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Australia Puts Its Power behind Pumped Hydro Energy Storage Plants

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Australia, as most countries across the globe, is increasing its focus towards renewable energy for future sustainability. These initiatives are faced with the inherent challenge in the renewable energy development – intermittency of supply, i.e. the fact that the supply is not continuously available (e.g. sunlight or wind) and it cannot be modulated according to demand. To tackle this, power companies and the Australian government are making significant investments in pumped hydro energy storage (PHES) plants. These plants facilitate the storing of energy when supply is high but demand is low, so that it can be used when demand supersedes supply levels. Currently, several PHES projects are under assessment and development in Australia.

In 2015, the Australian government set renewable energy targets of 33,000 GWh in large-scale generation, equaling to about 23.5% of Australia’s total electricity generation by 2020. The ongoing pace of new and upcoming solar and wind power projects during 2017, 2018, and 2019 has ensured that the targets set under the Renewable Energy Targets (RET) scheme are met. Moreover, if the current rate of renewable installations continues, Australia is on track to achieve 50% renewable electricity by 2025 and 100% by early 2030’s.

To make renewable energy more sustainable, the government is looking at storage options for solar and wind energy. Solar and wind energy are inherently intermittent in nature. This means that energy can be harnessed based on availability of these resources and not based on the demand at a certain time. This makes renewable energy supply less predictable and dependable in comparison with fossil fuel-based energy.

This is where pumped hydro energy storage can prove useful. PHES plants can store renewable energy on a large scale within the electrical power grid. Fundamentally, PHES plants work in a similar way as regular hydro energy plants, wherein water flows from a higher reservoir to a lower reservoir, generating electricity by spinning the turbines. However, the key difference in case of a PHES plant is that in case when more energy is being produced than the current demand level, the plant uses the spare energy to pump the water back from the lower reservoir to the higher reservoir, thereby making it available again to generate power when the demand rises.

PHES stations are all the more beneficial when integrated with renewable energy generating grids. Since it is difficult to ascertain how much energy will be produced through wind and solar at a given time, pumped hydro energy storage helps balance it in accordance to the demand levels. When wind and solar grids produce more energy than currently required, the excess energy can be used to push the water uphill in the integrated PHES plant, which can be used later when energy produced through renewables is lower than the demand levels. Thanks to this, these plants act as energy-storing batteries.

PHES stations are all the more beneficial when integrated with renewable energy generating grids. Since it is difficult to ascertain how much energy will be produced through wind and solar at a given time, pumped hydro energy storage helps balance it in accordance to the demand levels.

PHES projects across Australia

Owing to these benefits, Australia is extensively exploring this technology. It is estimated that the country is looking to add about 363 GWh of new pumped hydro energy storage capacity, through nine projects that are under consideration and development. In addition to this, there are several other projects that are at initial stages of assessment and do not have a specified capacity yet. As per experts, Australia needs about 450 GWh of storage to support a 100% renewable electricity grid. Some of the most prominent PHES projects in Australia include Snowy 2.0, Marinus Link Project (Battery of the Nation), and Kidston project.

Snowy 2.0

Snowy 2.0 (an expansion of the 70-year-old Snowy Hydro scheme) is the largest energy storage project in Australia, with capacity of 2,000 MW. The plant will offer 350 GWh of pumped storage. The project, which is to be developed and operated by Snowy Hydro (an Australia-based electricity generation and retailing company), is estimated to cost US$2.8-4.2 billion (AU$4-6 billion) and is expected to commence operations by 2024. It has received US$1 billion (AU$1.38 billion) in federal funding.

Moreover, it has partnered with large global technology companies, such as Germany-based Voith Group, which has been contracted to supply the electrical and mechanical components such as the reversible pump turbines and variable-speed pump turbines to be used in the storage hydro power plant.

Marinus Link Project (Battery of the Nation Project)

The Marinus Link Project is a part of Tasmania’s Battery of the Nation program, under which a second interconnector will be built across the Bass Strait. This high voltage interconnector will ensure smooth supply of hydro power to Australia’s mainland. Tasmania has huge potential for wind and hydro electricity generation and an initial assessment by state-owned Hydro Tasmania (Tasmania’s largest electricity generator) indicates that the state has 14 potential sites for PHES plants, with a cumulative capacity of 4,800 MW.

