uwa energy and minerals institute flng uncovered ... · pdf fileuwa energy and minerals...

UWA Energy and Minerals Institute FLNG Uncovered - Economic Impact Assessment

April 2016

FLNG technology presents a new era for developing remote, offshore gas reserves and offers improved commercial viability compared with traditional development techniques. However, the technology and scale involved in FLNG production means uncertainty remains over how this new technology of building and shipping natural gas entirely from a floating offshore facility will benefit jurisdictions near the resource. This report provides insight into the size of the potential economic benefits for Western Australia, which has several potential FLNG developments on its doorstep.

Glossary

AMC Australian Marine Complex

C-D Cobb-Douglas

CDE Constant Differences of Elasticities

CGE Model Computable General Equilibrium Model

CRESH Constant Ratios of Elasticities Substitution, Homothetic

DAE-RGEM Deloitte Access Economics Regional General Equilibrium Model

DAE Deloitte Access Economics

EIA Economic Impact Assessment

EMI Energy and Minerals Institute

EPCM engineering, procurement and construction management

FEED Front end engineering and design

FLNG floating liquefied natural gas

GDP Gross Domestic Product

GJ Gigajoule

GSP Gross State Product

NPV Net Present Value

PJ Petajoule

WA Western Australia

Contents

Executive summary 1 1 Introduction 5

1.1 Purpose of this study 5 1.2 Informing the FLNG debate 5 1.3 Structure of the report 7

2 Analysis undertaken 8 2.1 Step 1 - Review of publicly available information 8 2.2 Step 2 - Development of modelling assumptions 9 2.3 Step 3 - Consultation with relevant external stakeholders 11 2.4 Step 4 - Refinement of modelling assumptions 11 2.5 Step 5 - Measurement of direct economic impacts 12 2.6 Step 6 - Measurement of total economic impacts 12

3 Economic impact assessment 14 3.1 Introduction 14 3.2 Direct economic impacts 14 3.3 Total economic impacts 20

4 Limitation of our work 25 General use restriction 25 Limitations of assumptions 25

Appendix A : Inquiry findings relevant to study 26 Appendix B : CGE modelling 30

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Liability limited by a scheme approved under Professional Standards Legislation.

© 2016 Deloitte Access Economics Pty Ltd

Executive summary

FLNG Uncovered - Economic Impact Assessment 1

Executive summary

Study objectives

The UWA Energy and Minerals Institute (EMI) appointed Deloitte Access Economics (DAE) to undertake an Economic Impact Assessment (EIA) of potential Floating Liquefied Natural Gas (FLNG) projects in Western Australia. This is part of a broader study being undertaken by APPEA and UWA titled ‘FLNG Uncovered: Understanding the Benefits and Opportunities’.

This study quantifies the potential economic benefit to WA of FLNG developments located off the coast of WA. Using publicly available information and advice from relevant stakeholders, Deloitte Access Economics has developed assumptions and undertaken a modelling exercise to quantify the potential economic impact.

The results are not intended to be a definitive estimate of the economic benefit from FLNG development in WA. Rather, the results and discussion are intended to inform the debate about the potential net benefits from FLNG development should the industry develop further.

FLNG: a new era in energy brings uncertainty for ‘host’ economies

Offshore FLNG production allows access, extraction and delivery of hydrocarbons discovered further offshore (or which are too small to develop by conventional LNG means) to market. This is achieved by removing expensive links in the offshore-to-onshore gas / LNG supply chain, thereby reducing development costs and improving the commercial viability of some projects. It also limits the environmental impact of operations.

However, uncertainty about the size and nature of the benefits from FLNG to the jurisdiction where the gas reserve is located has stoked debate as to whether FLNG is preferable to traditional onshore LNG development.

FLNG design and construction requires cutting-edge technology, specialised skills and significant construction scale. These are often not available in ‘host’ countries, such as Australia. The WA State Government’s 2014 Parliamentary Inquiry into the implications of Floating LNG operations concluded that the economic benefits from constructing major components of the facility are likely to flow to countries where the construction occurs.

In addition, the extent of local involvement at the operational phase is relatively unknown given the infancy of the FLNG sector - Shell’s Prelude facility, set to begin production in 20171, will be one of the world’s first FLNG facilities.

Some FLNG proponents suggest the debate is not ‘onshore’ versus ‘offshore’, but ‘development’ versus ‘non-development’. For example, the distance and size of some reserves from shore means onshore development is not currently viable. Under this scenario, FLNG - even if generating smaller benefits to a local economy than onshore development - generates an incremental economic impact that would not otherwise be realised.

The objective of this study is to estimate and model this incremental difference, over a 25-year assessment period, between 2015 and 20402.

1 Commonwealth Department of Industry, Innovation and Science, Resources and Energy Major Projects Listing, http://industry.gov.au/Office-of-the-Chief-Economist/Publications/Pages/Resources-and-energy-major-projects.aspx 2 The assessment period includes known impacts commencing from 2013. Potential impacts commence from the time of study in 2015.

Executive summary


Robust analysis was undertaken to estimate economic impacts

To ensure the modelling assumptions in the study are based on credible and accurate information, a rigorous process of collecting data, developing assumptions and consulting with industry to test and refine assumptions was used.

The gas fields selected to form the basis of the modelling have all been identified by proponents as having the potential to use FLNG technology. The size and the level of exploration and development undertaken were also considered when deciding which projects to include. Due to confidentiality, this study does not name which potential projects were selected.

This study modelled both the direct economic impacts and the economy-wide impacts of the growth of the FLNG sector in WA.

Direct economic impact refers to the pattern of spending, investment and employment in the WA economy expected directly as a result of the construction and operational phases of the selected projects. It was modelled according to four core inputs:

1. The cost to construct and install FLNG facilities

2. The cost to operate each FLNG facility

3. The extent to which Western Australian firms may benefit from project construction and operation requirements

4. The output and revenue likely to be generated from each facility.

Each input was estimated using publicly available data and information from stakeholders. FLNG project proponents gave broad guidance, rather than detailed advice, on the validity of assumptions. This reflects the confidential nature of the projects. Given the limited information, the study did not model each project individually. Instead, available data were applied to the selected projects, based on the likely scale and production potential of each.

Economy-wide impacts constitute the flow-on effects of the direct impacts through the economy. These include impacts on prices, productivity, output (Gross State Product), and employment (jobs and wages) from the initial direct impacts.

The total (i.e. direct plus flow on) economic impact is measured through the use of a Computable General Equilibrium (CGE) model: the Deloitte Access Economics Regional General Equilibrium Model (DAE-RGEM). More detail is in Appendix B.

CGE modelling builds a picture of the future ‘investment’ or ‘project’ scenario. It also specifies a ‘counterfactual’ scenario - the scenario that is expected to have emerged in the absence of the investment. In this study, the counterfactual can be described as a ‘zero base case’, of a scenario where FLNG projects do not proceed onshore. This reflects the publicly expressed views of proponents3.

Economic impact assessment results: potentially significant benefits to WA

The estimates generated suggest that almost $40 billion in GSP could be added to the State economy over the assessment period 2015 to 2040 as a result of FLNG development. Table A shows the estimated macroeconomic impacts, expressed as deviations between the project case and the counterfactual scenario, for the following variables:

• Gross State Product (GSP)

• Real consumption

• Balance of trade

• Government revenue

3 Submission No. 15 from Shell in Australia, 30 August 2013, p 8.

Executive summary


Table A – Summary of estimated total economic impacts of FLNG to the WA economy, deviations from the base case, real 2014-15 dollars

Macroeconomic variable Deviation at the end of the assessment period (in 2040)

Cumulative deviation through assessment period (net present value terms*)

Gross State Product $6,106m $38,871m

Real consumption $7,020m $22,377m

Balance of trade $1,200m $26,905m

State Government revenue $2,527m $13,397m

Source: Deloitte Access Economics; *Discount rate = 7.00%

Gross State Product (GSP)

GSP is expected to increase most rapidly following the commissioning of FLNG projects, upon production commencement. The estimated expenditure in WA at the construction and operational phases (discussed in sections 3.2.1 and 3.2.2) boosts economic activity in intermediate input sectors such as transport, construction and manufacturing. However, the resultant increase in GSP from this is moderate compared with the expected growth in LNG output, and the resultant rise in revenues in the WA oil and gas sector.

Overall activity and income in the WA economy is expected to increase as a result of FLNG development. The cumulative economic impact of the FLNG development over the period 2015 to 2040, in terms of the Net Present Value (NPV) of future GSP gains, is estimated to be approximately $38.9 billion.

Real consumption

Real household consumption measures the amount that households in Western Australia spend on goods and services. As real consumption is based on income rather than production, it is a better measure of the impact of FLNG development on the domestic economy compared to GSP.

Real household consumption is projected to increase at a fairly constant rate during the assessment period. Consumption in 2040 is expected to be $7.02 billion higher compared with the base case. It is expected to be $22.4 billion higher in NPV terms over the assessment period as a result of the development of WA’s FLNG sector.

