidies like those being implemented in the Beetaloo would distort the energy market in Australia and could eventually lead to 'stranded assets' that the market cannot sustain.
The Protect Country Alliance concluded that 'gas production in the Beetaloo is clearly not viable in its own right as it depends on huge government subsidies', a view with which Ms Verschuer agreed:
Beetaloo gas is unlikely to be a competitive source of supply without some form of government subsidy or incentive. What this means, in other words, is that opening up the Beetaloo Basin will mean decades of taxpayers paying gas companies, and not the other way around.
Better ways to spend $50 million
In addition to the alternative expenditure options for the $50 million BCD Program that could benefit First Nations Peoples, a number of other submitters suggested other possible alternatives.
After analysing the economic impacts of the BCD Program, The Australia Institute concluded that the Australian Government funding could be put to better use:
…rather than facilitating the exploration of new gas basins, this money could be directed towards salaries for essential services workers [such as medical, education or other essential services]… The money for the Drilling Program could be used to pay a year's salary for many hundreds of essential service workers that provide immediate benefit to the NT community.
Mr Campbell added that it would be more economically advantageous to subsidise any industry other than the oil and gas sector, as this would create more jobs:
There are any number of industries that could receive hundreds of millions in subsidies from the federal government and absolutely every one of them would create more jobs than the gas industry for the simple reason that the gas industry uses a lot of machinery and a lot of pipelines but actually employs very, very few people.
Earlier analysis by The Australia Institute, based on Australian Bureau of Statistics data, found that the job intensity of the oil and gas extraction industry was the lowest of the 20 industries examined (see Figure 3.1 below).
Figure 3.1: Job intensity of selected Australian industries (jobs per $m sales income)
Australian Parents for Climate Action, Darwin and NT expanded on this argument:
For every million dollars spent the gas industry employs approximately 0.4 people compared to health or education where for every million dollars more than 10 people are employed.
The Protect Country Alliance agreed that the $50 million grant funding could be better spent elsewhere:
The money being proposed as subsidies to these foreign owned companies could be much better spent on renewable energy systems and housing across the region and activities that might have a lasting benefit for future generations. To spend this money accelerating fracking is a clear breach of Ecologically Sustainable Development (ESD) principles.
The economic case for gas exploration in the Beetaloo appears to be based on overly optimistic assumptions and unrealistic modelling. Evidence clearly points to the likelihood that the BCD Program will create very few jobs, if any.
Even under the most optimistic scenarios, Commonwealth and territory tax revenues are expected to be low, with the industry requiring substantial taxpayer subsidies to commercialise. In the committee's view, Australian taxpayers will be required to foot the bill for propping up the industry for decades to come with little in return.
The tenuous case for sustaining the NT's onshore shale gas industry appears to be driven primarily by the Australian Government's narrow-focus on a 'gas‑fired recovery', with little thought for the public good. Even before the likely detriment to the environment, culture, and society is considered—and to First Nations communities, in particular—the economics of exploration in the Beetaloo just don't stack up.
The BCD Program will bring few jobs, little tax, and will continue to be a drain on Australian taxpayers for decades to come. Added to this are the perceptions of impropriety related to the political ties enjoyed by Empire Energy and the potential for Commonwealth funds to be siphoned off into tax havens (see Chapter 2).