The project is expected to cost US$0.9-1.2 billion (AU$1.3-1.7 billion) for the 600 MW capacity interconnector link or US$1.3-2.2 billion (AU$1.9-3.2 billion) for the 1,200 MW capacity link. The Australian government has provided US$39 million (AU$56 million) in federal funding to help fast-track the interconnector, while the Tasmanian government has committed about US$21 million (AU$30 million) to support the feasibility assessment of three shortlisted pumped hydro energy storage sites in north-western Tasmania.

The interconnector, which is expected to deliver 2,500 MW of renewable hydro power along with 16 GWh of storage to Tasmania and Victoria is expected to be completed by 2025 and reach economic feasibility by early 2030s.

Kidston Pumped Hydro Project

Another project that is gaining significant traction is the Kidston pumped hydro energy project, which is a 250 MW project (2 GWh of pumped storage) in northern Queensland, and is proposed by Genex Power. It is estimated to be completed by 2022.

The Kidston project will also be integrated with an already built 50 MW solar farm. It will help store solar energy when it is in surplus and release it back to generate more electricity when solar energy cannot be harnessed.

Genex Power plans to build another 270 MW solar plant and 150 MW of wind energy capacity over a phased period. In June 2018, the company’s pumped hydro project secured about US$358 million (AU$516 million) in concessional loans from the federal government’s Northern Australia Infrastructure Facility (NAIF).

Moreover, in December 2018, Genex Power signed a deal with EnergyAustralia (Australia’s third-largest power company, owned by Hong Kong’s CLP Holdings), giving exclusive rights to the latter to negotiate an off-take agreement for Kidston’s (solar plus pumped hydro) output, encompassing an option to buy 50% stake in the PHES component. Under the term sheet of the agreement, EnergyAustralia will have exclusive rights to negotiate, finalize, and execute a long-term purchase agreement with Genex, however the contract currently is non-binding and is subject to a number of conditions.

In addition to these, there are several other projects that are currently in the feasibility or development stage. In May 2018, Delta Electricity, an Australian electricity generation company, received development approval from the South Australian government for a 230 MW Goat Hill pumped hydro project. Altura Group (Australia-based renewable energy project developer and advisor) has been hired as the project developer. The project is expected to cost about US$284 million (AU$410 million) and the South Australian government has committed about US$3.3 million (AU$4.7 million) to facilitate final project development. The project is expected to be completed by late 2020.

Another such project is EnergyAustralia’s Cultana Pumped Hydro Energy Project, which is the first sea water pumped hydro energy storage project in Australia. The project will have a capacity of 225 MW. In 2018, it received US$0.35 million (AU$0.5 million) funding from ARENA (Australian Renewable Energy Agency) to support the US$5.6 million (AU$8 million) feasibility study. The project is currently undergoing feasibility studies and concept development and, if approved, it is expected to be completed by 2023.

Similarly, in April 2019, Australian utility company, AGL Energy, unveiled plans to build a 250 MW pumped hydro energy storage facility in South Australia’s Adelaide Hills region. While the company has received the right to develop, own, and operate the plant, the project is currently under assessment. If approved, the project is expected to be completed by 2024.

PHES projects and their viability

Large sums of investment into PHES projects by private companies as well as the federal government indicate its criticality in the overall transition of Australia’s energy grid to include a larger share of renewable sources. Moreover, several coal-based energy plants are retiring in Australia in the near future, which will further create an opportunity for renewables with storage options to replace the current form of generation. As per experts, the cost of energy from wind and solar combined with storage (from either pumped hydro or other form of batteries) will be lower than generation from new coal or natural gas plants post the retirement of existing coal and gas plants. This further makes the case for huge investments in pumped hydro energy storage.

As per experts, the cost of energy from wind and solar combined with storage (from either pumped hydro or other form of batteries) will be lower than generation from new coal or natural gas plants post the retirement of existing coal and gas plants. This further makes the case for huge investments in pumped hydro energy storage.

