BRE Resources & Energy Quarterly (March 2012)

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Resources and EnergyQuarterlyMarch Quarter 2012

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Resourcesand Energy

Quarterly

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2 ResourcesandEnergyQuarterlyvol1no3Marchquarter2012

BREE 2012, Resources and Energy Quarterly, March Quarter 2012, BREE, Canberra, March 2012.

Commonwealth of Australia 2012

This work is copyright, the copyright being owned by the Commonwealth of Australia. The Commonwealth ofAustralia has, however, decided that, consistent with the need for free and open re-use and adaptation, public sectorinformation should be licensed by agencies under the Creative Commons BY standard as the default position. Thematerial in this publication is available for use according to the Creative Commons BY licensing protocol wherebywhen a work is copied or redistributed, the Commonwealth of Australia (and any other nominated part ies) mustbe credited and the source linked to by the user. It is recommended that users wishing to make copies from BREEpublications contact the Chief Economist, Bureau of Resources and Energy Economics (BREE). This is especiallyimportant where a publication contains material in respect of which the copyright is held by a party other than theCommonwealth of Australia as the Creative Commons licence may not be acceptable to those copyright owners.

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ISSN 1839-499X (Print)

ISSN 1839-5007 (Online)

Vol. 1, no. 3

From 1 July 2011, responsibility for resources and energy data and research was transferred from ABARES to theBureau of Resources and Energy Economics (BREE).

Postal address:BureauofResourcesandEnergyEconomics

GPO Box 1564Canberra ACT 2601

Phone: +61 2 6276 1000Fax: +61 2 6272 2001

Email: [email protected]: www.bree.gov.au


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ResourcesandEnergyQuarterlyvol1no3Marchquarter20123

Foreword

Resources and Energy Quarterlyis an important publication of the Bureau of Resources andEnergy Economics. This issue provides an overview of the global macroeconomic situation;the most up-to-date global production, exports and values of major resources energy

commodities and forecasts for 201112 until 201617; reviews of key topics and issues ofrelevance to the sector; and detailed statistical tables on world production, consumption,

stocks and trade in key commodities as well as detailed information on Australian productionand exports over several years.

In the review section ofResources and Energy Quarterlythere is a comparison of Australian,OECD and global energy markets; a SWOT analysis of Australias LNG industry; and a short

history of uranium.

BREEs forecast for the value of Australian exports of resources and energy for 201112 is about$200 billion or about a little less than a 10 per cent increase over 201011. This export growth

is despite an increase in the value of the Australian dollar in the second half of 2011 andforecasted reduction in global economic growth in 2012.

Over the short term overall metal prices are projected to decline by 6 per cent in 2012 relative

to the average price in 2011. The key long-term projection in this issue is that future growth inAustralian export earnings from minerals and energy will be generated by higher volumes and,

with a few exceptions, will be not be because of rising commodity prices.

Quentin Grafton

Executive Director/Chief EconomistMarch 2012


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Contents

Foreword 3

Acronymsandabbreviations 5

Macroeconomicoutlookandenergyandmineralsoverview 6

Energyoutlook 23

Oil 23

Gas 38

Thermal coal Uranium 61

Resourcesoutlook 70

Steel and steel-making raw materials 70

Raw materials 74Metallurgical coal 80

Gold 87Aluminium 96

Alumina 103

Copper 106Nickel 113

Zinc 124

Reviews 135

A comparison of Australian, OECD and global energy markets 136Australia's LNG industry a SWOT analysis 145

A short history of uranium 150

Statisticaltables 159


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Acronyms and abbreviations

ABARES Australian Bureau of Agricultural and Resource Economics and Science

ABS Australian Bureau of Statistics

BREE Bureau of Resources and Energy Economics

FOB free on board

GDP gross domestic product

IEA International Energy Agency

IMF International Monetary Fund

LME London Metal Exchange

LNG liquefied natural gas

mb/d millions of barrels per day

MBtu million British thermal units

Mt million tonnes

OECD Organisation for Economic Co-operation and Development

OPEC Organisation of the Petroleum Exporting Countries

PPP purchasing-power parity

RBA Reserve Bank of Australia

TWI trade-weighted index

UNCTAD United Nations Conference on Trade and Development

WTI West Texas Intermediate


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Macroeconomic outlook and

energy and minerals overviewNhu Che, Pam Pham, Quentin Grafton and Roger Rose

The global economy: stalled recovery in Europe andelevated risks

The world economy has entered a challenging period with increased vulnerabilities and amoderation of global growth in 2012 relative to 2010 and 2011.The updated World Economic

Outlook by the International Monetary Fund (IMF) in February 2012 projects global activitydecelerating in the year ahead because of the ef fects of the euro zone debt crisis which have

spread beyond Europe. Uncertainties associated with the sovereign debt crisis in Europe havealso generated large fluctuations in financial markets and this volatility has had a negative

impact on consumer and business confidence.

Global economic growth in 2012 is assumed to be around 3.3 per cent (see Figure 1), whichis 0.75 percentage points down from the forecast in the September 2011 World Economic

Outlook (WEO) by the IMF. The expected slower growth rate is attributed largely to intensifyingstrains in the euro zone and economic fragilities in some other large economies. Within most

of Western Europe short- to medium-term economic growth prospects have diminished.Despite a strengthening of economic activity in the US, global growth and world trade have

slowed (see Table 1).

Europe appears to have entered a mild recession in 2012 caused by the rise in sovereign yieldsin 2010 and 2011, the effects of bank deleveraging on the real economy, and the impact of

on-going fiscal consolidation. The main reason for the diminished outlook in Europe is theescalating euro zone crisis. It is interacting with financial fragilities elsewhere, has sharplyreduced capital flows to emerging economies, and led to substantial changes in the relative

values of key currencies.


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Figure1: Worldeconomicgrowth

-1

%

1

2

3

4

5

6

20172015201320112009200720052003200119991997

Sources: BREE; ABARES.

The outlook for the large developed economies in 2012 is assumed to be weaker than in 2010or 2011. Growth in Western Europe is expected to falter in 2012. Most advanced economies,

however, are expected to avoid falling back into a recession and overall economic growth inthe advanced economies is projected to average 1.5 per cent during 2012 and 2013.

Emerging economies, particularly those in Asia, contribute to an already important and

increasing share of world economic growth. Over the outlook period the prospects foremerging economies are much better than those for advanced economies, but are becoming

less certain, especially for those countries that are highly reliant on export-led growth. Annualeconomic growth in emerging and developing economies is expected to average 5.75 percenta significant slowdown from the 6.75 per cent growth experienced from 2010 to 2011,

and about 0.5 percentage points lower than forecast in September 2011 by the IMF. Theserevised growth figures reflect a less optimistic external environment in terms of trade and a

slowdown in domestic demand in key emerging economies.