Balance of trade

As FLNG projects proceed to operational phase, the State’s balance of trade (exports minus imports) is expected to improve as the majority of projected FLNG output is export bound. The balance of trade is estimated to improve rapidly following the construction and commissioning of projects. However, the positive trade balance diminishes over time as the increased gas output causes an appreciation of the Australian dollar. Firms and individuals adjust their behaviour accordingly and consequently exports from other sectors decrease, while imports in other sectors increase.

In 2040 the improvement over the base case is $1.20 billion and over the assessment period, the development of the FLNG sector is forecast to improve the State’s balance of trade by approximately $26.9 billion (in NPV terms).

Executive summary


State Government revenue

As a result of the expected increase in economic activity in WA, State government taxation revenue is projected to increase. A direct taxation revenue impact was calculated based on projected additional increases in State royalties paid as a result of the FLNG development4. The indirect taxation revenue refers to the additional revenue generated in other sectors as overall activity in the State economy grows. An additional $2.53 billion in taxation revenue at the State level is forecast to be raised over the base case in the year 2040. In NPV terms, the revenue boost to the State Government is estimated at $13.4 billion over the assessment period.

4 Revenue related to potential domestic gas supplies to the WA market was also relevant for some projects. This revenue stream was estimated utilising the LNG price forecast presented in Figure 3, and netting off benchmark costs of liquefaction and shipping costs. Output allocated for the domestic market was estimated from publicly available data and information.

Introduction


1 Introduction

1.1 Purpose of this study

The UWA Energy and Minerals Institute (EMI) appointed Deloitte Access Economics (DAE) to undertake an Economic Impact Assessment (EIA) of potential Floating Liquefied Natural Gas (FLNG) projects in Western Australia. This is part of a broader study being undertaken by APPEA and UWA titled ‘FLNG Uncovered: Understanding the Benefits and Opportunities’.

This study quantifies the potential economic benefit to WA of FLNG developments located off the coast of WA. Using publicly available information and advice from relevant stakeholders, Deloitte Access Economics has developed assumptions and undertaken a modelling exercise to quantify the economic impact.

The results and discussion in this study are not intended to be a definitive estimate of the economic benefit from FLNG development off the coast of WA. Rather, they are intended to inform the debate on FLNG development as to the potential net benefits that could be expected should the industry develop further in WA.

1.2 Informing the FLNG debate

1.2.1 About FLNG

Like traditional forms of oil and gas production, FLNG involves the extraction of hydrocarbons from gas fields, separating well-stream components and then further processing the crude oil, condensate, liquefied petroleum gas and natural gas. However, unlike traditional processes, FLNG allows this entire process to be undertaken on a floating facility, bypassing the need to pipe gas to an onshore facility for processing. As such, FLNG is an attractive option for developing small, remote, offshore gas fields.

FLNG facilities enable all of the key life cycle components of LNG production (extraction, liquefaction, storage and transfer) to occur at sea5. The technology combines the function of an offshore gas receiving facility, with gas treatment and liquefaction plants as well as storage and offloading facilities6. Once condensed, LNG can be efficiently transported and exported directly from the floating facility7.

Offshore LNG production allows access, extraction and delivery of hydrocarbons discovered further offshore (or those which are too small to develop by conventional LNG means) to market. This is achieved by lowering development costs through the removal of a number of expensive links in the offshore-to-onshore gas / LNG supply chain. These links include separate offshore processing facilities, long high-compression pipelines to shore, nearshore works such as shipping channels and jetties and the civil works associated with an onshore liquefaction plant and storage tanks.

5 Shell, Why FLNG?, website, available from :< http://www.shell.com.au/aboutshell/who-we-are/shell-au/operations/upstream/prelude/why-flng.html> 6 Woodside (2015), Browse FLNG Development, available from: < http://www.woodside.com.au/Our-Business/Developing/Documents/FLNG%20browse%20fact%20sheet.pdf> 7 Economics and Industry Standing Committee (2014), The economic impact of floating LNG on Western Australia, volume 2, WA Legislative Assembly, Parliament of WA.

Introduction


Avoiding these activities limit the environmental impact of operations. Lower development costs also improve the economic viability of projects8. However, some advocates for FLNG have acknowledged that it can involve a significant compromise in relation to increased operating costs over the conventional onshore production method9.

1.2.2 The role of local industries in FLNG development

For all the potential efficiencies that flow to project proponents from the FLNG production method, the technology has also been criticised as providing little short-term economic stimulus in the economic jurisdiction where the gas reserve is located.

In the available examples of FLNG developments globally, it has been clear that cutting-edge technology and significant production scope is required to build the floating facility. This has meant that design and construction requires highly specialised skills and significant construction scale - such elements are often not available in ‘host’ countries, such as Australia.

For example, Shell’s Prelude FLNG facility stretches 488m in length, 74m wide and 44m deep. This makes the FLNG facility approximately three times the length of Subiaco Oval. Constructing such a facility clearly requires significant production scale.

The economic benefits from the construction of major components of the facility are likely to flow to countries where the construction occurs10. In contrast, the construction of onshore processing facilities can more readily provide opportunities for local businesses both during the construction of the facility (where thousands of jobs are often created at peak construction) and during the ongoing operational phase (further descriptions of development phases are in the supply chain component of the FLNG Uncovered study).

However, the infancy of FLNG technology means there is little experience from which to draw information, particularly with regard to local opportunities at the operational phase.

1.2.3 Overcoming the information gap

Shell’s Prelude FLNG facility is located off the coast of WA, and is one of only a few FLNG projects under development or attracting serious consideration around the world at present. Shell’s Prelude facility, set to begin production in 201711, will be one of the world’s first FLNG facilities.

Because so few FLNG projects are under construction or planned to any detailed extent, little publicly available information exists regarding the typical operational structure of these projects and the required inputs from ‘host’ economies through the project lifecycle. This information vacuum has created uncertainty about the size and nature of benefits to local economies, stoking debate as to whether FLNG should be supported compared with traditional onshore LNG developments.

However, some FLNG proponents suggest that the debate is not so much ‘onshore’ versus ‘offshore’ but rather ‘development’ or ‘non-development12’. For example, the distance from shore and / or small size of some fields mean that onshore development is not economically viable. Under this scenario, FLNG development - even if constituting smaller benefits to a local economy than onshore development - generates an incremental economic impact that would otherwise not be realised. The objective of this study is to estimate and model this incremental difference.

8 Shell, Why FLNG?, website, available from :< http://www.shell.com.au/aboutshell/who-we-are/shell-au/operations/upstream/prelude/why-flng.html> 9 Economics and Industry Standing Committee (2014), The economic impact of floating LNG on Western Australia, volume 2, WA Legislative Assembly, Parliament of WA. 10 Economics and Industry Standing Committee (2014), The economic impact of floating LNG on Western Australia, volume 2, WA Legislative Assembly, Parliament of WA. Page 87 11 Commonwealth Department of Industry, Innovation and Science, Resources and Energy Major Projects Listing, http://industry.gov.au/Office-of-the-Chief-Economist/Publications/Pages/Resources-and-energy-major-projects.aspx 12 Submission No. 15 from Shell in Australia, 30 August 2013, p 8.

Introduction


As a result of this information gap, a key source of data for this study is the WA State Government’s Parliamentary Inquiry into the implications of Floating LNG operations (the ‘Inquiry’). This Inquiry was completed in 2014. The Inquiry uncovered complexities in understanding the contribution of FLNG. The Inquiry presented 68 findings on FLNG in WA, some of which are relevant to this study and form the basis for some key assumptions. The relevant findings are in Appendix A.

1.3 Structure of the report

The report is set out as follows:

• Section 1 is an introductory chapter that presents the project background and objectives

• Section 2 outlines the methodology used for the EIA. The methodology includes:

1. Review of publicly available information

2. Development of modelling assumptions

3. Consultation with relevant external stakeholders

4. Refinement of modelling assumptions

5. Measurement of direct economic benefits

6. Measurement of total economic impacts

• Section 3 presents the results of the EIA. This includes the estimated direct and total (direct and economy-wide) impact of FLNG developments on the Western Australian economy.

Analysis undertaken


2 Analysis undertaken

The analysis for this study involves six steps, which are described in this section. To ensure modelling assumptions were based on credible and accurate information, a rigorous process to vet assumptions was employed across this six-step process.

As illustrated in Figure 1 this included an initial literature review followed by development of key assumptions, and finally industry consultation to validate and refine assumptions. These steps are explored in detail below. Figure 1 - Summary of project approach

Source: Deloitte Access Economics

2.1 Step 1 - Review of publicly available information

Most of the publicly available information regarding FLNG has been based on a number of projects that have been confirmed or proposed. These include Shell’s Prelude FLNG development13 and Woodside’s Browse FLNG development. Woodside completed front end engineering and design (FEED) for Browse in March 2016, opting not to progress with the development due to economic and market factors. However, in announcing this decision Woodside affirmed its commitment to the earliest commercial development of the Browse

13 Shell, 2013, Inquiry into Floating LNG, Shell submission to the Economics and Industry Standing Committee.

Analysis undertaken


resources (depending on future economic and market trends) and to FLNG as the preferred solution14.

The principal source of information on these projects was the 2014 WA Inquiry. Woodside and Shell both provided submissions to the Inquiry on their respective projects, Browse and Prelude. Representatives of both companies also appeared before the Inquiry, the transcripts of which were also used as inputs in developing modelling assumptions.