However, apart from PHES plants, there are other forms of storage as well. These primarily comprise of lithium-ion batteries. One example of such a battery is Tesla’s Hornsdale Power Reserve Battery. It is located in Narien Range (South Australia), was constructed in December 2017, and has a storage capacity of 129 MWh. However, these batteries are not a direct competitor/substitute for PHES plants, as they are usually smaller projects than pumped hydro energy storage plants and have a relatively shorter life as well. Moreover, pumped hydro energy storage is a more cost-effective way of storing energy, when compared with lithium-ion batteries.

Investments in PHES projects are significantly higher, when compared with lithium-ion batteries. This makes these projects long-term in nature, especially with regards to return on investments. These projects have a lifespan of about 90-100 years (and are highly capital intensive), whereas lithium-ion batteries have a lifespan of 10-15 years.

Therefore, the government is being fairly cautious about commissioning PHES projects at the moment. In fact, all of the current projects under review may not be commissioned considering their economic viability. PHES plants need a revenue of about US$139,000 (AU$200,000) per MW per year to be economically viable. While this can be achieved in the long run when there is higher electricity volatility owing to greater dependency on renewables (after the coal generators have retired), currently this cost cannot be justified as electricity volatility is lower with coal and natural gas generation. Moreover, different political parties have a different take on Australia’s energy mix. Thereby, the boost provided to the PHES sector with respect to cheap financing and subsidies will depend on the political party in power, which in turn will affect the economic viability and profitability of pumped hydro energy storage plants.

Moreover, new technologies are being developed at lightning speed, which may further affect the uptake for PHES plants. One such emerging technology is concentrating solar power, in which solar energy is stored in molten salt. This technology can provide several hours of storage and can also act as a baseload power plant. However, currently, this technology is much more expensive when compared with pumped hydro energy storage technology. At the same time, with growing focus on renewables globally, there are always possibilities of new technologies that solve the energy volatility problem in a most cost-effective and efficient manner.

EOS Perspective

Pumped hydro energy storage plants seem to surely have a secure place for themselves in Australia’s energy grid in the long run. With coal and natural gas generators retiring, there will be an increasing push for renewables to fill in their shoes. Renewable energy needs storage options that are stable and effective. PHES plants developed today will be operating for the next century providing a good base for Australia to move to a 100% renewable energy when it is ready. While investments in these projects run high, several large energy players in the Australian market are looking for investment opportunities in this form of storage as they believe it will play a critical role in Australia’s energy grid in the coming years.

However, most of the works regarding PHES plants is currently on paper, with majority of the projects still at the stage of seeking financing. The project closest to completion currently is the Kidston Project, which also failed to secure a confirmed off-take agreement (i.e., pre-contracted purchase agreement) with EnergyAustralia and had to settle for an agreement to negotiate an off-take based on the fulfillment of a few conditions. This hints towards a cautious approach adopted by large utility players when it comes to investing in pumped hydro energy storage projects. With utility players, such as EnergyAustralia, claiming that before committing to huge investments in this space, they would like clarity and stability in the national energy policy (that includes an emission trajectory), a lot falls into the government’s keenness to support renewable energy in the future. While it may seem like things are moving in that direction, a stronger emission policy or a higher renewable target is likely needed for matters to gain momentum.

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High Production Costs Dampen Camel Milk Market Potential

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Over the past few years, dairy-caused allergies and the growing debate regarding the inherent benefits and disadvantages of consumption of cow milk and its products have made consumers look for alternative sources to traditional dairy products. One product that has been growing in popularity owing to this is camel milk. Deemed to be the most expensive milk in the market, camel milk is known to have several medicinal values, especially for the treatment of diabetes, orthopedic problems, and autoimmune diseases. Few studies also claim that it is beneficial for the treatment of autism. While camel milk remains a niche product at the moment, it will be interesting to see if this product can make a dent in the massive dairy-milk industry, especially with the presence of several other healthy plant-based milk alternatives.

Growing demand and expanding production

Camel milk is not a new product as it has been consumed in the Middle East for ages, however, it is only recently that it has sparked global interest. Owing to its significant health benefits (primarily for diabetes), the product has found traction especially in developed countries, such as the USA, parts of Europe, Singapore, and Australia. The global market, which was valued at about US$4.24 billion in 2017 is estimated to register a CAGR of about 7% during 2018-2022.