Most of Asia and Latin America experienced robust economic growth in 2011. Growth isexpected to moderate in 2012, but to regain strength in 2013 and beyond. Unlike some

advanced economies for some of these emerging economies their immediate concern is risinginflation rather than lagging growth.

In Asia, recent data are broadly consistent with the modest slowdown that some authorities

in the region have been trying to achieve in order to contain inflationary pressures. Indiaand China, in particular, are trying to reduce the rates of price increases and their actions are

expected to moderate their previously very high rates of economic growth.


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Table1: Keymacroeconomicassumptionsforresourcesandenergy

2010 2011 2012 a 2013 a 2014 a 2015 a 2016 a 2017 a

Economicgrowthbc

OECD % 3.0 1.4 1.1 1.8 2.0 2.0 2.0 2.0

United States % 3.0 1.8 1.8 2.2 2.7 3.0 3.0 3.0

Japan % 4.0 0.9 1.7 1.6 1.6 1.2 1.1 1.1

Western Europe % 1.8 1.5 0.3 0.9 1.2 1.1 1.2 1.2

Germany % 3.7 3.1 0.3 1.5 1.4 1.2 1.2 1.2

France % 1.5 1.6 0.2 1.0 1.1 1.1 1.1 1.1

United Kingdom % 1.4 0.9 0.6 2.0 2.2 2.2 2.3 2.3

Italy % 1.3 0.4 2.2 1 0.5 0.7 0.8 0.8

Republic of Korea % 6.2 3.9 4.4 4.3 3.4 3.4 3.4 3.4

New Zealand % 1.7 2.0 3.8 3.2 2.6 2.3 2.2 2.2

Emerging countries % 7.8 6.5 6.0 6.4 6.4 6.4 6.4 6.4

Non-OECD Asia % 9.6 8.0 7.5 7.9 7.9 7.9 7.9 7.9

South East Asia d % 6.9 5.3 5.6 5.8 6.0 6.0 6.0 6.0

China e % 10.3 9.2 8.2 8.8 8.8 8.8 8.8 8.8

Chinese Taipei % 10.9 5.4 5.1 5.0 4.2 4.2 4.2 4.2

Singapore % 14.5 4.3 3.4 4.2 4.2 4.1 4.0 4.0

India % 9.0 7.4 7.0 7.3 7.3 7.3 7.3 7.3

Latin America % 6.1 4.6 3.6 3.9 3.8 3.7 3.7 3.7

Middle East % 3.8 3.1 3.2 3.6 4.2 4.3 4.4 4.4

Russian Federation % 4.0 4.1 3.3 3.5 3.5 3.4 3.3 3.3

Ukraine % 4.2 4.2 4.3 4.0 3.8 3.6 3.6 3.6

Eastern Europe % 4.2 5.1 1.1 2.4 2.1 2.1 2.2 2.2

World c % 5.0 3.8 3.3 3.9 4.1 4.1 4.1 4.1

Industrialproductionb

OECD % 7.9 2.8 3.0 4.2 4.6 4.6 4.5 4.5

Japan % 16.0 3.5 7.1 6.7 6.5 4.8 4.4 4.4

China % 15.7 9.9 8.8 9.5 9.4 9.5 9.5 9.5

InflationratebUnited States % 1.6 3.4 2.3 2.3 2.3 2.3 2.3 2.3

Interestrates

US prime rate g % pa 3.3 3.3 3.3 3.3 3.4 3.5 3.5 3.5

a BREE assumption. b Change from previous period. c Weighted using 2011 purchasing power parit y (PPP) valuation

of country gross domestic product by the IMF. d Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

e Excludes Hong Kong. g Commercial bank lending rates to prime borrowers in the US.

Sources: BREE; ABS; IMF; OECD; RBA.


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Economic prospects in Australias major miningexport markets

Non-OECD economies

The Chinese economy continues to record strong growth, although this is projected tomoderate in 2012. In part, this expected easing in economic growth is due to domestic

economic policies to combat inflation, including the continuing unwinding of the 200809fiscal stimulus, tighter monetary policy and measures to contain price increases in its property

market. Additionally, spillovers from problems in the broader global economy and somehigh internal risks facing the Chinese economy could threaten and slow economic growth.

Internally, socioeconomic factors, such as the structural effect of the so-called middle incometrap, if not well managed, and rising inequality could slow economic growth.

Despite some moderation in economic growth, domestic demand remains strong. Retail

sales continue to expand and passenger vehicle sales are just below their late 2010 peaklevel. Although there has been relatively weaker export demand, manufacturing investment

continues to grow. Industrial production growth remains robust, but slightly below 2011 levels,and both power generation and automobile production are growing strongly. As a result, over

the outlook period China is expected to continue its major role as a growth engine for theworld economy.

In 2012, gross domestic product (GDP) growth for the Chinese economy is assumed to be

lower than in 2011, although remaining at a robust level of 8.2 per cent. This is 0.8 per centbelow that assumed by BREE in December 2011. An annual rate of economic growth of 8.8 per

cent (based on purchasing power parity terms (PPP) valuation of GDP) is assumed over themedium term (see Figure 2).

Over the past decade rapid economic growth, growing urbanisation, and structural change

within manufacturing have combined to make China the worlds largest energy user,outstripping the US in 2010 although, on a per capita basis, the US still consumes much more

energy than China.

For Australia, China is the most important market for mining. Over the medium term, China

is expected to remain the most important mining export market for Australia, given a strongtrend of continued growth in industrialisation and urbanisation, both of which are resource-

intensive.


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The rapid expansion of industrial production in China is expected to support growth in

energy and minerals consumption over the medium term. The expansion of resource intensiveindustries such as electricity generation and steel, pig iron and cement production is expected

to remain strong. Over the longer term Chinas growing technological prowess could drive

rapid change in its industrial structure. These changes should create new areas of dynamiccomparative advantage. For instance, Chinas construction industry is becoming a globalleader in international construction projects.

In 1978, less than a fifth of Chinas population resided in cities; by 2009, urban residents made

up close to half the population; and by 2030, the share is expected to swell to near two-thirds.Most urban growth in the future is expected to result from the expansion of existing citiesthrough migration from rural areas. Chinas strong growth of per capita income and an

expanding middle class over the medium term outlook will also increase demand for resource-intensive consumer durables, such as motor vehicles and electronics.

