CEDA Oil & Gas Industry Update - Driving Australia's Economy
Sydney, 5 November 2009

Mr Julian Segal
Managing Director & Chief Executive Officer, Caltex Australia Limited

Caltex Australia is in the business of transforming and distributing energy. We take primary energy sources like crude oil and convert and distribute useable energy to end users. As the global population grows and economies expand, the demand for energy increases. That brings with it a raft of business opportunities in the oil and gas industry, in the upstream for companies like Santos and those represented here today by APPEA, and in the downstream for companies like Caltex. There are also many opportunities beyond conventional oil and gas for companies in the wider energy business.

The oil industry is going to change permanently over coming decades. Natural gas, biomass and other renewables will become the "new oil". The "downstream" will also change permanently. Some traditional downstream oil companies may remain but will be challenged as their business models lose relevance. New, more broadly focused "downstream" companies will survive and prosper. New competitors will emerge. All this means many opportunities are available for Caltex in addition to fully exploring our existing business model.

Growing energy demand also brings huge policy and technological challenges. Climate change is one. We are seeing governments around the globe taking action to reduce greenhouse gas emissions and working towards ambitious targets. Energy security is another challenge. Forecasters are predicting oil supply to peak in the coming decades. So how do we ensure energy security for ourselves and future generations and address climate change?

To cut energy demand and greenhouse gas emissions we will need to improve energy efficiency. And to reduce greenhouse gas emissions further we must reduce the carbon intensity of energy supply. Let's take a closer look at greenhouse gas emissions.



The United States emits 20 tonnes of carbon dioxide per person from energy-related sources each year, the highest in the OECD. Australia emits about 18 tonnes per person and Europe emits an average of eight tonnes per person. In contrast, China's emissions are just five tonnes per person. And the world population grows by 200,000 people per day, mostly in developing countries.

Currently, the highest emissions per capita come from the developed world. Reducing carbon intensity is a challenge for all developed countries including Australia. We have a collective responsibility to take the lead on emission reduction but without damaging existing industries or limiting development opportunities for new, lower carbon energy supplies.

But as developing countries move from farming to industry and populations become urbanised, their economies and emissions are growing rapidly. And to put that economic growth in perspective, last month it was announced that China had grown by almost nine per cent over the past 12 months.

If we look at the US Energy Information Administration's projections to 2030, China's emissions will grow to eight tonnes per person. That's the same as the European Union emits now. With a huge population, China already has more emissions than any other country so almost doubling those emissions per capita by 2030 is a global challenge. Climate change is a global cost but also a global opportunity as energy supply and demand are transformed to meet energy security and climate change goals.

Currently most of the world's energy comes from fossil fuels, led by oil and coal. But the International Energy Agency recently warned that if the world wants to address climate change effectively, fossil fuel energy consumption will have to peak by 2020.

The UK Energy Research Council has predicted that oil demand will outstrip supply within 10 years leading to spiralling oil prices. Meanwhile, Cambridge Energy Research Associates believes oil supply peaked in the developed world in 2005 but demand will continue to rise in developing economies.

So if fossil fuels are under pressure, what will the global energy mix look like in the future?



First a reality check. The world will change but not overnight. In the electricity sector the Energy Information Administration predicts coal will continue to dominate, still meeting 30 per cent of the world's energy needs by 2030. But it will increasingly be supplemented by lower-emission energies such as natural gas, nuclear power and renewable sources like wind, solar and geothermal energy.

Likewise, oil will continue to dominate supply in the transport sector. While some predict oil prices will skyrocket as demand outstrips supply, with last year's price of $US147 a barrel only a taste of things to come, others claim growth in oil demand has been permanently impaired by the global financial crisis. It seems very likely we will see a shortfall in conventional oil supply and higher oil prices in the next two decades. Oil will increasingly be replaced by other energy sources.

Natural gas, while still a fossil fuel, is widely seen as one of the main transitional alternatives to crude oil and numerous energy companies who traditionally produced oil have expanded into this area. Australian finds are large and demand is high but so are the costs. Coal seam methane is an important alternative source of natural gas. But gas, like oil and coal, must eventually face the challenge of massive reductions in greenhouse gas emissions, even with carbon capture and storage.