Relevant information in media and other analyst reports on these projects and other proposed FLNG projects around the world was also collated and used to test some of the modelling assumptions developed from Inquiry responses, particularly with regard to the degree of consistency across publicly available information.

2.2 Step 2 - Development of modelling assumptions

A preliminary set of modelling assumptions was developed following the review of publicly available information. Forming accurate assumptions that are supported by reliable sources is a critical step in undertaking an economic impact assessment. Credible, accurate inputs support good quality modelling outputs. Two fundamental inputs underpin the assumptions:

1. Location of gas fields / projects off the coast of WA potentially suited to FLNG

2. Nature of project economics for potential FLNG projects

These are discussed further below.

2.2.1 Location of gas fields potentially suited to FLNG

The first step in developing the modelling assumptions involved identifying gas fields off the Western Australian coast where FLNG technology has the potential to be deployed. This review identified the proposed projects in Figure 2 below as potentially suited to FLNG development.

The gas fields in Figure 2 are located a significant distance off shore. The extent and proof of the reserve and the level of exploration and development undertaken was also considered in determining which projects ought to form the basis of the modelling. Due to matters of confidentiality, this study does not identify which projects were selected to form the basis of the modelling15.

14 Woodside Petroleum Ltd., ASX Announcement, ‘Browse Petroleum Update’, 23 March 2016. See: http://www.woodside.com.au/Investors-Media/announcements/Documents/23.03.16%20Browse%20Development%20Update.pdf 15 Although publicly available information formed the primary source of information and data for the study, consultation was also undertaken with some project proponents to test and refine the modelling assumptions (see section 2.3). As such, for reasons of confidentiality, the projects selected to form the basis of the modelling cannot be identified.

Analysis undertaken


Figure 2 - Gas fields and proposed projects off the WA coast (as of June, 2015)

Source: Deloitte Access Economics, Engineer’s Australia.

Note: the graphic is intended to provide an indicative illustration of the general location of gas fields and projects rather than an accurate depiction of their scale and location. Crux may not be a standalone FLNG project.

Analysis undertaken


2.2.2 Project economics

Having identified which projects form the basis for the modelling, the next step involved formulating generic assumptions on the economics of each potential project. Given the limited information available, this study did not seek to model each selected project specifically. Rather, the publicly available data and information on FLNG technology was applied to the selected projects based on the likely scale and production potential of each.

Four core inputs were required for the modelling process:

1. The cost to construct and install FLNG facilities

2. The cost to operate each FLNG facility

3. The extent to which Western Australian firms may benefit from project outlays with regard to construction and operation requirements16

4. The output and revenue likely to be generated from each FLNG facility

Each input was estimated using publicly available data (and stakeholder discussions – see section 2.3).

With regard to project revenues, price and output forecasts were used to estimate the potential revenue generation from each FLNG project. Output was estimated from publicly available data. Price forecasts for LNG prepared by the Australian Energy Market Operator (AEMO)17 were used for the period 2016 to 2040 (a long-term average of A$12.78 / GJ over the forecast period to 2040)18.

Revenue related to potential domestic gas supplies to the WA market was also relevant for some projects. This revenue stream was estimated using the LNG price forecast from AEMO, and netting off benchmark costs of liquefaction and shipping19. Output allocated for the domestic market was estimated from publicly available data.

2.3 Step 3 - Consultation with relevant external stakeholders

Having compiled the preliminary modelling assumptions from publicly available information, the next step involved meetings with some FLNG project proponents to test the preliminary assumptions developed. Broad guidance on the validity of assumptions was received from proponents through a number of meetings.

The nature of information shared in the meetings was broad and indicative as opposed to detailed and commercial-in-confidence. This reflects the confidential nature of these projects. Many specific assumptions are not provided in this study due to reasons of confidentiality.

2.4 Step 4 - Refinement of modelling assumptions

The ultimate objective of engaging with project proponents in step 3 was to validate and refine the preliminary modelling assumptions developed. Step 4 entailed the process of review and adjustment itself.

Feedback from stakeholders in step 3 was consolidated and reviewed to identify inconsistencies in the preliminary assumptions set. Only minor inconsistencies were found,

16 This study examines the impact to Western Australia only. A broader approach which considers the impact of FLNG development to Australia would be expected to yield a larger impact. 17 Australia Energy Market Operator “Planning Assumptions” for LNG price (USD/tonne), exchange rates and inflation to determine a AUD/GJ price estimate 18 This is lower than the International Energy Agency’s (IEA) World Energy Outlook 2015 which projects Japanese natural gas import prices will average A$11.60, A$14.10, and A$16.40 per GJ by 2020, 2030 and 2040 respectively under its ‘Low Oil Price’ scenario at an average exchange of rate of US$0.80. This gives an average AUD price over these three time periods of A$14.00. Notably, the IEA’s ‘Low Oil Price’ scenario is somewhat similar to current (March 2016) consensus oil price forecasts, which envisage a rise and flattening out in oil price to the mid-2020s at around US$69.00 per barrel. The IEA’s ‘Low Oil Price’ scenario is the most conservative price scenario in the World Energy Outlook 2015. Note that according to the World Bank, the average Japanese import price of LNG during February 2016 was A$11.61 per GJ 19 The Oxford Institute for Energy Studies, 2014, The Future of Australian LNG Exports: Will domestic challenges limit the development of future LNG export capacity?

Analysis undertaken


and where this was the case, feedback and guidance received from proponents was generally adopted for the modelling rather than information obtained publicly. The consultation process also allowed residual information gaps to be plugged.

The modelling assumptions were finalised at the completion of stage 4, with assumptions current as at 14 December 2015. The preceding steps ensured a rigorous, multi-step process was engaged to develop and refine the modelling assumptions.

2.5 Step 5 - Measurement of direct economic impacts

Economic impacts are estimated according to the direct and indirect impacts to the economy. This study models the potential impacts over a 25-year assessment period between 2015 and 204020.

Direct economic impacts refer to the value of economic activity directly generated for the WA economy as a result of the development and operation of the selected FLNG projects.

The direct impact of the FLNG sector in WA was modelled as part of the data collection and refinement steps detailed above. The four key drivers of the direct impacts are outlined in section 2.2.2.

The direct impacts are the most critical set of assumptions for the modelling of the expected economic impacts to WA from the growth and development of the FLNG sector. That is, determining the value of economic benefits that directly accrue to WA, the timing of these benefits, and their nature with regard to the sectors likely to provide intermediate inputs. These assumptions were developed using the publicly available sources, and consultation with proponents.

This information was housed in a ‘direct shocks’ model which outlines the pattern of spending, investment, and employment in the WA economy expected directly as a result of the construction and operational phases of the selected projects.

Spending and investment in WA was modelled across multiple sectors of the economy over time. The modelling accounted for the type of industries expected to benefit from FLNG and the extent to which they benefit from FLNG development differing from those sector impacted by onshore LNG projects (see section 3.2 for more detail).

The outputs of the direct shocks model form the key inputs to the Computable General Equilibrium (CGE) model to determine the flow on impacts to the WA economy from FLNG developments. This is discussed in step 6 below. Further detail on the direct impacts is in section 3.2.

2.6 Step 6 - Measurement of total economic impacts

Indirect economic impacts constitute the flow-on effects of the direct economic impacts through the economy. These include impacts on prices, productivity, output (Gross State Product), and employment (jobs and wages) from the initial direct impacts.

The total (i.e. direct plus indirect) economic impact is measured through the use of a CGE model: the Deloitte Access Economics Regional General Equilibrium Model (DAE-RGEM).

CGE analysis incorporates a system of equations and modelling parameters, based on a widely-accepted body of economic theory that models competition for resources (particularly in labour and capital markets) between economic agents and allows for economy-wide modelling impacts incorporating any “crowding-out” impacts.

DAE-RGEM is a large scale, dynamic, multi-region, multi-commodity computable general equilibrium model of the world economy. The model allows policy analysis in a single, robust, integrated economic framework. This model projects changes in macroeconomic aggregates such as GDP, employment, export volumes, investment, taxation and private consumption.

20 The assessment period includes known impacts commencing from 2013. Potential impacts commence from the time of study in 2015.

Analysis undertaken


A particular requirement of CGE modelling is to not only build a picture of the future ‘investment’ or ‘project’ scenario, but also to specify a ‘counterfactual’ scenario. The counterfactual refers to the scenario that is expected to have emerged in the absence of the investment or project case intervention.

In this case, the counterfactual scenario can be described as a ‘zero base case’ entailing a scenario where FLNG projects do not proceed on an onshore basis. This reflects the publicly expressed views of proponents21. The economic impacts are expressed as deviations between the project case and the counterfactual scenario – or base case (i.e. on a net basis). Further detail on CGE modelling is in Appendix B.

21 Submission No. 15 from Shell in Australia, 30 August 2013, p 8.

Economic impact assessment


3 Economic impact assessment

3.1 Introduction

As noted in section 2, economic impacts are estimated according to expected direct impacts and total impacts. Direct impacts constitute the economic benefits that are generated for WA directly as a result of the FLNG projects. Total impacts incorporate both the direct impacts and the indirect (flow on) impacts. Indirect impacts are estimated using the DAE-RGEM model for which the estimated direct impacts serve as inputs.