Figure2: EconomicgrowthinAustraliasmajorresourceandenergyexportmarkets

-2

%

2

4

6

8

10

12

2013-17 z2012 f20112010

United StatesRepublic of KoreaChinaJapan

f BREE forecast. z BREE projection.

Source: BREE


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Box1: Fiscalconsolidation:Implicationsforeconomicgrowthanddemand

Global economic growth is vulnerable to spillovers associated with the European sovereign

debt crisis and fiscal consolidation in Western Europe. Too rapid fiscal consolidation during2012 could exacerbate downside risks. Ideally, fiscal consolidation should occur at a pacethat supports adequate growth and employment. From Australias perspective too rapid

fiscal consolidation in major export markets could have a short-term negative effect onboth the price and volume of key resource commodities.

The global financial crisis resulted in a sharp deterioration in the fiscal health of many

advanced economies. For example, Spain moved from a budget surplus of 2 per cent of itsGDP in 2007 to a deficit of 11 per cent in 2009. For the US and the UK, the budget deficit

increased by 10 and 8 percentage points of GDP, respectively. Government fiscal stimuluspackages in response to sharp falls in consumer demand during the global financial

crisis were primary causes of those increasing deficits. While the stimulus spending hasdecreased since 200910, budget deficits persist and in many countries debt-to-GDP ratios

have continued to rise.

In the medium term, lower budget deficits and fiscal consolidation should supporteconomic growth by reducing real interest rates, lowering tax burdens and encouraging

increased private sector investment. In the short term, however, fiscal consolidation willlikely slow economic activity. This is especially the case for some countries in southern

Europe that are already in recession and have an exchange rate determined by economicconditions for the euro zone as a whole, rather than by country-specific conditions. Should

there be widespread and rapid fiscal consolidation, this could have a short-run moderatingeffect on prices of resource commodities used in industrial production.

The IMF assumes that, for the global economy as a whole, fiscal consolidation equivalent to

3 percentage points of GDP will occur in 2013. Over the next two years fiscal consolidationis projected at around 4.6 per cent of GDP for advanced economies. In the euro zone, the

IMF projects that fiscal consolidation will be around 3 per cent of GDP in 2012 and 2013.Fiscal consolidation in the US is estimated to represent about 1 per cent of GDP in 2011, and

projected to be between 2 to 4 per cent of GDP over the next two years.

Japan is projected to be the only large advanced economy to implement a fiscal expansion

in 2012 reflecting, in part, reconstruction costs related to the natural disaster of March 2011.Its fiscal deficit is estimated to have increased by around 0.8 per cent in 2011 and projected

to remain at that level in 2012, but to fall by 0.5 per cent of GDP in 2013. Total reconstructioncosts are budgeted at about 4 per cent of GDP over 2011 to 2013 and are expected to be

financed, on the first instance, via bond sales.

In China, the budget deficit was around 2.5 per cent of GDP in 2010, and 3.1 per cent in2009. In 2012 an improvement of Chinas budget condition is expected with its deficit

expected to be around US$126 billion, down from U$142 billion in 2011.

Sources: IMF; RBA; NBS China.


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Economic growth in India has moderated due to policies intended to combat rising inflationary

pressures. Economic growth is projected to be 7 per cent in 2012, 0.5 percentage pointslower than assumed by BREE in December 2011. The slowing in growth follows a significant

tightening in monetary policy. Growth in industrial production is projected to remain subdued

over the medium term at around 6 per cent a year below its early 2011 peak. In addition to theeffect of tighter monetary policy, industrial production has also been affected by problems ata number of coal-mines that have disrupted the fuel supply for thermal coal power stations.

Furthermore, the value of merchandise exports fell in the December quarter, reflectingweaker external demand and lower commodity prices, particularly for iron ore. Despite somemoderation, inflation in India still remains relatively high as the wholesale price index rose by

7.5 per cent over the year to December 2011.

Near-term growth in ASEAN countries (including Indonesia, Malaysia, Philippines, Thailand,and Vietnam) is assumed to be around 5.6 per cent in 2012 due to robust investment. This

investment should offset a possible slowdown in export momentum.

Despite the weak global outlook for 2012, the Republic of Koreas economy is expected to growat more than 4 per cent in 2012 and 2013, but to slow from 2014. In Asia as a whole, growth is

projected to moderate in 2012. Nevertheless, even with some moderation, growth is expectedto be robust at 7.5 per cent, on average, during 2012 and 2013.

OECD economies

Economic growth in OECD economies is assumed to be 1.1 per cent in 2012. The annual

growth rate in Japan is assumed to be 1.7 per cent, 0.8 percentage points lower than assumedin December 2011 by BREE. The pace of growth in the 17 countries in the euro zone slowed in2011, and is expected to deteriorate further in 2012. In Greece, Ireland, Italy, Portugal, and Spain,

fiscal tightening, banking system concerns, low consumer confidence and high unemploymentare all having a negative impact on domestic demand. An expected slow-down in growthin the core northern euro zone economies, such as Germany, is likely to make economic

conditions in the southern economies more difficult in 2012.

The German economy remains the most robust in Western Europe with strong export-ledgrowth of 3.1 per cent in 2011. However, German industrial production has fallen by almost 5

per cent from its peak in July 2011 and growth is expected to be down to 0.3 per cent in 2012.Forward-looking indicators of equipment investment and exports, the two strongest sectors

in the German recovery, have moderated. By contrast, construction activity in Germany hasremained more or less unchanged in recent months. Over the medium term economic growth

is expected to recover to an annual rate of 1.5 per cent by 2013, and rates of around 1.2 percent to 1.4 per cent over the following two years.

The US economy has been improving in recent months. Its unemployment rate is declining

and there are tentative signs of improvement in housing construction activity. The economyis estimated to have grown at a rate of 1.8 per cent in 2011 and is assumed to continue

growing at that rate in 2012. Economic growth is expected to be supported by increases in

consumption and business investment, with forward-looking indicators of economic activity


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improving. Assumed very low nominal interest rates over the next two years are expected

to provide stimulus to investment. In 2012, the negative spillovers from the euro zone crisisare expected to be of fset by stronger underlying domestic demand. Nonetheless, economic

activity may slow from the pace reached during the second half of 2011, as higher risk aversion

tightens financial conditions and fiscal policy becomes less expansionary.

Commodity prices

Commodity prices which increased substantially in 2010 have moderated since mid-2011 as

a result of the slowing growth in the global economy in the second half of 2011. Commodityprices were also lower in the December quarter 2011 compared with the previous quarter.