Investments to expand Australian camel milk production

In response to the growing demand, several companies (especially across Australia) are entering the camel milk space and are increasing their investments in the sector.

Australia’s Wild Camel Corporation has expressed plans to increase its herd size five-fold from 450 camels to 2,500 camels over the next two years.

Similarly, Western Australia-based Good Earth dairy, which in mind-2018 had about 100 camels, plans to expand to 3,300 camels by June 2020, which would help the dairy produce about 10,000 liters of camel milk in a day.

Victoria-based The Camel Milk Co. doubled its milk output in 2017 to reach 250 liters a day from a herd of 250 camels. It has also maintained a scope for further expansion by moving to a farm that can house a herd of 1,000 camels, planning to increase its herd size along with growing demand.

International investments are also pouring into Australia’s camel milk market. In 2017, UAE-based investors funded a US$6 million (AUD8 million) pilot camel milk farm at Rochester, Australia. Several Chinese investors are also reported to be interested in investing in the camel milk business in the country.High Production Costs Dampen Camel Milk Market Potential

India’s camel milk production grows as well

In addition to Australia, India (and a few African countries, such as Kenya and Ethiopia) has also focused on increasing camel milk production.

India-based Aadvik Foods and Products, which procures raw camel milk from Indian camel breeders and herders and processes and markets it, has significantly increased its scale of operations. It started with procuring and processing 80-100 liters milk per month in 2015 and moved on to procuring and processing close to 8,000 liters per month in 2017.

In January 2018, Rajasthan’s State Government (in partnership with Jaipur-based Saras Dairy) announced its plans to set up a mini camel milk plant in Jaipur. The plant will cost US$1 million (INR 70 million) and is expected to be set up by the end of the year. Post the establishment of the Jaipur plan, the government plans to open another mini plant in Bikaner.

Expanding food product lines

In addition to processing and marketing camel milk, several companies across the globe are expanding their product base to include camel milk products such as milk powder, chocolate, cheese, infant formula, ice cream, etc.

In 2016, Desert Farms, a US-based camel milk company, added camel milk soaps and camel milk powder to its product range.

In 2017, India-based Aadvik Foods, also extended its camel milk product line to include camel milk chocolates and milk powder.

In a similar move, Amul, one of India’s largest dairy cooperatives, launched camel milk chocolates in late 2017. Unlike most other players in the market, Amul has first started with chocolates and then wishes to enter the packaged camel milk market in the near future.

In 2018, Australia’s QCamel announced its plan to launch camel-milk chocolates for the Australian as well as international markets.

In February 2018, UAE-based Camelicious launched the world’s first camel milk infant formula for children aged one to three, an alternative for children who are lactose-intolerant.

The camel products for children are praised for their benefits, as camel milk is the closest alternative to mother’s milk in terms of nutritional value. Since camel milk is beneficial for children as it has higher iron and vitamin C content compared with other milk options, products such as chocolates, infant formula, and ice cream, seem to be smart product extensions, especially if such benefits are highlighted through marketing.

Moreover, product extensions help companies reach a greater audience for their camel milk. Since camel milk is saltier than the largely consumed cow milk, products such as chocolates, help garner users that otherwise may reject camel milk due to taste preferences.

High retail prices hamper demand growth

While camel milk as a product is gaining popularity and acceptance globally, it is not without its share of challenges. Camel milk is the most expensive type of milk in the market.

In the USA, Desert Farms sells one gallon of camel milk for US$144 (US$38 per liter), while it sells a kg of camel milk powder for about US$370. In comparison, a gallon of cow milk sells for about US$3.50 in the USA.

In Singapore, a liter of camel milk sells for about US$19 per liter (US$72 per gallon). In comparison, cow milk sells for close to US$8 per gallon in Singapore.

Similarly, camel milk in India costs about US$7 per liter and camel milk powder costs close to US$87 per kg, whereas cow milk retails for about US$0.6 per liter.