Figure 3 illustrates the direct impacts (in blue) and the corresponding total economic impact metrics (in green) that are measured in the study. This section follows this broad structure, examining the key direct impacts and the estimated total economic impacts.

Due to the confidential nature of certain assumptions underpinning the modelling, some economic impacts are described in this section according to their nature, the sectors in which they occur, and their cumulative size rather than in specific detail. Figure 3 – Summary of approach to modelling direct and total economic impacts22


*Note that an estimate of the total revenue generated from the FLNG industry is used as an input in the estimation of the GSP impact. However, foreign ownership in a proportion of the industry will mean revenue will ‘leak’ from the economy. This quantum is based on historic data and estimates from previous major projects. Impacts to domestic consumption adjust for these effects, and arguably provide a more accurate measure of the impact of FLNG on the WA economy.

3.2 Direct economic impacts

As noted in section 2.2.2, four key drivers influence the direct economic activity generated in WA as a result of FLNG projects. From these drivers, three inputs were estimated as incremental changes from the counterfactual scenario to form the direct impacts:

22 Note that the illustrated share profile may not necessarily be accurate and is not uniform across each impact. The purpose of the figure is to illustrate that the impact share WA receives will be less than the Australian share, and that the Australian share will be a proportion of the global share.



1. construction and installation related expenditure in WA

2. operational related expenditure in WA

3. output and revenue of the oil and gas sector in WA.

Note that the extent to which Western Australian firms may benefit from project outlays with regard to construction and operation requirements are inputs into determining the value of construction and installation related expenditure, and operational-related expenditure in WA.

Figure 4 outlines the cumulative value of FLNG-related expenditure in WA at the construction, installation and operational phases. Over the assessment period to 2040, approximately $7.2 billion in Net Present Value (NPV) terms23 could be expected to be spent directly in WA as a result of FLNG developments. Figure 4 – Estimated cumulative expenditure in WA from FLNG developments, NPV terms


Figure 4 shows that WA is expected to derive significantly greater benefit from operational related outlays compared with upfront construction and installation-related spending. These aspects are discussed in further detail below.

3.2.1 Construction and installation related expenditure in WA

The research and consultation undertaken confirmed that upfront capital expenditure on FLNG facilities will primarily occur overseas. This is chiefly due to a lack of competitive advantage in WA and Australia in large-scale manufacturing and engineering construction.

Part of the limitation with regard to scale relates to infrastructure, with insufficient large-scale substructure such as dry docks. For example, the Australian Marine Complex (AMC) was opened in 2003 to provide WA with the capacity and capability for fabrication, construction and load out of modular equipment for the oil, gas and mining sectors24. However, the scale is insufficient for FLNG-sized facilities. As quoted in the Inquiry by a witness familiar with the capacity and capability of the AMC:

“if we are talking about building the actual (hull), with that capability and that sized module, it is reasonable to say Western Australia does not have it. But Western Australia has the capability, capacity and experience to build FLNG modules, because it has done it.25”

However, in addition to scale, highly specialist manufacturing capability and engineering skillsets are also required to build many key components of an FLNG facility. While WA remains a world-class oil and gas destination, some specialist engineering skills are not present in the State.

23 All NPVs in this study are calculated using a discount rate of 7.00% 24 Economics and Industry Standing Committee (2014), The economic impact of floating LNG on Western Australia, volume 2, WA Legislative Assembly, Parliament of WA. Page 183. 25 Ibid



For example, a finding of the Inquiry was that many skilled engineers had left WA to find employment on projects elsewhere following the decision in 2005 to build the fifth North West Shelf LNG train overseas. As a result, it is reported that WA lost some of the capability required to construct an FLNG or LNG facility.

Western Australian firms had previously been involved in the construction of LNG projects in the State. Metal fabricators manufactured four topside processing modules for Woodside’s Northern Endeavour floating production storage and offloading (FPSO) vessel in 1999. Further, trains 1-4 of the North West Shelf LNG plant were all built in WA.

Australia’s relative isolation also means that it is disadvantaged by having poorer access to global supply chains, while the cost of labour and materials has made meeting budgets for capital projects challenging in Australia. For example, globally, construction costs for LNG projects are on average 30 per cent of the total, lifecycle cost of the project. In Australia however, this is 50-60 per cent owing in part to high labour costs26.

Australia has the capability to construct particular components of FLNG facilities. Table 1 outlines some of the key components of the Prelude FLNG facility, the core supplier and the production location. Contracts to design and construct some smaller, niche components for Prelude have been awarded to Australian and West Australian based firms.

Details on the challenges and opportunities for local firms in the FLNG supply chain are in the supply chain component of the broader FLNG Uncovered study. Table 1 – Selected key construction components27, suppliers and production locations for the Prelude FLNG project

Structure Key supplier Main production location

FLNG hull Samsung Heavy Industries Geoje, South Korea

Topside modules Samsung Heavy Industries Geoje, South Korea

Turret mooring systems Drydocks World Dubai, United Arab Emirates

Mooring chains Vicinay Cadenas Bilbao, Spain

Subsea systems FMC Technologies Nusajaya, Malaysia

Offshore loading arms FMC Technologies Sens, France

Compressors GE oil and gas Florence, Italy

Compressor trains and power generation system

Mitsubishi Heavy Industries Compressor Corporation

Hiroshima, Japan

Main onshore supply base Decmil Darwin, Australia

Buckle initiators Civmec Perth, Australia

Pipeline End Terminations, Pig Launchers and Receivers

Civmec Perth, Australia

Uninterruptible power supply systems

Emerson Network Power Sydney, Australia

Source: Shell, LNG World News

While WA may possess the capacity to develop certain components of an FLNG facility, the fact that major works like hull and topside construction cannot be undertaken locally precludes the State from significant engagement in the construction phase. As such, the majority of capital expenditure during the construction phase of FLNG projects is expected to occur overseas.

26 KPMG (2014). Floating LNG: Revolution and evolution for the global industry? As quoted in Bureau of Resources and Energy Economics (BREE), 2014, Gas Market Report November 2014, Australian Government, p.39 27 Design, construction and installation of the Prelude facility has been contracted to a consortium of Technip and Samsung and is primarily being undertaken in Goeje, South Korea. There are three components to an FLNG facility: (1) The topside is a collective term used to refer to infrastructure required for gas processing and liquefaction and vessel operation. (2) The hull forms the watertight body of vessel. (3) The turret is a massive cylindrical structure that sits at one end of the vessel to which all gas flow lines and mooring chains are attached.



The research and consultation suggested that WA could receive an approximate 5 per cent share of the value of global contracts to design and construct components of FLNG facilities throughout the construction phases of FLNG projects, and across the assessment period. This is based on WA retaining this relative disadvantage in large scale engineering projects.

It also suggested that the majority of activity within WA’s share of construction would constitute services such as drilling, subsea logistics, marine and other onshore activities (including aviation and supply bases). The work expected to flow to WA would peak at the installation phase in particular, reflecting the State’s close proximity to the gas fields.

Applying these assumptions, the study incorporates an estimated $1.03 billion (in net present value terms) spending boost to WA from the design, construction and installation of FLNG facilities during the assessment period (up to 2040). Based on the research and consultation, it is estimated that around 35 per cent of the direct expenditure impact will occur within the heavy and civil engineering construction sector in WA (Figure 5). Combined, the WA transport sector (water, air and road) is expected to account for 25 per cent of the spending. Details on local opportunities in the FLNG supply chain are in the supply chain component of the broader FLNG Uncovered study. Figure 5 – Estimated sectoral split of expenditure in WA during the design, construction and installation phases of FLNG developments nearby WA

Source: Deloitte Access Economics. *Other sectors expected to benefit from FLNG construction include Specialised Industrial Machinery and Equipment Wholesaling, Fuel Retailing, Specialised Machinery and Equipment, Manufacturing, and Structural Metal Product Manufacturing

3.2.2 Operational related expenditure in WA

The research and consultation suggest that WA could play a significant role in the operational aspects of FLNG projects.

The proximity of Western Australian industry to FLNG projects and the diminished need for significant scale at this phase means local businesses could be expected to provide greater support to FLNG proponents compared with the construction and installation phase.

While the majority of FLNG operations are expected to occur offshore on the FLNG facilities, onshore infrastructure and operations are required in support. For example, in Woodside’s response to the WA FLNG Inquiry the following onshore requirements were presented:

• Access to marine support and materials supply base

• Access to helicopter aviation base for crew transfers and other aviation requirements

• Some onshore accommodation to support FLNG crew rotations and transfers

• Logistics support vessels to transfer goods and materials to the facility

• Dedicated infield support and supply vessels for operations including:

o Permanent standby vessels at the FLNG facility



o Vessels for supply and removal of materials, equipment and consumables28.

In addition, Woodside indicated that local businesses will have the opportunity to support with technical services, facility repair, and maintenance during the operational phase of FLNG projects29.