Prices for some base metals and bulk commodities fell sharply in the second half of 2011in response to weaker global demand (see Figure 3). An exception is thermal coal, with its

price more or less unchanged over the last quarter of 2011 (see Figure 4). The resilience of

the thermal coal spot price, relative to other bulk commodities, reflects dif ferent demandconditions. In particular, the shutdown of nuclear power generation capacity in severalcountries (especially Japan), and below average hydro electricity generation in China, have

provided strong underlying support for thermal coal demand.

Figure3: Quarterlyindexofmetalprices

index

Dec 00=100

100

200

300

400

500

600

700

800

zincnickelaluminiumgoldcopper

20172001 2003 2005 2007 2009 2011 2013 2015

Source: BREE.


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Figure4: Quarterlyindexofbulkcommodityprices

index

Dec-00=100

200

400

600

800

1000

1200

Iron oreMetallurgical coalThermal coal

20172001 2003 2005 2007 2009 2011 2013 2015

Source: BREE.

In 2012, commodity prices are expected to continue to ease given the current lower than

expected growth in the global economy. Overall, metal prices are projected to decline 6per cent in 2012 relative to the average price in 2011. The price of crude oil is expected to

average $98 per barrel in 2012, down 6 per cent from the 2011 average; while iron ore pricesare expected to ease by about 8 per cent. Commodity prices are expected to remain relatively

stable over the remainder of the outlook period.

Demand for resources and energy commodities

Uncertainties about future growth prospects associated with the sovereign debt crisis in

Europe generated very large fluctuations in financial markets in the second half of 2011 andearly 2012. This volatility is expected to depress demand growth for commodities in the short-

term as ongoing and sharp fluctuations in financial markets moderate consumer and businessconfidence.

In Japan, industrial production and exports were severely affected following the March 2011

earthquake and tsunami, but are recovering at a greater-than-expected rate. Demand in Japanis expected to grow in response to the necessary rebuilding of infrastructure. Domestic andexternal demand in several central Asian countries that have significant financial and trade

linkages to the euro zone have also weakened as a result of the ongoing euro crisis. In SouthAsia, domestic demand is expected to continue to slow in 2012.

Consumption demand in large export-oriented European Union (EU) economies, such as

Germany, will depend on efforts to remediate public debt and liquidity concerns in the regionas a whole. Growth has slowed due to a combination of weakening domestic and external

demand. Several Central European countries are particularly vulnerable to the deepening crisisin the euro zone due to close trade linkages and high levels of maturing debt.


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On a positive side, faster convergence to trend economic growth in the US is forecast to

support resources and energy commodity demand in that economy. However, the size of thiseffect on commodity prices will depend on the scale of the recovery in the US housing and

labour markets.

In 2012, demand for resources and energy commodities is expected to ease in response toweaker growth in many countries. China is expected to continue its major role in maintaining

both the supply and demand side of the global economy. However, a dip in its growth rate in2012 is expected to moderate demand for some bulk commodities in 2012.

Supply of resources and energy commodities

Over the outlook period, the production of most energy and mineral commodities is projected

to grow. In 2012, world refined nickel production is projected to grow by 5.6 per cent, relative

to 2011, to total of 1.7 million tonnes. This growth is expected to come from increasedproduction at new operations and an increasing use of existing spare capacity. It is forecastthat, relative to 2011, there will be a production growth in 2012 for aluminium and alumina

(both up 2 per cent), oil (up to 1.2 per cent), steel (up 5.4), uranium (2.8 per cent) and zinc (up3.2 per cent). Supported by forecast high growth in steel production, primarily in China, world

trade of iron ore in 2012 is forecast to increase by 3.6 per cent and metallurgical coal by 3.5 percent, relative to 2011. By contrast, concerns about geopolitical oil supply risks have risen again.

The impact of a sustained oil supply disruption in the Middle East would be substantial. Shouldthis happen it would result in sharply higher petroleum prices as there are limited inventories

and spare capacity buffers.

Australias economic prospects

Real GDP in Australia (based on a PPP valuation of GDP) is assumed to grow at annual rateof 3.8 per cent in 201112, but to moderate to around 3 per cent over the remainder of the

outlook period (see Table 2). According to the ABS, economic growth in the last quarter of 2011was half of what was expected, and lead to the slowest annual growth since 2008. However,

Australia remains among the fastest growing economies in the world.

Recent economic data suggest that the mining sector will continue to perform strongly

in terms of both volumes of exports and growth in capital investments. Overall, Australiandomestic demand continues to grow at a robust pace, although the high level of the exchangerate, and changes in household spending and borrowing behaviour continue to have a

negative affect on some industries. As in many other countries, volatility in global financialmarkets has resulted in noticeable declines in measures of consumer and business confidence

in the latter half of 2011.


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Over the remainder of the outlook period (201213 to 201617), growth in the Australian

economy is expected to be supported by mining-related activities. High levels of mininginvestment are expected to continue. Significant expansions to iron ore and coal production

capacity are also underway, and will contribute to solid growth in resource export volumes

over the foreseeable future.

Table2: Australiaskeymacroeconomicassumptionsforresourcesandenergy

2009

10

2010

11

2011

12 a

2012

13 a

2013

14 a

2014

15 a

2015

16 a

2016

17 a

Economic growth b c % 2.3 1.8 3.8 3.0 3.0 3.0 3.0 2.9

Inflation rate b % 2.3 3.1 1.8 2.8 2.8 2.8 2.8 2.8

Interest rates d % pa 6.0 6.6 7.2 6.7 6.7 6.7 6.7 6.7

Nominal exchange rates e

US$/A$ US$ 0.88 0.99 1.04 1.05 1.03 1.03 1.05 1.06Trade weighted index

for A$ g index 69 74 76 76 75 75 76 77

a BREE assumption. b Change from previous period. c Weighted using 2011 purchasing power parit y (PPP) valuation

of country gross domestic product by IMF. d Large business weighted average variable rate on credit outstanding.

e Average of daily rates. g Base: May 1970 = 100.

Sources: BREE; ABS; RBA.

The Australian dollar traded in a wide range during 2011. In December, the Australian dollar

traded at US102c, TWI 76. This compares with US98c and TWI 72 in September 2011, andUS106c and TWI 75 in early June 2011. In mid-March 2012, the Australian dollar traded around

of US105c while the trade-weighted index was around 78. The recent fall of the Australiandollar from US108c and TWI79 in late February was a result of speculation that lower economic

growth in the December quarter 2011 would increase the likelihood of an interest rate cut bythe Reserve Bank.

There are several important drivers of the Australian exchange rate over the medium term.

In the next three years factors that may cause the Australian dollar to weaken are: the effectof the expected euro zone recession in 2012; a possible reduction in demand in Europe for

Chinas exports; a stall in the US economic recovery; and any decline in domestic interest rates.

