ORAM No brass with this muck
The Government is digging in the wrong place for growth.
WE CAN make lots of money from our abundant natural resources, and do so in environmentally responsible ways, the government assures us in its latest economic development paper.
It says the prize is huge. Our stock of natural capital is the eighth largest in the world, according to a World Bank study. The nations ahead of us are all large oil producers; we are a small one but the Government is pushing hard for us to be a big one.
The Government makes this case for making money in Building Natural Resources, its latest report on its Business Growth Agenda. It’s available at http://bit.ly/UUmeBs
Lifting natural resource exports is clearly the Government’s growth priority. It points out that primary sector exports of $32 billion in the year to March, make them 71 per cent of all exports and 12 per cent of GDP. It also reminds us of its goal of lifting total exports from 30 per cent of GDP to 40 per cent by 2025, which would require a doubling of exports in real terms (that is, minus inflation).
We can do it, the Government reckons, if we create more value from water, land, minerals and oceans. And it promises we’ll do so ‘‘while maintaining and improving overall water quality’’ and ensuring we have ‘‘healthy functioning ecosystems supplying and maintaining the natural capital we need to prosper’’.
The Government’s strategy raises lots of crucial questions, though. This column will deal with only one: Can we generate sustainable value from our natural resources?
The Government relies on lots of big assumptions to suggest we can. For example, our existing oil and gas fields will deliver $3b of royalties to the Government over their life. Current exploration trends could make that $8.5b from expanded and new fields, the Government says.
But the Government got two pieces of unwelcome news this past week: Brazil’s Petrobras withdrew from exploration here; and oil companies showed limited enthusiasm in the latest round of permit bidding.
Oil multinationals are sending a very clear signal: New Zealand is a long-odds, high-cost prospect. The geology is far from conclusive and operating deep offshore in such a remote part of the world is difficult.
And there are no quick wins. Some 130 wells were drilled in the North Sea before the Forties Field, its biggest, was discovered by BP in 1970. Exploration and production technologies have improved dramatically since, but today there are many easier places to explore and produce than here.
Moreover, profitable exploitation of any commodity is hostage to world prices and local operating costs. A very telling example is found in Bathurst Resources’ proposal for an opencast coal mine on the Denniston Plateau on the West Coast.
In its evidence to the Environment Court in recent months, Bathurst says the mine would yield 4.8 million tonnes of coking coal exports over its six-year life. It assumes an international price of US$240 per tonne, which would generate $1.45b in revenues. This in turn would produce $631m of net cashflow, equal to $467m in net present-value terms.
From this the Government would get $11m of royalties (a rate of about 1 per cent of the coal’s value) and $125m in taxes. Overseas investors would receive $321m of dividends and NZ investors $26m.
But Peter Clough, an economist with NZIER, has comprehensively undermined these numbers in court. He represents Forest & Bird, a member of the coalition of environmental groups seeking to block the mine because of the plateau’s biodiversity, landscape and environmental values.
Using international coking coal prices submitted by Bathurst, Clough pointed out that over the past three years they were below US$165 a tonne almost half the time. That was 31 per cent below Bathurst’s target of US$240.
At this low level, the net present value of the profits would drop to $20m over the life of the mine, giving a zero return to investors. The Government would still get its royalties, assuming production was maintained, even though it wasn’t profitable. But it would get no corporate tax from the mine.
Clough offers a second scenario: a price of US$192 (which would be a drop of 20 per cent from Bathurst’s target) plus a 20 per cent increase in mine development and operating costs. The international price has been this low more than half the time over the past three years. In this scenario, profits and taxes evaporate.
Plenty of coal companies around the world, including Solid Energy here, have made big investment decisions in recent years on the assumption that high coal prices were permanent.
But they have been caught short by plunging prices caused by huge structural changes in the sector: The massive switch in the US from coal to gas for electricity generation has pushed excesses in coal supplies onto world markets; largescale closure of steelmaking in developed countries is freeing up coking coal supplies for more efficient, newer producers in China and other developing countries. Huge low-cost mines are now on stream in Mongolia, Indonesia and Mozambique.
Yet, even if Bathurst’s extremely optimistic price assumptions were correct, the mine’s real value to the NZ economy would be very modest indeed, Clough’s analysis shows.
But it gets worse. On October 11, Bathurst lowered its estimate of the mine’s lifetime exports by 21 per cent to 3.8 million tonnes. At US$240 a tonne, the net present value would halve to $238m. But at US$170 a tonne it would disappear entirely, Clough pointed out to the court. Quite simply, the mine would be loss-making for investors and the NZ economy. Yet, US$170 a tonne is exactly the average price Solid Energy has achieved for its coal over the past three months.
Clearly, it’s a mug’s game for us, a high-cost producer of coal and some other minerals, to chase illusory overseas profits.
But could we create value in other ways? Yes, because we have the world’s largest volume of renewable resources per person.
The Government knows this – it mentions it in passing in its report Building Natural Resources – but doesn’t understand it. It is systematically gutting the Resource Management and Local Government acts and has introduced a feeble oceans act.
Thus the Government’s economic development strategy will degrade and deplete our renewable resources. It will make us poor.