This is supported by Shell’s decision in November 2015 to award a $200 million maintenance and modifications services contract for Prelude to Perth-based engineering group, Monadelphous. The contract is for an initial 7-year period and includes maintenance, brownfield modifications and turnaround services to the LNG process plant, support utilities, hull and non-process infrastructure including accommodation and control rooms. The contract also includes the delivery of fabrication services from the Darwin supply base in support of offshore operations30.

Based on Shell’s estimates for Prelude, this study assumes 70 per cent of global operational expenditure will be Australian content, and that 70 per cent of this Australian content will come from WA31.

Applying these assumptions over the assessment period, the modelling assumes that up to $6.15 billion (in NPV terms) could be spent in WA procuring services from local firms as part of the operational phases of FLNG projects. This is almost five times the level of FLNG-related construction and installation expenditure that is expected to be spent in WA over the assessment period.

Figure 6 outlines the split of expected operational spending in WA across key industry sectors as incorporated in the modelling, based on the research and consultation undertaken. Unlike the construction and installation phase, the transport sector is projected to be the key beneficiary from the operating phases of possible FLNG projects. The transport sector in WA is expected to account for almost 40 per cent of the total operating spend from FLNG during the assessment period. Details on local opportunities in the FLNG supply chain are in the supply chain component of the broader FLNG Uncovered study. Figure 6 - Estimated sectoral split of expenditure in WA during the operational phases of FLNG developments nearby WA

Source: Deloitte Access Economics. *Other sectors include Specialised Industrial Machinery and Equipment Wholesaling, Fuel Retailing, and Architectural, Engineering and Technical Services.

3.2.3 Employment at construction and operational phases

As discussed in section 3.2.1, the majority of construction activity is not expected to occur in WA in the foreseeable future. As such the impact on local employment is likely to be modest during the construction phase.

28 Woodside, 2013, Woodside submission to the Inquiry into the Economic Implications of Floating Liquefied Natural Gas Operations 29 Ibid 30 Monadelphous Group Limited, ASX Release, Monadelphous Secures Shell Prelude FLNG Maintenance Contract, 23/11/15 31 Shell, 2013, Inquiry into Floating LNG, Shell submission to the Economics and Industry Standing Committee



However, FLNG facilities are projected to provide employment opportunities during their operational phases. Shell estimate that ‘[by] 2017 there will be 350 people working on Prelude with a further 650 in support roles, across Broome, Darwin and with a majority based in the Perth office32’.

Shell also noted that at the time of WA Inquiry more than 500 staff were employed at their Prelude project headquarters in Perth33.

In Woodside’s submission to the WA Inquiry, the company estimated that 350 personnel would be required in steady-state operations (across two shifts on a rotating basis) per facility. Woodside estimates that an additional 250-270 personnel will be required per facility during periods of major maintenance.

Publicly available information suggested that the Browse FLNG project was to operate through three facilities, which would require approximately 1,050 personnel in steady-state operations and 750-810 personnel during periods of major maintenance34.

Due to the difficulty in defining what proportions of these estimated workforces are likely to stem from WA specifically, employment does not form a direct input into the CGE modelling.

In terms of the nature of jobs required for FLNG operation, Woodside has stated publicly that personnel on board during normal operations will consist of highly trained LNG operators and maintainers, engineers, management, as well as facility maintenance personnel (e.g. cleaners and cooks)35.

Given the relative infancy of FLNG technologies, an opportunity exists for Australia to generate benefits from FLNG projects by providing necessary training. Through industry and government collaboration, appropriate training and education can be provided locally to develop future expertise in the sector36.

3.2.4 Output and revenue of the oil and gas sector in WA

Along with expenditure in WA at the construction and operational phases, the estimated revenue generated for the WA oil and gas sector from FLNG operations also forms a key input into the modelling process. This is applied in the CGE model as a revenue shock to the oil and gas sector.

As outlined in section 2.2.2, project revenues are a function of price and output forecasts ascertained in the research and consultation phases. Output was estimated from publicly available data on the proposed / potential FLNG projects37. Price forecasts for LNG prepared by the AEMO38 were used for the period 2016 to 2040.

Figure 7 shows the cumulative increase in natural gas production attributable to the proposed / potential FLNG projects (price and production drive the revenue estimates generated). By the end of the assessment period, the projects considered are expected to have produced a combined, cumulative 22,412 petajoules (PJ) of natural gas for supply to the global and domestic markets. As a comparison, the State exported over 1,134 PJ of LNG in 2014-15.

32 Shell, 2013, Inquiry into Floating LNG, Shell submission to the Economics and Industry Standing Committee 33 Economics and Industry Standing Committee (2014), The economic impact of floating LNG on Western Australia, volume 1, WA Legislative Assembly, Parliament of WA. Page 165 34 Woodside, 2013, Woodside submission to the Inquiry into the Economic Implications of Floating Liquefied Natural Gas Operations 35 Ibid 36 Ibid 37 As previously noted, revenue related to potential domestic gas supplies to the WA market was also relevant for some projects. This revenue stream was estimated using the LNG price forecast in Figure 1, and netting off benchmark costs of liquefaction and shipping. Output allocated for the domestic market was estimated from publicly available data and information. 38 Australia Energy Market Operator “Planning Assumptions” for LNG price (USD/tonne), exchange rates and inflation to determine a AUD/GJ price estimate



Figure 7 – Cumulative natural gas production from potential FLNG projects off the coast of WA


3.3 Total economic impacts

Using the above key direct impacts as inputs, deviations in total economic activity compared with the base case were estimated using the DAE-RGEM model.

The DAE-RGEM model provides a complete representation of the Australian economy and takes into consideration a range of factors, including competition in the labour and capital markets, linkages with other competing and complementary industries in the economy, and interactions with the rest of the world. A detailed explanation of the model is in Appendix B.

The particular characteristics of the FLNG development and their impact on WA’s economy are captured in the model through three main channels:

• the additional expenditure on capital investment to assemble, operate and maintain the facilities

• the additional LNG output (revenue) from the facilities

• the idiosyncratic production structure and use of intermediate inputs by the projects

Modelling results are expressed as deviations from the counterfactual scenario or base case (a scenario in which no FLNG developments proceed in WA during the assessment period). Outputs are provided for the following macroeconomic variables:

• Gross State Product

• Real consumption

• Balance of trade39

• State Government revenue

The results of the DAE-RGEM modelling process are below (results are expressed in 2014-15 real dollars).

39 Beyond a three nautical mile limit, petroleum exploration and exploitation is covered by Commonwealth legislation which applies from the three nautical mile limit to the outer edge of the Australian continental shelf (subject to the application of other more particular regimes such as those applying in the Timor Sea). While many FLNG projects are likely to sit in Commonwealth waters, the infancy of FLNG means that it is not clear how the output from these projects should be treated from a statistical point of view. Specifically, it is unclear whether FLNG exports off the coast of WA ought to be allocated to WA for the purposes of determining Gross State Product under the expenditure approach. For the purposes of this study, it is assumed that FLNG output in Commonwealth waters is allocated to the nearest State or Territory. There is a basis for this assumption in exploration expenditure statistical data, whereby the Australian Bureau of Statistics allocates expenditure in Commonwealth waters to the nearest State or Territory.



3.3.1 Gross State Product

Gross State Product (GSP) is a measure of the economic output of a State. Where Gross Domestic Product (GDP) measures the total value added by industries within a country, GSP provides this measure at a State level, in this case for WA.

The proposed FLNG development is expected to produce an overall net increase in economic activity in WA over the assessment period of 2015 to 204040. The model shows that GSP impacts will be predominantly driven by the expansion of gas production.

GSP is expected to increase most rapidly following the commissioning of FLNG projects, upon production commencement. The estimated expenditure in WA at the construction and operational phases (discussed in sections 3.2.1 and 3.2.2) boosts economic activity in intermediate input sectors such as transport, construction and manufacturing. However, the increase in GSP from this influence is moderate in comparison to the expected growth in LNG output, and the resultant rise in revenues in the WA oil and gas sector.

As presented in Figure 8, GSP is estimated to be higher than the base case by $5.34 billion in 2030 and by $6.11 billion at the end of the assessment period in 2040. The various inflection points in Figure 8 represent key development milestones in the projects modelled.

Overall economic activity and income in the Western Australia economy is expected to increase as a result of the FLNG development. To frame the cumulative economic impacts of the FLNG development, the stream of value-added gains over the period 2015 to 204040 is converted to present terms. In total, the NPV of future GSP gains is estimated to be approximately $38.9 billion. Figure 8 – Projected change in WA Gross State Product as a result of FLNG development, deviation from base case, real terms


However, a positive deviation in GSP is not necessarily indicative of a positive outcome for WA. GSP shows where the production of goods and services occurs, and is not concerned with the ultimate end location of revenue associated with the production.

Given that many proposed FLNG projects are partially foreign owned, the extent to which the additional revenue will remain in WA will be determined by the degree of local ownership. For this reason, other indicators of the domestic economy, such as consumption, together with GSP provide a more complete picture of the expected economic benefits for WA.

3.3.2 Real consumption

Real household consumption is an alternative measure for the potential benefits to WA from anticipated FLNG developments. Consumption measures the amount that resident households in WA spend on goods and services.

40 The assessment period includes known impacts commencing from 2013. Potential impacts commence from the time of study in 2015.