In the last two years of the outlook period (2016 and 2017), it is assumed that the Australiandollar will slightly increase in value due to: expected stronger economic growth in Australia;recovery in the EU economy; a rebound in demand in Europe for Chinas exports; and relatively

low ongoing interest rates in the US that should dampen demand for US dollars. The demandin Asia for Australias exports, and market expectations about resources and energy commodity

prices, are also factors that will influence the value of the Australian dollar over the outlookperiod.


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The Australian mining sector

In 201011, the mining sector contributed approximately 7 per cent of Australias total GDP. The

gross value added produced from mining activities was about $100.7 billion (in 201112 dollars),

of which $9.5 billion was contributed by exploration and mining support services (see Figure 5).

Figure5: Australianminingindustrygrossvalueadded,chainvolumemeasures

2011-12A$b

75

80

85

90

95

100

mining (excludes services to mining)

2010-112006-072002-031998-991994-951990-91

2011-12A$b

2

4

6

8

10

12

exploration and mining support services (right axis)

Source: ABS.

Resources and energy commodity exports account for a large proportion of Australias

commodity exports. In 201011, the value of energy and minerals commodity exports wasabout $179.2 billion, some 85 per cent of Australias total value of commodity exports.

China is the main export market for Australias resources and energy exports, accounting for26 per cent of Australian total export value of resources and energy commodities in 201011,

followed by Japan (19 per cent), the Republic of Korea (9 per cent) and the US (4 per cent).

Over the past decade, there has been a significant increase in the value of investment in theAustralian mining sector, supported by high commodity prices and strong demand fromAsia. In 201011, investment in private new capital expenditure in the mining sector was

$47.2 billion. This compared with inf lation-adjusted figures (in 201112 dollars) of $37.5 billion

in 200910 and $7.9 billion a decade ago. The share of the mining sector as a proportion ofnew capital expenditure of Australias total industries has also increased significantly, risingfrom 12 per cent in 200001 to 39 per cent in 201011 (see Figure 6). Much of this growth is

underpinned by liquefied natural gas (LNG), coal and iron ore projects.


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Figure6: Investmentinprivatenewcapitalexpenditure

2011-12A$b

10

20

30

40

50

investment

2010-112006-072002-031998-991994-951990-91

%

10

20

30

40

50

share in total industries (right axis)

Source: ABS.

As a capital-intensive industry, the contribution of the mining industry to total employment

is low, and accounted for about 2 per cent of total employment over the past three years. In201011, the sector employed about 205 000 people. By sub-industry, the metal ore industry

employed the largest number of people (about 69 000 people), followed by the coal and oiland gas extraction industry (see Figure 7).

Figure7: EmploymentintheAustralianminingindustry

000people

50

100

150

200

250

other mining (including services)metal oreoil and gas extractioncoal

2010-112006-072002-031998-991994-951990-91

Source: ABS.


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Australian resources and energy commodities productionand exports

In 201011, the overall index of Australian mine production increased by 5 per cent compared

with 200910. This includes a 13 per cent increase in metals and other minerals production thatwas offset by a 3 per cent decrease in the production of energy commodities, primarily coaldue to flooding in Queensland (see Figure 8).

Total Australian mine production is forecast to increase by 6 per cent in 201112, relative

to 201011, primarily due to a 7 per cent increase in the output of energy commodities,particularly thermal and metallurgical coal. Another contributing factor to this growth will be

a forecast 6 per cent increase in the production of metals and other minerals, underpinned byrising iron ore, nickel and zinc production.

Figure8: Australianmineproduction

index

2011-12=100

20

40

60

80

100

120

140

energyminerals

2016-172011-122006-072001-021996-971991-92

Source: BREE.

Export earnings from energy and minerals commodity exports increased by 25 per cent in realterms (in 201112 dollars) between 200910 and 201011, reaching $185 billion in 201011 (see

Figure 9). Of this total, export earnings from minerals commodities contributed $113 billion,accounting for about 61 per cent of the total. Export earnings from energy commoditiesaccounted for a smaller share, 39 per cent, and contributed approximately $72 billion in real

terms to the total value of Australian energy and minerals exports.


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Figure9: Australianenergyandmineralsexportearnings

2011-12A$b

20

40

60

80

100

120

140

MineralsEnergy

2016-172011-122006-072001-021996-971991-92

Sources: BREE; ABS.

In 201112, the total export earnings for energy and mineral commodities are forecast to

increase by 8 per cent to $199 billion supported by increases in the export values for bothenergy and mineral commodities. Energy commodity export earnings are forecast to grow by

7 per cent to $77 billion (in 201112 dollars) as a result of strong increases in export earningsfrom thermal coal (up 28 per cent to $17.8 billion), LNG (up 13 per cent to $12 billon), oil (up7 per cent to $12.6 billion), and metallurgical coal (up 4 per cent to $31 billion).

Mineral commodity export earnings are forecast to increase by 8 per cent to $122 billion as aresult of increases in the export values of gold (up 33 per cent to $17.3 billion), alumina (up14 per cent to $6 billion), copper (up 7 per cent to $9 billion), and iron ore (up 2 per cent to

$59.7 billion). Partially offsetting the increased export earnings for mineral commodities will belower forecast export earnings for aluminium (down 9 per cent to $3.8 billion), and zinc (down

8 per cent to $2.2 billion).

Over the medium term, the outlook for energy and minerals commodity exports remainsrobust (see Table 3 and Table 4). Investment in LNG production facilities will drive a surge

in LNG exports over the outlook period and the commissioning of the Pluto LNG project isexpected to boost exports in 2012. Based on mining, rail and port infrastructure expansions

currently under way or in planning, significant growth in coal export capacity is expectedover the next three years. The outlook for major energy and minerals commodities in detail is

outlined in the following Resources Outlookand Energy Outlooksections.


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Table3: Australiasresourcesandenergycommodityexports,byselectedcommodities

Volume Value b

2010-11 2016-17 z averageannual

growth %

2010-11 2016-17 z averageannual

growth %

Oil ML 19 638 13 945 5.5 $m 12 166 7 961 6.8

LNG Mt 20 63 21.1 $m 10 786 30 055 18.6

Thermal coal Mt 143 268 11.0 $m 14 423 18 793 4.5

Uranium t 6 950 13 700 12.0 $m 630 1 687 17.8

Iron ore Mt 407 767 11.1 $m 60 340 76 777 4.1

Metallurgical coal Mt 140 218 7.7 $m 30 790 30 387 0.2

Gold t 301 396 4.7 $m 13 451 13 994 0.7

Alumina kt 16 227 21 610 4.9 $m 5 392 8 116 7.1

Aluminium kt 1 686 1 241 5.0 $m 4 318 2 742 7.3

Copper kt 850 1 201 5.9 $m 8 703 8 983 0.5

Nickel kt 210 300 6.1 $m 4 233 4 429 0.8

Zinc kt 1 493 1 958 4.6 $m 2 452 2 926 3.0

b In 201112 Australian dollars. z BREE projection.