While the benefits of camel milk are plentiful, they do not always justify the high price in the eyes of the consumer. The high cost can be attributed to the high production cost and low yield compared with dairy cattle produce.

In Australia, the cost of producing one liter of camel milk is around US$13 (AUD17), while in India a liter of camel milk cost US$5-6 (INR 350-400) to produce – in comparison to this, producing one liter of cow milk costs farmers about US$0.27-0.32 (AUD0.37-0.44) per liter in Australia and US$0.2-0.27 (INR 14-22) per liter in India.

Camels also produce less milk in comparison with cows. While cows produce around 16 liters a day, a camel usually produces only 6 liters a day.

While the benefits of camel milk are plentiful, they do not always justify the high price in the eyes of the consumer.

In addition to the barrier of high price and costs, camel milk also faces significant competition from plant-based milk alternatives, such as soy, almond, and coconut milk. These milk options are also considered to be a healthy alternative to cow milk and have the added benefit of being vegan. Moreover, while these milk options are more expensive in comparison with cow milk, their prices are still considered more reasonable when compared with camel milk price.

EOS Perspective

Camel milk has a lot of inherent benefits, which are expected to ensure steady sales growth over the next decade. While there are no doubts regarding the growing popularity of camel milk, it is too far-fetched to say that this market can dent the dairy mega-industry. Camel milk market is standing at the beginning of its promising growth curve, however, it must work towards pushing the production costs down to become more mainstream rather than niche, which will not be achieved by simply marketing the medicinal properties of the product.

Camel milk market is standing at the beginning of its promising growth curve, however, it must work towards pushing the production costs down to become more mainstream.

Several dairy farms across the globe have realized this aspect and are working towards achieving economies of scale and getting costs down through increasing operations size and venturing into extended product lines. While it is certain that the industry will continue to grow, it is yet to be seen whether it can create a shelf space for itself across large retail stores or whether it remains a primarily niche premium online sales product mostly for affluent consumers.

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Commentary: OLA Finds Its Way on Aussie Roads

With plans to expand globally, Ola Cabs, India’s leading ride-sharing service provider, marked its entry into the international market by announcing in January 2018 the launch of its services in the Australian territory. While the exact date of the service launch in Australia is not yet decided, as it is subject to regulatory approvals, the service provider has already started the ground work by inviting private hire vehicles to join them. The company is starting to collaborate with private hire vehicle owners in Sydney, Melbourne, and Perth, the three cities where Ola cabs will initially be available for rides, to be ready to roll out once the commercial operations commence.

Presently, the market for ride-sharing service providers in Australia includes players such as Uber, Taxify, and GoCatch, among others. With Uber, which has emerged as the leading player in Australia, already present in the market, Ola needs to have its strategy, policies, and priorities set just right to smoothly launch and successfully run its operations. However, the presence of Uber has worked, to some extent, in favor of Ola, as it paved the way for ride-sharing services in the country resulting in regulatory policies being already in place. This makes the market entry a bit easier for Ola as the company will not need to deal with several challenges that the early market entrants in such novelty markets as ride-sharing typically have to tackle.

However, competing against its largest rival, Uber, is not the only concern for Ola. To be successful in the Australian market, Ola also has to focus on smaller and newer competitors, and set its operational and pricing policies keeping in mind their strategies in the market. Taxify, an Estonia-based company that launched its operations in Australia in December 2017, is expected to closely compete with Ola, especially with its ride services being operational only in Sydney and Melbourne, two of the locations where Ola is launching its services as well. With two ride-sharing service providers launching its operations in similar locations within a span of few months, a price war between the two is expected to happen. Currently, Taxify offers rides to its commuters without any surge pricing, making the ride cheaper than Uber. If Ola plans a similar pricing structure, among other strategies to drive the business, the competition between the two operators will, most likely, heat up very soon.

With two ride-sharing service providers launching its operations in similar locations within a span of few months, a price war between the two is expected to happen.