As real consumption is based on income rather than production, it is a better measure than GSP of the impact FLNG developments will have on activity in the domestic economy. However, the below results are indicative only as historical assumptions inbuilt in the DAE-RGEM model have been used to determine the proportion of development owned by foreign sources. Consequently, the accuracy of the results depends on how well the model reflects actual foreign ownership shares.

As a result of FLNG development, real household consumption is projected to increase at a fairly constant rate during the assessment period, compared with the base case (Figure 9). This is a substantially different pattern of growth to GSP. This is because the consumption deviation kicks-in and increases over time as the total GSP deviation increases and the projected capital expenditure decreases. By 2040, real household consumption is expected to be $7.02 billion higher compared to the base case.

Over the assessment period, real household consumption is estimated to be $22.4 billion higher in NPV terms as a result of the development of the FLNG sector in WA. The estimated rise in household consumption confirms that FLNG development in WA is expected to generate positive wealth effects to the State. Figure 9 - Projected change in WA household consumption as a result of FLNG development, deviation from base case, real terms


3.3.3 Balance of trade

As the FLNG projects proceed to operational phase, the State’s balance of trade41 is expected to improve as the majority of projected FLNG output is export bound42.

The balance of trade is estimated to improve rapidly following the construction and commissioning of projects over the assessment period. The improvement peaks in 2027 at $4.05 billion.

While the trade balance increases initially (because it is assumed that a portion of the additional gas output is exported), the positive trade balance diminishes over time as the increased gas output causes an appreciation of the Australian dollar in the modelling. As the appreciation persists, firms and individuals adjust their behaviour accordingly and consequently, exports from the other sectors decrease in the model, while imports in other sectors increase.

By 2030 the balance of trade improvement over the base case falls to $3.79 billion and by 2040 the improvement is $1.20 billion (Figure 10). Over the assessment period, the development of the FLNG sector is forecast to improve the State’s balance of trade by approximately $26.9 billion (in NPV terms).

41 The balance of trade, or trade balance, is equals to exports minus imports. 42 As noted in section 2.2.2, the direct impacts incorporate a small amount of FLNG production being supplied to the domestic market



Figure 10 - Projected change in WA trade balance as a result of FLNG development, deviation from base case, real terms


3.3.4 Employment

As noted in section 3.2.3, due to the difficulty in defining the proportion of the estimated FLNG workforce that is likely to stem from WA specifically, employment does not form a direct input into the CGE modelling process.

In the case of typical onshore LNG development, economy-wide employment tends to be driven by capital expenditure, given that gas production is capital intensive. Capital expenditure stimulates indirect demand for labour in relatively labour intensive industries such as manufacturing and construction. However, given that FLNG development requires less capital expenditure in WA both during the construction and maintenance phases, the model-determined outputs43 suggest that the indirect employment effects are likely to be limited.

These employment effects are not reported in this study given the lack of credible information on WA’s likely employment share from FLNG projects. This would typically form inputs to (or at least serve as comparative benchmarks for) the CGE modelling process.

3.3.5 State Government revenue

As a result of the expected increase in economic activity in Australia, State government taxation revenue is projected to increase.

A direct taxation revenue impact was calculated based on projected additional increases in State royalties paid as a result of the FLNG development44.

The indirect taxation revenue refers to the additional revenue generated in other sectors of the economy as overall activity in the State grows. This follows a similar pattern to GSP impacts (Figure 11).

An additional $2.53 billion in taxation revenue at the State level is forecast to be raised over the base case in 2040. In total NPV terms, the revenue boost to the State Government is estimated at $13.4 billion over the assessment period.

43 Even without feeding direct employment estimates into the CGE model, it is possible for the model to derive estimates of expected employment generation from the expenditure and output shocks inputted 44 Despite being in Commonwealth waters, some FLNG projects are expected to remit State royalties and supply into the domestic market in WA. The royalty estimate derived here is based on this structure, drawing on publicly available estimates



Figure 11 - Projected change in State Government revenues as a result of FLNG development, deviation from base case, real terms


Limitation of our work


4 Limitation of our work

General use restriction

This report is prepared solely for the internal use of UWA Energy and Minerals Institute (EMI). This report is not intended to and should not be used or relied upon by anyone else and we accept no duty of care to any other person or entity. The report has been prepared for the purpose of estimating the potential economic impacts to WA from the possible development of certain FLNG projects in this jurisdiction. You should not refer to or use our name or the advice for any other purpose.

Limitations of assumptions

Some of the core assumptions which underpin the economic models have been developed by Deloitte Access Economics with input from UWA Energy and Minerals Institute (EMI), the Australian Petroleum Production & Exploration Association (APPEA), APPEA’s members, other contractors and consultants engaged in the broader FLNG Uncovered study as well as publicly available data.

While reasonable efforts have been made to ensure the information contained in this report is accurate and correct at 14 December 2015, Deloitte Access Economics Pty Ltd has not audited, tested, verified or checked for completeness any information provided for the purpose of preparing the report. To the extent that there is any error in the report, the report information, or any other relevant information providers have failed to provide additional relevant information; the report may be incorrect or unsuitable for use.

In particular, many of the stakeholders that participated in the process were unable to validate all assumptions due to commercial sensitivities and information gaps stemming from the on-going development of FLNG technology. Therefore, Deloitte Access Economics Pty Ltd takes no responsibility for the accuracy of the assumptions adopted in the modelling, or the modelling outcomes.

Deloitte Access Economics Pty Ltd does not provide any assurance on the reliability of any forecasts or projections set out in the report or the reasonableness of any underlying assumptions. All forecasts and projections (including prices) have been built on assumptions developed from public information and feedback from project participants and industry stakeholders and are for illustrative purposes only.

Since forecasts or projections relate to the future, they may be affected by unforeseen events and they depend, in part, on the effectiveness of actions in implementing the forecasts or projections. Accordingly, actual results are likely to be different from those forecasts or projected because events and circumstances frequently do not occur as expected, and those differences may be material.

CG

E m

odel

ling

FLN

G U

ncov

ered

- Ec

onom

ic Im

pact

Ass

essm

ent

26

Appe

ndix

A: I

nqui

ry fi

ndin

gs re

leva

nt to

stu

dy

The

WA

Stat

e G

over

nmen

t’s P

arlia

men

tary

Inqu

iry in

to th

e im

plic

atio

ns o

f Flo

atin

g LN

G o

pera

tions

was

com

plet

ed in

201

4. T

he In

quiry

find

ings

unc

over

ed a

rang

e of

co

mpl

exiti

es in

und

erst

andi

ng th

e co

ntrib

utio

n of

FLN

G. T

he In

quiry

pre

sent

ed 6

8 fin

ding

s on

FLN

G in

Wes

tern

Aus

tralia

, som

e of

whi

ch a

re re

leva

nt to

this

stu

dy a

nd

form

the

basi

s fo

r som

e ke

y as

sum

ptio

ns. T

he re

leva

nt fi

ndin

gs a

re p

rese

nted

in T

able

2 b

elow

.

Tabl

e 2

- Fin

ding

s fr

om th

e W

A F

LNG

Inqu

iry re

leva

nt to

this

stu

dy

Find

ing

# Fi

ndin

g R

elev

ance

to s

tudy

Find

ing

21

Wes

tern

Aus

tralia

n lo

cal c

onte

nt p

olic

ies

may

not

pro

vide

max

imum

op

portu

nitie

s fo

r loc

al b

usin

esse

s to

par

ticip

ate

in F

LNG

pro

ject

s.

The

mod

ellin

g m

ay n

eed

to c

onsi

der a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

com

pare

d to

trad

ition

al o

nsho

re p

roje

cts

desp

ite g

over

nmen

t loc

al c

onte

nt p

olic

ies

Find

ing

22

Des

pite

gov

ernm

ent i

mpl

emen

tatio

n an

d m

onito

ring

of lo

cal c

onte

nt p

rovi

sion

s in

S

tate

Agr

eem

ents

, loc

al b

usin

esse

s st

ill d

o no

t hav

e fu

ll, fa

ir an

d re

ason

able

op

portu

nity

to p

artic

ipat

e in

thes

e m

ajor

pro

ject

s.

The

mod

ellin

g m

ay n

eed

to c

onsi

der a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

com

pare

d to

trad

ition

al o

nsho

re p

roje

cts,

par

ticul

arly

as

such

pro

ject

s ap

pear

to

be h

avin

g im

pact

s on

loca

l con

tent

that

are

per

haps

less

sig

nific

ant t

han

antic

ipat

ed

Find

ing

23

The

use

of g

loba

l eng

inee

ring,

pro

cure

men

t and

con

stru

ctio

n m

anag

emen

t (E

PC

M) c

ontra

ctin

g fo

r LN

G p

rodu

ctio

n pr

ojec

ts h

as h

ad a

sig

nific

ant a

nd

dele

terio

us e

ffect

upo

n th

e A

ustra

lian

and,

in p

artic

ular

the

Wes

tern

Aus

tralia

n,

engi

neer

ing

sect

or.