Sources: BREE; ABS.


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Table4: MediumtermoutlookforAustraliasresourcesandenergycommoditysector

2009

10

2010

11

2011

12 f

2012

13 f

2013

14 z

2014

15 z

2015

16 z

2016

17 z

CommodityexportsExchange rate US$A$ 0.88 0.99 1.04 1.05 1.03 1.03 1.05 1.06

Valueofexports

Resources and energy A$m 139 468 179 211 199 166 208 316 223 084 234 419 249 240 258 257

real b A$m 148 599 185 207 199 230 202 613 211 006 215 626 222 950 224 660

Energy A$m 57 478 69 670 77 227 77 947 84 527 86 896 97 205 105 698

real b A$m 61 241 72 001 77 252 75 813 79 951 79 929 86 952 91 947

Metals andother minerals

A$m 81 990 109 541 121 939 130 369 138 557 147 523 152 035 152 559

real b A$m 87 358 113 206 121 978 126 800 131 055 135 696 135 999 132 712

Resourcesandenergysector

Volume of mine

production c

index 89.8 94.0 100.0 105.2 114.3 119.1 124.1 127.7

energy index 96.1 93.2 100.0 104.8 113.3 117.4 124.9 132.3

metals and

other minerals

index 84.0 94.7 100.0 105.5 115.0 120.3 123.8 125.1

Gross value ofmine production

A$m 133 890 172 043 191 199 199 983 214 161 225 042 239 270 247 927

real b A$m 142 655 177 799 191 261 194 508 202 566 207 001 214 032 215 673

b In 201112 Australian dollars. c Base 201112=100. f BREE forecast. z BREE projection.

Sources: BREE; ABARES; ABS.


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Energy outlook

Oil

Nina Hitchins

The West Texas Intermediate (WTI) oil price is forecast to increase to an average of US$113a barrel in 2013, assuming crude oil stocks in Cushing return to historic levels. The Brent oil

price is forecast to increase to an average of US$119 a barrel in 2013, supported by strongdemand from emerging economies. Over the medium term, further increases in oil prices

are projected to be limited by higher OPEC spare production capacity and the exploitationof unconventional oil resources. In 2017, the WTI oil price and the Brent oil price are

projected to average US$105 and US$104 (in 2012 dollars), respectively. World oil consumption is forecast to increase in 2012 and 2013 by 0.9 and 1.4 per cent,

respectively. Stronger consumption growth in 2013 reflects assumed improvements in

world economic activity. For the remainder of the outlook period, world oil consumptionis projected to increase at an average annual rate of 1.1 per cent, as the intensity of oil use

within non-OECD economies falls.

In 2012, non-OPEC oil production is forecast to account for the majority of the increase inworld oil production. Over the medium term, however, OPEC oil production is projected to

constitute an increasing proportion of the world supply.

The value of Australian crude oil and condensate exports is forecast to total $12.6 billion in

201112. Over the following four years, export earnings are projected to decline, reflectinglower export volumes associated with falling production from maturing fields. However, in201617, the value of Australias crude oil and condensate exports is projected to increase

to $8 billion (in 201112 dollars) supported by condensate production associated with thePrelude and Ichthys projects.

Higher oil prices over the medium term

The WTI crude oil price averaged US$95 a barrel in 2011, an increase of 20 per cent from 2010.As explained in Box 1: The Brent-WTI price differential(REQ December 2011, pp. 2021) increases

in the WTI price were constrained by higher stocks of crude oil in Cushing. Meanwhile, theBrent price averaged US$110 in 2011, an increase of 39 per cent from 2010. Higher prices

reflected supply disruptions in both OPEC and non-OPEC regions and strong consumptiongrowth in non-OECD economies. Price increases were amplified by low OPEC spare production

capacity and lower OECD stocks.


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Figure1: WeeklyWTIoilprice

US$/bbl

20

40

60

80

100

120

140

160

Tensions betweenTurkey and Iraq

Renery rein Texas

Lower production fromVenezuela and Russia

Tension between

Iran and Israel

Global nancial crisis

Hurricane Ikeand Gustav

OPEC announcesproduction cut

Outlook for worldeconomy improves

Record oilimports

from China

Exports from Iraqreaches highest level

since the US led invasion

Russiaincreases

output

Cold northernhemisphere winter

Start of Europeandebt crisis

Earthquakes andtsuanmi in Japan

Outbreak ofcivil warin Libya

IEA oilreserve release

US credit ratingdowngrade

Iran threatensto block the

Strait of Hormuz

July 2007 July 2008January 2008 January 2009 January 2010 January 2011 January 2012July 2009 July 2010 July 2011

Source: BREE.

OECD oil stocks declined during 2011, and are estimated to have averaged 2 per cent lower

than stocks recorded in 2010. Lower stocks reflected the IEAs decision in June 2011 thatmember countries would collectively release 60 million barrels over 30 days to replace lost

Libyan production. OPEC spare production capacity is estimated to have fallen to an averageof 4.4 million barrels a day in 2011, from an average of 6.1 million barrels a day in 2010. The

reduction in OPEC spare capacity ref lected production shut-ins in Libya during the civil war,which prompted other OPEC members to use a greater proportion of their capacity.

In 2012, OPEC spare production capacity is forecast to increase as Libyan oil production

approaches pre-war output. This excess capacity and growth in non-OPEC oil production areforecast to limit increases in the Brent oil price over the short term. The Brent price is forecast

to average US$119 in 2013, supported stronger growth in world oil consumption. The WTI priceis forecast to converge to the Brent price, assuming pipeline constraints in the US are resolved

and stocks in Cushing decrease (see Figure 2).

There are two significant risks to the short term outlook for oil prices. The first risk relates topotential escalations of tensions in the Middle East that could cause production disruptions,and put upward pressure on oil prices. The second risk is weaker than assumed world economic

growth over the next 12 to 18 months, which may put downward pressure on oil prices.


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Figure2: WTIandBrentoilprices

2012US$/bbl

20

40

60

80

100

120

140

Brent WTI

20172015201320112009200720052003200119991997

Source: BREE.