In the Australian market, the ride-sharing services segment is still in its infancy stage of development and with only one player (in this case, Uber) currently dominating the scene, it makes sense for Ola to launch its operations here now, offering a new option for consumers to choose from. Entry of Ola, along with new players such as Taxify, may indicate a transitioning phase in the Australian ride-sharing market as the entry of new players has the potential to end Uber’s monopoly. Currently, with very little known about the operating dynamics, not much can be commented about the success of Ola in the Australian market. However, the unsaturated state of the local market clearly indicates that Ola has a good chance to thrive in Australia, as long as they get the pricing right and set their eyes on the long-term business growth rather than short-term gain through higher prices.

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Will Shale Gas Solve Our Fuel Needs for the Future?

At first glance, shale gas might look too good to be true: large untapped natural gas resources present on virtually every continent. Abundant supplies of relatively clean energy allowing for lower overall energy prices and reduced dependence on non-renewable resources such as coal and crude oil. However, despite this huge potential, the shale gas revolution has remained largely limited to the USA till now. Concerns over the extraction technology and its potentially negative impact on the environment have hampered shale gas development in Europe and Asia on a commercial scale. However, increasing energy import bills, need for energy security, potential profits and political uncertainty in the Middle East are causing many countries to rethink their stand on shale gas extraction development.

How Large Are Shale Gas Reserves And Where Are They Being Developed?

An estimation of shale gas potential conducted by the US Energy Information Administration (EIA) in 2009 pegs the total technically recoverable shale gas reserves in 32 countries (for which data has been established) to 6,622 Trillion Cubic Feet (Tcf). This increases the world’s total recoverable gas reserves, both conventional and unconventional, by 40% to 22,622 Tcf.


Technically Recoverable Shale Gas Reserves

Continent
Shale Gas Reserves and Development
North America Technically Recoverable Reserves: 1,931 Tcf
Till now, almost whole commercial shale gas development has taken place in the USA. In 2010, shale gas accounted for 20% of the total US natural gas supply, up from 1% in 2000. In Canada, several large scale shale projects are in various stages of assessment and development. Despite potential reserves, little or no shale gas exploration activity has been reported Mexico primarily due to regulatory delays and lack of government support.
South America Technically Recoverable Reserves: 1,225 Tcf
Several gas shale basins are located in South America, with Argentina having the largest resource base, followed by Brazil. Chile, Paraguay and Bolivia have sizeable shale gas reserves and natural gas production infrastructure, making these countries potential areas of development. Despite promising reserves, shale gas exploration and development in the region is almost negligible due to lack of government support, nationalization threats and absence of incentives for large scale exploration.
Europe Technically Recoverable Reserves: 639 Tcf
Europe has many shale gas basins with development potential in countries including France, Poland, the UK, Denmark, Norway, the Netherlands and Sweden. However, concerns over the environmental impact of fracturing and oil producers lobbying against shale gas extraction are holding back development in the region with some countries such as France going as far as banning drilling till further research on the matter. Some European governments, including Germany, are planning to bring stringent regulations to discourage shale gas development. Despite this, countries such as Poland show promising levels of shale gas leasing and exploration activity. Several companies are exploring shale gas prospects in the Netherlands and the UK.
Asia Technically Recoverable Reserves: 1,389 Tcf
China is expected to have the largest potential of shale gas (1,275 Tcf). State run energy companies like Sinopec are currently evaluating the country’s shale gas reserves and developing technological expertise through international tie-ups. However, no commercial development of shale gas has yet happened. Though both India and Pakistan have potential reserves, lack of government support, unclear natural gas policy and political uncertainty in the region are holding back the extraction development. Both Central Asia and Middle East are also expected to have significant recoverable shale gas reserves.
Africa Technically Recoverable Reserves: 1,042 Tcf
South Africa is the only country in African continent actively pursuing shale gas exploration and production. Other countries have not actively explored or shown interest in their shale gas reserves due to the presence of large untapped conventional resources of energy (crude oil, coal). Most potential shale gas fields are located in North and West African countries including Libya, Algeria and Tunisia.
Australia Technically Recoverable Reserves: 396 Tcf
Despite Australia’s experience with unconventional gas resource development (coal bed methane), shale gas development has not kicked off in a big way in Australia. However, recent finds of shale gas and oil coupled with large recoverable reserves has buoyed investor interest in the Australian shale gas.