The

desi

re to

app

oint

EPC

M c

ontra

ctor

s on

maj

or p

roje

cts

may

be

a fa

ctor

co

ntrib

utin

g to

dim

inis

hed

loca

l inp

ut. T

he m

odel

ling

may

nee

d to

con

side

r a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

as a

resu

lt

CG

E m

odel

ling

FLN

G U

ncov

ered

- Ec

onom

ic Im

pact

Ass

essm

ent

27

Find

ing

# Fi

ndin

g R

elev

ance

to s

tudy

Find

ing

24

Est

ablis

hing

Per

th a

s a

glob

al d

esig

n ce

ntre

pot

entia

lly w

ould

hav

e su

bsta

ntia

l be

nefit

s fo

r mul

tiple

sec

tors

of t

he e

cono

my.

D

esig

n is

an

area

whe

re A

ustra

lia m

ay b

e ab

le to

dev

elop

a c

ompe

titiv

e ad

vant

age

in th

e fu

ture

from

whi

ch lo

cal i

ndus

tries

cou

ld b

enef

it in

sup

porti

ng

FLN

G o

pera

tions

. The

mod

ellin

g m

ay n

eed

to c

onsi

der i

f the

nat

ure

of lo

cal

enga

gem

ent w

ith F

LNG

pro

ject

s sh

ould

impr

ove

over

tim

e as

a re

sult

of s

uch

fact

ors

Find

ing

26

Eng

agem

ent o

f loc

al m

anuf

actu

ring

and

fabr

icat

ion

busi

ness

es la

rgel

y de

pend

s on

loca

l eng

inee

ring

in th

e de

sign

pha

se.

Firm

s en

gage

d in

the

desi

gn p

hase

are

idea

lly p

lace

d to

sup

port

in c

onst

ruct

ion

and

fabr

icat

ion.

The

mod

ellin

g ne

eds

to c

onsi

der h

ow li

kely

it is

that

WA

firm

s w

ill be

invo

lved

in th

is a

spec

t giv

en th

e pr

open

sity

for F

EED

on

FLN

G p

roje

cts

to b

e un

derta

ken

over

seas

Find

ing

27

Sev

eral

fact

ors

cons

pire

to e

xclu

de th

e A

ustra

lian

engi

neer

ing

sect

or fr

om th

e FL

NG

des

ign

proc

ess.

The

se in

clud

e:

• th

e us

e of

glo

bal e

ngin

eerin

g, p

rocu

rem

ent a

nd c

onst

ruct

ion

man

agem

ent (

EP

CM

) con

tract

ing

and

cons

eque

nt te

nder

ing

to

over

seas

com

pani

es;

• th

e ex

odus

of s

kille

d en

gine

ers

from

Per

th fo

llow

ing

the

deci

sion

to

desi

gn a

nd e

ngin

eer t

he N

orth

Wes

t She

lf tra

in 5

ove

rsea

s; a

nd

• th

e de

sign

one

, bui

ld m

any

conc

ept o

f FLN

G p

roje

ct d

esig

n an

d de

tail

engi

neer

ing

bein

g do

ne to

tally

ove

rsea

s.

The

mod

ellin

g m

ay n

eed

to c

onsi

der a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

com

pare

d to

trad

ition

al o

nsho

re p

roje

cts

Find

ing

28

FLN

G te

chno

logy

pot

entia

lly w

ill g

ener

ate

oppo

rtuni

ties

for s

ubse

a en

gine

erin

g an

d de

sign

that

wou

ld n

ot h

ave

even

tuat

ed fr

om o

ther

wis

e st

rand

ed g

as.

Whi

le th

e ec

onom

ic o

ppor

tuni

ty fo

r con

stru

ctio

n in

volv

emen

t in

FLN

G p

roje

cts

may

not

be

as s

igni

fican

t as

tradi

tiona

l ons

hore

tech

niqu

es, i

t may

allo

w fo

r nic

he

expe

rtise

to b

e de

velo

ped

loca

lly th

at m

ay o

ther

wis

e no

t hav

e ev

entu

ated

. The

se

area

s of

opp

ortu

nity

nee

d to

be

cons

ider

ed in

the

mod

ellin

g

CG

E m

odel

ling

FLN

G U

ncov

ered

- Ec

onom

ic Im

pact

Ass

essm

ent

28

Find

ing

# Fi

ndin

g R

elev

ance

to s

tudy

Find

ing

29

The

oper

atio

ns p

hase

of F

LNG

pro

ject

s ha

s th

e po

tent

ial t

o ge

nera

te

engi

neer

ing

oppo

rtuni

ties

in W

este

rn A

ustra

lia, i

n pa

rticu

lar s

ubse

a en

gine

erin

g.

The

mod

ellin

g ne

eds

to in

clud

e su

bsea

eng

inee

ring

a pr

ospe

ctiv

e in

dust

ry

oppo

rtuni

ty fo

r WA

to p

rovi

de in

term

edia

te in

puts

to F

LNG

ope

ratio

ns

Find

ing

30

Whi

le A

ustra

lian

man

ufac

ture

rs c

an s

till w

in fa

bric

atio

n w

ork

for o

nsho

re L

NG

pl

ants

, FLN

G te

chno

logy

pla

ces

them

at a

geo

grap

hic

disa

dvan

tage

rela

tive

to

the

cons

truct

ion

loca

tion

and

thei

r dis

conn

ectio

n fro

m g

loba

l sup

ply

chai

ns.

The

mod

ellin

g m

ay n

eed

to c

onsi

der a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

com

pare

d to

trad

ition

al o

nsho

re p

roje

cts

Find

ing

32

The

com

plex

and

sop

hist

icat

ed s

ubse

a co

mpo

nent

ry fo

r Aus

tralia

n an

d in

tern

atio

nal F

LNG

pro

ject

s pr

ovid

es a

n op

portu

nity

for t

he A

ustra

lian

met

al

fabr

icat

ion

indu

stry

.

The

mod

ellin

g ne

eds

to c

onsi

der i

f and

to w

hat e

xten

t fab

ricat

ion

coul

d be

a

pros

pect

ive

indu

stry

opp

ortu

nity

for W

A to

pro

vide

upf

ront

or i

nter

med

iate

inpu

ts to

FL

NG

ope

ratio

ns w

ithin

the

cont

ext o

f com

plex

, nic

he p

roje

ct re

quire

men

ts

Find

ing

33

As

part

of a

Cen

tre o

f Exc

elle

nce,

Wes

tern

Aus

tralia

can

be

a su

cces

sful

fa

bric

ator

of h

igh

qual

ity, h

igh

valu

e m

anuf

actu

ring

for t

he o

il an

d ga

s se

ctor

. Th

e m

odel

ling

need

s to

con

side

r if a

nd to

wha

t ext

ent f

abric

atio

n co

uld

be a

pr

ospe

ctiv

e in

dust

ry o

ppor

tuni

ty fo

r WA

to p

rovi

de u

pfro

nt o

r int

erm

edia

te in

puts

to

FLN

G o

pera

tions

with

in th

e co

ntex

t of c

ompl

ex, n

iche

pro

ject

requ

irem

ents

Find

ing

34

The

cons

truct

ion

of a

n on

shor

e ga

s pr

oces

sing

and

liqu

efac

tion

plan

t at J

ames

P

rice

Poi

nt w

ould

cre

ate

thou

sand

s of

con

stru

ctio

n jo

bs la

stin

g se

vera

l yea

rs. I

f th

e B

reck

nock

, Cal

lianc

e an

d To

rosa

gas

fiel

ds a

re d

evel

oped

usi

ng F

LNG

te

chno

logy

, the

se jo

bs w

ill n

ot e

vent

uate

.

Nee

d to

con

side

r an

appr

opria

te c

ount

erfa

ctua

l for

the

mod

ellin

g pr

oces

s an

d se

ek to

und

erst

and

pote

ntia

l WA

empl

oym

ent

requ

irem

ents

for F

LNG

faci

litie

s

CG

E m

odel

ling

FLN

G U

ncov

ered

- Ec

onom

ic Im

pact

Ass

essm

ent

29

Find

ing

# Fi

ndin

g R

elev

ance

to s

tudy

Find

ing

37

The

use

of F

LNG

tech

nolo

gy to

dev

elop

gas

fiel

ds in

Aus

tralia

n w

ater

s w

ill

sign

ifica

ntly

redu

ce c

onst

ruct

ion

oppo

rtuni

ties

for W

este

rn A

ustra

lian

busi

ness

es

and

the

rela

ted

flow-o

n op

portu

nitie

s.

The

mod

ellin

g m

ay n

eed

to c

onsi

der a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

com

pare

d to

trad

ition

al o

nsho

re p

roje

cts,

par

ticul

arly

at c

onst

ruct

ion

phas

e

Find

ing

65

Whe

re F

LNG

tech

nolo

gy is

use

d:

• th

e po

tent

ial b

enef

its o

f con

stru

ctio

n ac

tivity

, loc

al ta

xes

and

dow

nstre

am a

ctiv

ity a

re lo

st; a

nd

• a

serio

us lo

ss o

f rev

enue

to th

e S

tate

will

resu

lt.

The

mod

ellin

g m

ay n

eed

to c

onsi

der a

dim

inis

hed

role

for W

A in

FLN

G p

roje

cts

com

pare

d to

trad

ition

al o

nsho

re p

roje

cts,

par

ticul

arly

at c

onst

ruct

ion

phas

e.