For the remainder of the outlook period (2013 to 2017), OPEC spare capacity is projected to

average 5.4 million barrels a day, supported by growing capacity in Iraq, the United ArabEmirates (UAE) and Angola. An increase in OPEC spare capacity is expected to limit the rise in

oil prices over the medium term, as unexpected increases in demand will be met by increasedutilisation of capacity. Between 2014 and 2017, the Brent and WTI oil prices are projected toaverage US$108 (in 2012 dollars), in line with moderating world oil consumption growth, and

the increased viability of exploiting unconventional resources. By the end of the outlook

period, the traditional WTI-Brent price relationship, typically characterised by US$1-3 dollar apremium of WTI above Brent, is projected to reappear.

Exploration and development activity at a 27 year high

Movements in oil prices over the medium term will depend on discoveries that expand

economic demonstrated reserves, and ultimately world production. Investment in oilexploration, as measured by the Baker Hughes worldwide drilling rig count, reached 3751 in

January 2012, the highest count recorded since 1985.


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Figure3: WorldwidedrillingcountandtheWTIoilprice

number

500

1000

1500

2000

2500

3000

3500

4000

worldwide drilling rig count

20122005 2006 2007 2008 2009 2010 2011

US$/bbl

20

40

60

80

100

120

140

WTI price

Sources: BREE; Baker Hughes.

High oil prices over 2012 and 2013 are expected to encourage exploration activity and

increase the economic viability of extraction from new oil fields. The majority of new oil fielddevelopments, particularly in non-OPEC regions, have higher development and production

costs compared with existing fields. New offshore fields are generally further below the seabedand a greater distance from shore, while onshore oil fields increasingly exploit unconventionalresources. As the technology and industry knowledge used to develop new oil fields improves

and becomes more readily available, development and extraction costs of these oil fields are

likely to fall, potentially limiting significant increases in oil prices over the medium term.

Moderate growth in world oil consumption over themedium term

In 2011, world oil consumption averaged 89.1 million barrels a day, an increase of 0.8 per

cent relative to 2010. Consumption growth in 2011 reflected robust consumption growth innon-OECD economies that was offset by lower consumption in the OECD. Demand for oil

decreased in the US and Europe in 2011, reflecting weak economic growth and decreases in oilintensity of economic growth.

World oil consumption is forecast to increase marginally in 2012, reflecting an assumed weak

world economic outlook. Beyond 2012, world economic growth is assumed to strengthen. In2013, world oil consumption is forecast to increase by 1.4 per cent, with oil consumption in

non-OECD economies surpassing consumption in the OECD (see Figure 4). Over the remainderof the outlook period (2014 to 2017), world oil consumption is projected to increase at an

average rate of 1.1 per cent a year, to reach 95.4 million barrels a day in 2017. Increases in worldconsumption are projected to be characterised by moderating oil consumption growth in

non-OECD economies and continuing falls in OECD consumption.


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Figure4: OilconsumptioninOECDandnon-OECDeconomies

mb/d

10

20

30

40

50

60

non-OECDOECD

20172015201320112009200720052003200119991997

Sources: BREE; IEA.

Robust consumption growth in non-OECD economies

In 2012, oil consumption within non-OECD economies is expected to grow 2.7 per cent, relative

to 2011, to average 44.6 million barrels a day. From 2013, stronger assumed economic growthin most non-OECD economies is forecast to support robust growth in industrial production,

transport fleets and, therefore, oil demand. In 2013, non-OECD oil consumption is forecastto increase by a further 3.3 per cent to average 46.1 million barrels a day. Over the remainder

of the outlook period (2014 to 2017), oil consumption growth in non-OECD economies isprojected to average 2.9 per cent a year, as oil use intensity falls with projected persistent high

prices. Non-OECD Asia is projected to account for the majority of total non-OECD consumptiongrowth over the outlook period, with economic growth in Asia assumed to rise faster than

elsewhere.

Chinas oil consumption averaged 9.5 million barrels a day in 2011, an increase of 5 per centfrom 2010. In February 2012, Chinas National Development and Reform Commission increased

the ceiling on Chinas petrol and diesel prices for the first time in ten months, by 3 and 4 percent, respectively. Nevertheless, the price of petroleum products remains low by international

standards. In 2012 and 2013, Chinas oil consumption growth is forecast to grow by 4 percent and 5 per cent, respectively, to reach 10.4 million barrels a day in 2013. Consumption is

expected to be supported by domestic price controls, strengthening economic growth anddemand for Chinas exports.


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Chinas oil consumption is projected to increase at an average annual rate of 4 per cent from

2014 to total 12.3 million barrels a day in 2017. Despite being the worlds second largest oilconsumer, Chinas per capita consumption of oil is around half of the world average. Strong

assumed economic growth in China over the medium term is projected to result in rising

income per capita, an expansion of both ground and air transportation fleets and a growingpetrochemical sector. However, Chinas economic growth is expected to become progressivelyless oil intensive, as high oil prices encourage energy efficiency and the substitution of residual

fuel oil for natural gas in electricity generation. Under its current five year plan (20112015),China has targeted a 16 per cent reduction in the energy intensity of its economy that mayeven result in a decline in per capita oil consumption.

Oil consumption in India is projected to increase by an average annual rate of 3 per cent to

be 4.2 million barrels a day by 2017. Projected growth in oil consumption is underpinned by ayoung population demographic and a growing middle class. Over the medium term, Indias

working age population is expected to expand by an average of 1.6 per cent a year andsupport demand for consumption of petroleum fuels for transport.

Sustained economic growth in the Middle East is expected to support increases in the regions

oil consumption. The expansion of electricity generation capacity to support increases ineconomic activity, combined with limited availability of natural gas, is likely to continue to

underpin consumption growth of residual fuel oil in power plants. Widespread end-user fuelsubsidies are also unlikely to be dismantled during the outlook period and are expected to

insulate consumers from high oil prices. In 2012, oil consumption in the Middle East is forecastto increase by 3 per cent, relative to 2011, to reach 8.2 million barrels a day. Over the remainder

of the outlook period (2013 to 2017), oil consumption growth is projected to average 3 per cent

a year to reach 9.7 million barrels a day in 2017.

OECD oil consumption to fall over the medium term

OECD oil consumption is forecast to contact 0.9 per cent to average 45.2 million barrels a

day in 2012. Lower consumption in the US and Europe will be partially offset by increasedconsumption in the Pacific region (Japan, Republic of Korea, Australia and New Zealand). In

2013, oil consumption is forecast to fall marginally in all three OECD regions. For the remainderof the outlook period, OECD oil consumption is projected to decrease at an average annual

rate of 0.7 per cent to average 43.8 million barrels a day by 2017.