What Are The Potential Negative Impacts Of Shale Gas Production?

Despite the large scale exploration and production of shale gas in the USA, countries around the world, especially in Europe, remain sceptical about it. Concerns over the environmental impact of hydraulic fracturing, lack of regulations and concerns raised by environmental groups have slowed shale gas development. Though there is no direct government or agency report on pitfalls of hydraulic fracturing, independent research and studies drawn from the US shale gas experience have brought forward the following concerns:


Shale Gas Challenges

Will Shale Gas Solve Our Future Energy Needs?

Rarely does an energy resource polarize world opinion like this. Shale gas has divided the world into supporters and detractors. However, despite its potential negative environmental impact, shale gas extraction is associated with a range of unquestionably positive aspects, which will continue to support shale gas development:

  • Shale gas production will continue to increase in the USA and is expected to increase to 46% of the country’s total natural gas supply by 2035. USA is expected to transform from a net importer to a net exporter of natural gas by 2020.

  • Despite initial opposition, countries in Europe are opening up to shale gas exploration. With the EU being keen to reduce its dependence on imported Russian piped gas and nuclear energy, shale gas remains one of its only bankable long-term options. Replicating the US model, countries like Poland, the Netherlands and the UK are expected to commence shale production over the next two-five years and other countries are likely to follow suit.

  • Australian government’s keenness to reduce energy imports in addition to the recent shale gas finds has spurred shale gas development the country. Many companies are lining up to lease land and start shale gas exploration.

  • More stringent regulations from environment agencies are expected to limit the potential negative environmental impact of shale gas exploration.

  • Smaller energy companies that pioneered the shale gas revolution in the USA are witnessing billions of dollars worth of investments from multinational oil giants such as Exxon Mobil, Shell, BHP Billiton etc. are keen on developing an expertise in the shale gas extraction technology. These companies plan to leverage this technology across the world to explore and produce shale gas.The table below highlights major acquisitions and joint venture agreements between large multinational energy giants and US-based shale gas specialists over the last three years.

Major Deals in Shale Gas Exploration

Company

Acquisition/Partnership

Year

Investment
Sinopec Devon Energy January 2012 USD 2.2 billion
Total Chesapeake Energy January 2012 USD 2.3 billion
Statoil Brigham Exploration October 2011 USD 4.4 billion
BHP Billiton Petrohawk July 2011 USD 12.1 billion
BHP Billiton Chesapeake Energy February 2011 USD 4.75 billion
Shell East Resources May 2010 USD 4.7 billion
Exxon Mobil XTO Energy December 2009 USD 41.0 billion
Source: EOS Intelligence Research


Shale gas production is expected to spike in the coming three-five years. Extensive recoverable reserves, new discoveries, large scale exploration and development and technological improvement in the extraction process could lead to an abundant supply of cheap and relatively clean natural gas and reduce dependence on other conventional sources such as crude oil and coal For several countries including China, Poland, Libya, Mexico, Brazil, Algeria and Argentina, where the reserves are particularly large, shale gas might bring energy stability.

The need for energy security and desire to reduce dependence on energy imports from the Middle East and Russia (and hence to increase political independence), are likely to outweigh potential environmental shortfalls of shale gas production, and some compromise with environment protection activist groups will have to be worked out. Though the road to achieving an ‘energy el dorado’ appears to be long and rocky, it seems that with the right governments’ support, shale gas could become fuel that could significantly contribute to solving the world energy crisis over long term.

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Australia – Stepping on to the Mine Field

While most developing countries have been negatively impacted by the significantly deteriorated economic conditions in the US and European markets, Australian economy appeared to be largely shielded from the impact of the global economic slowdown thanks to its mining industry. Following the onset of the 2008 crisis, when most developed economies slowed down, China continued on its path of infrastructure development and investment. This boosted its demand for minerals and resources, large part of which continue to be imported from mines across Australia.

Thanks to the Chinese economy growth sprint, Australian mining industry has been in a boom mode since 2006, and consequently witnessed soaring levels of capital investment in mining and related logistic infrastructure. The industry growth was significant enough to have resulted in higher dependency of Australian economy on this sector, with the mining and mining-related service industries accounting for about 20% of GDP in 2011-12, compared with only 10% a decade earlier.