That leaves a huge range of renewable energy sources and technologies, and smarter, lower emission ways of using conventional fossil fuels. Many of the key technologies we will rely on in 40 years time are probably not even in the laboratory. Others such as Fischer Tropsch synthesis have been around for years and will become increasingly refined. This technology allows a wide range of feedstocks containing carbon to be converted to a range of liquid fuels.

So where does that leave Caltex? If global oil supply is limited and the long-term energy landscape is changing, does Caltex have a viable long-term future?

To answer this question, I'd like to talk about Caltex's customer base.



As a downstream petroleum company, our business is primarily about fuelling mobile equipment, mainly in transport, although convenience retailing is important and growing. Caltex fuels one-third of Australia. Road transport dominates the customer base, from private motorists through to light commercial vehicles and the trucking industry. Then there's the aviation industry with jet fuel in high demand, as well as diesel sales to the shipping and rail industries. Caltex also keeps the mining and agricultural industries moving, and we can't forget the non-transport uses for our products, including chemicals, bitumen, lubricants, heating oil and diesel for power generation.

Almost all fuels for mobile uses currently come from crude oil which will decline in availability longer term. Transport emissions account for approximately 14 per cent of Australia's greenhouse gas emissions, so it's imperative we increase energy efficiency and move to low-carbon transport technologies to address climate change.

Already we are seeing a wealth of technologies being introduced into transport with the aim of reducing emissions and providing an alternative to oil - thus addressing both climate change and energy security.



While the internal combustion engine dominates, petrol-electric hybrids and full electric cars will increasingly appear on our roads. This chart from a recent CSIRO study provides one scenario for the penetration of hybrids and electric cars in Australia.

Toyota is planning to start producing hybrid Camrys at its Melbourne plant next month and the pure-electric Mitsubishi i-Miev is expected to be trialled here next year. That could be followed by Nissan's all-electric Leaf by 2012. Others are on their way. But for electric vehicles to be truly embraced by customers, there have to be further technological developments in battery life and a greater focus on ensuring these cars are powered by renewable electricity.

Hydrogen fuel cell vehicles may become a reality on our roads or hydrogen may be used directly in internal combustion engines. At the recent Tokyo Motor Show Honda showcased its hydrogen scooter, a nice match for its hydrogen fuel-cell car launched earlier this year. Research is continuing into synthetic fuels derived from coal, gas and biomass, while heavy transport is increasingly exploring the options of liquefied natural gas and compressed natural gas.

There are plenty of opportunities for a company like Caltex and we intend to explore them. But there's one renewable energy source we're already committed to, and that's biofuels.



With ethanol blending facilities at a number of our terminals and many of our service stations selling a 10 per cent ethanol/petrol blend (E10) throughout New South Wales and Queensland, sales are increasing. Caltex also sells biodiesel blends, in which the biodiesel is derived from renewable sources. Biofuels can have wide applications and research is being conducted overseas into powering jet aircraft with biofuels.

If any of these new transport technologies are to truly thrive they need supportive government policy. For example, there is no coherent policy framework for biofuels development and we hope the federal government's energy white paper will address this issue. Government policies can help or hinder many alternative fuels. In particular we are concerned about the impact of future excise changes on biofuels development.

Price signals, particularly the price of oil, will have a major influence on the viability of alternative fuels. The CPRS will result in very little reduction in greenhouse gas emissions because the price signal is very weak. Instead a package of complementary measures is needed.



The package should include voluntary targets for the carbon efficiency of new cars, incentives for consumers to buy more fuel-efficient vehicles and grants to Australian manufacturers for research and development into these cars. The government should also encourage increased use of low-carbon fuels such as biofuels, LPG, LNG and CNG with assistance for new refuelling facilities. Finally, there should be a greater focus on more sustainable cities. That means urban communities should be developed in a way to allow people access to transport and to work closer to home, and that public transport should be improved.

It is only through energy producers developing new energy sources, customers embracing new energy technologies and governments creating policies to ensure their viability that we can address the twin challenges of climate change and energy security. And for Caltex, which provides the links in the supply chain from energy producers to customers, it's clear these changes will bring abundant opportunities.

Thank you.