Con

side

ratio

n w

ill al

so n

eed

to b

e gi

ven

to a

ny p

roje

cts

whi

ch m

ay h

ave

a do

mes

tic c

ompo

nent

, with

flow

-on

bene

fits

to th

e St

ate

in te

rms

of ro

yalty

reve

nue

Sou

rce:

Eco

nom

ics

and

Indu

stry

Sta

ndin

g C

omm

ittee

(201

4), T

he e

cono

mic

impa

ct o

f flo

atin

g LN

G o

n W

este

rn A

ustra

lia, v

olum

e 1,

WA

Leg

isla

tive

Ass

embl

y, P

arlia

men

t of W

A. D

eloi

tte A

cces

s E

cono

mic

s

CGE modelling


Appendix B: CGE modelling

The Deloitte Access Economics – Regional General Equilibrium Model (DAE-RGEM) is a large scale, dynamic, multi-region, multi-commodity computable general equilibrium model of the world economy. The model allows policy analysis in a single, robust, integrated economic framework. This model projects changes in macroeconomic aggregates such as GDP, employment, export volumes, investment and private consumption. At the sectoral level, detailed results such as output, exports, imports and employment are also produced.

The model is based upon a set of key underlying relationships between the various components of the model, each which represent a different group of agents in the economy. These relationships are solved simultaneously, and so there is no logical start or end point for describing how the model actually works.

Figure D.1 shows the key components of the model for an individual region. The components include a representative household, producers, investors and international (or linkages with the other regions in the model, including other Australian States and foreign regions). Below is a description of each component of the model and key linkages between components. Some additional, somewhat technical, detail is also provided.

Figure A.1: Key components of DAE-RGEM

DAE-RGEM is based on a substantial body of accepted microeconomic theory. Key assumptions underpinning the model are:

• The model contains a ‘regional consumer’ that receives all income from factor payments (labour, capital, land and natural resources), taxes and net foreign income from borrowing (lending).

• Income is allocated across household consumption, government consumption and savings so as to maximise a Cobb-Douglas (C-D) utility function.

• Household consumption for composite goods is determined by minimising expenditure via a CDE (Constant Differences of Elasticities) expenditure function. For most regions, households can source consumption goods only from domestic and imported sources. In the Australian regions, households can also source goods from interstate. In all cases, the choice of commodities by source is determined by a CRESH (Constant Ratios of Elasticities Substitution, Homothetic) utility function.

CGE modelling


• Government consumption for composite goods, and goods from different sources (domestic, imported and interstate), is determined by maximising utility via a C-D utility function.

• All savings generated in each region are used to purchase bonds whose price movements reflect movements in the price of creating capital.

• Producers supply goods by combining aggregate intermediate inputs and primary factors in fixed proportions (the Leontief assumption). Composite intermediate inputs are also combined in fixed proportions, whereas individual primary factors are combined using a CES production function.

• Producers are cost minimisers, and in doing so, choose between domestic, imported and interstate intermediate inputs via a CRESH production function.

• The model contains a more detailed treatment of the electricity sector that is based on the ‘technology bundle’ approach for general equilibrium modelling developed by ABARE (1996).

• The supply of labour is positively influenced by movements in the real wage rate governed by an elasticity of supply.

• Investment takes place in a global market and allows for different regions to have different rates of return that reflect different risk profiles and policy impediments to investment. A global investor ranks countries as investment destinations based on two factors: global investment and rates of return in a given region compared with global rates of return. Once the aggregate investment has been determined for Australia, aggregate investment in each Australian sub-region is determined by an Australian investor based on: Australian investment and rates of return in a given sub-region compared with the national rate of return.

• Once aggregate investment is determined in each region, the regional investor constructs capital goods by combining composite investment goods in fixed proportions, and minimises costs by choosing between domestic, imported and interstate sources for these goods via a CRESH production function.

• Prices are determined via market-clearing conditions that require sectoral output (supply) to equal the amount sold (demand) to final users (households and government), intermediate users (firms and investors), foreigners (international exports), and other Australian regions (interstate exports).

• For internationally-traded goods (imports and exports), the Armington assumption is applied whereby the same goods produced in different countries are treated as imperfect substitutes. But, in relative terms, imported goods from different regions are treated as closer substitutes than domestically-produced goods and imported composites. Goods traded interstate within the Australian regions are assumed to be closer substitutes again.

• The model accounts for greenhouse gas emissions from fossil fuel combustion. Taxes can be applied to emissions, which are converted to good-specific sales taxes that impact on demand. Emission quotas can be set by region and these can be traded, at a value equal to the carbon tax avoided, where a region’s emissions fall below or exceed their quota.

The representative household

Each region in the model has a so-called representative household that receives and spends all income. The representative household allocates income across three different expenditure areas: private household consumption; government consumption; and savings.

Going clockwise around Figure B, the representative household interacts with producers in two ways. First, in allocating expenditure across household and government consumption, this sustains demand for production. Second, the representative household owns and receives all income from factor payments (labour, capital, land and natural resources) as well as net taxes. Factors of production are used by producers as inputs into production along with intermediate inputs. The level of production, as well as supply of factors, determines the amount of income generated in each region.

CGE modelling


The representative household’s relationship with investors is through the supply of investable funds – savings. The relationship between the representative household and the international sector is twofold. First, importers compete with domestic producers in consumption markets. Second, other regions in the model can lend (borrow) money from each other.

Some detail

• The representative household allocates income across three different expenditure areas – private household consumption; government consumption; and savings – to maximise a Cobb-Douglas utility function.

• Private household consumption on composite goods is determined by minimising a CDE (Constant Differences of Elasticities) expenditure function. Private household consumption on composite goods from different sources is determined is determined by a CRESH (Constant Ratios of Elasticities Substitution, Homothetic) utility function.

• Government consumption on composite goods, and composite goods from different sources, is determined by maximising a Cobb-Douglas utility function.

• All savings generated in each region are used to purchase bonds whose price movements reflect movements in the price of generating capital.

Producers

Apart from selling goods and services to households and government, producers sell products to each other (intermediate usage) and to investors. Intermediate usage is where one producer supplies inputs to another’s production. For example, Hotels supply inputs to the services sectors where travel is a part of client service.

Capital is an input into production. Investors react to the conditions facing producers in a region to determine the amount of investment. Generally, increases in production are accompanied by increased investment. In addition, the production of machinery, construction of buildings and the like that forms the basis of a region’s capital stock, is undertaken by producers. In other words, investment demand adds to household and government expenditure from the representative household, to determine the demand for goods and services in a region.

Producers interact with international markets in two main ways. First, they compete with producers in overseas regions for export markets, as well as in their own region. Second, they use inputs from overseas in their production.

Some detail

• Sectoral output equals the amount demanded by consumers (households and government) and intermediate users (firms and investors) as well as exports.

• Intermediate inputs are assumed to be combined in fixed proportions at the composite level. As mentioned above, the exception to this is the electricity sector that is able to substitute different technologies (brown coal, black coal, oil, gas, hydropower and other renewables) using the ‘technology bundle’ approach developed by ABARE (1996).

• To minimise costs, producers substitute between domestic and imported intermediate inputs is governed by the Armington assumption as well as between primary factors of production (through a CES aggregator). Substitution between skilled and unskilled labour is also allowed (again via a CES function).

• The supply of labour is positively influenced by movements in the wage rate governed by an elasticity of supply is (assumed to be 0.2). This implies that changes influencing the demand for labour, positively or negatively, will impact both the level of employment and the wage rate. This is a typical labour market specification for a dynamic model such as DAE-RGEM. There are other labour market ‘settings’ that can be used. First, the labour market could take on long-run characteristics with aggregate employment being fixed and any changes to labour demand changes being absorbed through movements in the wage rate. Second, the labour market

CGE modelling


could take on short-run characteristics with fixed wages and flexible employment levels.

Investors

Investment takes place in a global market and allows for different regions to have different rates of return that reflect different risk profiles and policy impediments to investment. The global investor ranks countries as investment destination based on two factors: current economic growth and rates of return in a given region compared with global rates of return.

Some detail

• Once aggregate investment is determined in each region, the regional investor constructs capital goods by combining composite investment goods in fixed proportions, and minimises costs by choosing between domestic, imported and interstate sources for these goods via a CRESH production function.

International

Each of the components outlined above operate, simultaneously, in each region of the model. That is, for any simulation the model forecasts changes to trade and investment flows within, and between, regions subject to optimising behaviour by producers, consumers and investors. Of course, this implies some global conditions must be met such as global exports and global imports are the same and that global debt repayments equals global debt receipts each year.

CGE modelling


About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 225,000 professionals, all committed to becoming the standard of excellence.

About Deloitte Australia In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 6,000 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte’s web site at www.deloitte.com.au.

Deloitte Access Economics is Australia’s pre-eminent economics advisory practice and a member of Deloitte's global economics group. The Directors and staff of Access Economics joined Deloitte in early 2011.

Liability limited by a scheme approved under Professional Standards Legislation.

Member of Deloitte Touche Tohmatsu Limited

© 2016 Deloitte Access Economics Pty Ltd