The industry is still on a roll, yet the situation might change soon. With the Chinese economy showing signs of slowing down in 2011 and 2012, the Australian government and business executives can no longer be certain of the continuous inflow of Chinese orders for Australian mining output. But the decline in orders is just part of their worries, as mining companies operating across Australia are faced with other challenges as well, which question their ability to remain competitive in the global market.

The Challenges

While currently it is estimated that the strong performance of the Australian mining sector will continue till at least 2014, there are already growing challenges in the industry. Slackening demand, particularly from the Chinese infrastructure sector, has lead to a global drop in commodity prices of coal and iron. This decline in prices, coupled with higher operating costs due to rise in employee wages and energy costs, makes it less economical for Australian ore extractors to trade in global markets.

Skills shortage and union pressures further drive the operational costs upwards. A shortfall in skilled personnel is likely to result in employees being available only at a premium, leading to further increase in costs. A shortage of truck drivers in mining sector has seen employees of large companies, such as Rio Tinto and Xstrata, receive as much as three times their base salary. The insufficient talent is also witnessed in more skilled and experienced jobs, including mine planning engineers, geologists, metallurgists and mineral processing engineers. This skill shortage also gives employee unions an upper-hand when it comes to negotiating perks.

The rise in costs is further multiplied by the introduction of additional taxes, including the Carbon Tax and the Mineral Resource Rent Tax, all of which contribute to the rising cost burden of the Australian mining companies.

At the same time, mining productivity has resurfaced as an increasingly relevant issue. According to 2012 estimates by the Mineral Council of Australia, productivity in mining industry has reduced by about 30% since 2003.

These challenges are a visible sign that Australia’s mining sector is likely to have an increasingly harder job to compete with mining companies in other emerging resource-rich countries, such as Indonesia, whose proximity to important Asian customers results in lower shipping costs to the client. This could result in a considerable decline in Australian mineral exports, and thereby, have a negative impact on the Australian economy as such.

The Way Out

Both the government and mining companies are devising ways to overcome the challenges posed by these increasingly pressing issues.

Expecting that the current peak in mining investment boom will soon be followed by the sector’s decline, the Reserve Bank of Australia (RBA) announced cuts of cash and lending rates in December 2012. Concerned by the fact that the non-mining industries in Australia continue to struggle, RBA has introduced these cuts to support the underperforming non-mining sectors, such as housing, construction, and retail. While the short-term outlook for non-resources investment is likely to remain subdued, these cuts are expected to provide impetus for investment in these sectors over a long term.

Mining companies face a tougher task to remain competitive in the global market. In the short-term, several Australian mining companies are looking at temporary shelving of investment projects to deal with the deteriorating demand and decline in commodity prices. For instance, BHP Billiton, the world’s largest mining company, shelved its Olympic Dam and Bowel Basin projects after witnessing a decline in profits.

However, putting investment projects on hold is not enough and mining companies will have to continue to undertake initiatives to tackle the problem of increase in cost per ton of output.

  • Initiatives to raise employee productivity are being put in place. In 2012, a contracting company overseeing work on Chevron’s $52 billion Gorgon gas project banned sitting during working hours to improve operational productivity.

  • Companies are trying to explore alternatives to tackle skill shortage. Rio Tinto has started employing driverless trains and trucks to cart iron ore from its mines in order to tackle the premium wage demands, caused by the shortage of drivers in mining operations.

  • Companies are cutting employee perks to lower wage costs and offset lower returns. In 2012, Fortescue Metals Group scrapped weekly staff barbecues, and removed free coffee and ketchup from the canteens.

While these initiatives might attract negative publicity, particularly with labour unions, these steps have become increasingly necessary for mining companies to get back on the path of competitiveness and profitability over a long run. But will this be enough? Will cutting weekly employee get-togethers, and making workers stand at work take care of 30% productivity decline witnessed over the past decade? These measures definitely appear disproportionate to the problem’s weight. Or do the Australian mining executives have some more tricks up their sleeves that will actually matter in prolonging the mining sector golden years?

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