Oil consumption in Europe has declined steadily since 2006, reflecting weak economic growthsince the global financial crisis, continued efficiency gains in the transport sector and declining

use of oil in electricity generation and heating. The declining trend is projected to continueover the outlook period. Short term falls in consumption are expected to be magnified by

weak economic growth following market concerns related to sovereign debt. In 2012, Europeanoil consumption is forecast to contract by 2.4 per cent to 13.9 million barrels a day. Between

2013 and 2017, oil consumption is projected to decrease at an average annual rate of around 1per cent, falling to 13.3 million barrels a day by 2017.


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North American oil consumption fell 1.1 per cent in 2011, relative to 2010, to average

23.5 million barrels a day, due to lower gasoline consumption in the US. In 2012, as economicgrowth remains weak, North American oil consumption is forecast to contract by a further

0.5 per cent to 23.4 million barrels a day. Over the medium term, North American oil

consumption is projected to decline at an average annual rate of 0.5 per cent to reach22.8 million barrels by 2017. Declines are projected to be underpinned by structural changesin the transport sector, including more stringent fuel economy standards, increasing sales ofelectric vehicles, and a growing share of f lex-fuel vehicles, which will reduce oil-based gasoline

demand and increase ethanol consumption.

Figure5: USmotorgasolineandethanolconsumption

mb/d

6.5

7.0

7.5

8.0

8.5

9.0

9.5

ethanol (energy content adjusted)

201720152013201120092007200520032001

gasoline

Sources: BREE; IEA.

Oil consumption in the Pacific region is projected to increase in the short term anddecline over the medium term. Changes in oil consumption are expected to largely reflectdevelopments in Japan, the largest oil consuming country in the Pacific region. In 2011,

Japans oil consumption increased by 0.9 per cent to 4.5 million barrels a day, underpinnedby increased use of residual fuel oil for electricity generation following the loss of earthquake

damaged nuclear power generation capacity. Japans oil consumption is forecast to increaseby an additional 0.8 per cent in 2012 supported by the continued use of oil-fired capacity

as nuclear facilities remain shut for maintenance and stress tests, and industrial productionincreases associated with post-earthquake reconstruction.

From 2013 to 2017, oil consumption in Japan is projected to contract at an average annual

rate of 0.6 per cent due to vehicle fuel efficiency increases and as a result of natural gas, coalor nuclear replacing high cost oil-fired electricity generation. Similarly, oil consumption in the

Republic of Korea is projected to fall by around 1 per cent a year in line with efficiency gainsand declining use of kerosene for heating. Oil consumption in the Pacific region is projected to

fall from 7.9 million barrels a day in 2011 to 7.7 million barrels a day in 2017.


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World oil supply growth to be underpinned by OPEC productionbeyond 2012

World oil production increased by 1.2 per cent in 2011, to average 88.5 million barrels a day. In

2012, production is forecast to increase by an additional 1.5 per cent to average 89.8 millionbarrels a day, with non-OPEC output accounting for around two thirds of incremental increasesin production. Oil production growth in non-OPEC economies is forecast to stall in 2013, while

OPEC production is forecast to increase by 4 per cent to average 37.5 million barrels a day.World oil production in 2013 is forecast to increase by 1.4 per cent to 91.1 million barrels a day.

For the reminder of the outlook period, world oil production is projected to increase at an

average annual rate of 1.1 per cent to reach 95.4 million barrels a day in 2017. Non-OPECproduction is projected to increase marginally, while OPEC production is projected to increase

at an average annual rate of 1.8 per cent to reach 40.3 million barrels a day in 2017. Capacity

increases in Iraq, Angola and the UAE are expected to support OPEC production growth.

Strong growth in non-OPEC production during 2012

Non-OPEC production remained relatively stagnant in 2011 as a result of increased production

in North America that was offset by lower than expected output due to maintenance andunplanned outages in the North Sea, Canada and the Middle East. Non-OPEC production in

2012 is forecast to increase by 2 per cent, relative to 2011, to average 53.6 million barrels a day.Increases in non-OPEC oil production are expected to be concentrated in North America and

Latin America.

Over the medium term, growth in non-OPEC oil production is forecast to slow. Between 2013and 2017, non-OPEC oil production is projected to grow at an average annual rate of 0.5 per

cent to reach 55.1 million barrels a day.

Incremental increases in non-OPEC oil production over the outlook period are projected tobe greatest in North America. Production growth is projected to be underpinned by greater

production in the US and Canada, of fsetting falling production in Mexico.

Oil production in the US over 2012 and 2013 is forecast to increase at an average rate of2 per cent a year to reach 8.4 million barrels a day in 2013. Increases in tight oil (see Box 1)

production primarily from the Bakken, Nicobara and Eagle Ford formations are forecast tooffset lower production from maturing conventional fields in Alaska and California. Towards

the end of the outlook period, continued expansion of the tight oil industry and additionalproduction from the Gulf of Mexico are expected to contribute to increased US oil productionprovided that issues with the allocation of drilling permits are resolved. In 2017, US oil

production is projected to grow to 9.1 million barrels a year, an increase of 13 per cent relativeto production in 2011.


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Canadas oil production is forecast to increase by 6 per cent in 2012 and 4 per cent in 2013

to reach 3.8 million barrels a day in 2013. Production growth in the short term is expectedto be supported by enhanced recovery of conventional crude oil in the Western Canadian

Sedimentary Basin as a result of the recent success of horizontal drilling and multi-stage

fracturing techniques.

Growth in Canadas oil production over the medium term is attributed to increases in

unconventional oil production, partially from oil sands projects. Increased production isexpected from the expansion of existing oil sands projects such as CNRLs Horizon project andSuncors Firebag project, and the commencement of new projects. Imperials Kearl Lake mining

project is due to start operation in late 2012 at 110 000 barrels a day and ramp up to 345 000barrels a day after 2017. Huskys Sunrise Energy project is due to commence production of

60 000 barrels a day in 2014, ramping up to 200 000 barrels a day. Canadas oil productionbetween 2014 and 2017 is projected to increase at an average annual rate of 8 per cent to

reach around 5.2 million barrels a day, with oil sands accounting for around two thirds of totalproduction.

Oil production from Latin America is projected to be the second largest source of growth in

non-OPEC over the medium term, largely supported by new projects in Brazil.

In Brazil, oil production in 2012 is forecast to increase by 7 per cent to 2.3 million barrels aday, underpinned by production from several of Petrobas new offshore projects that are due

to commence in the second half of the 2012. These projects include Baleia Azul, Tiro Sidon,Roncador module 3 and Guar, which have a combined peak capacity of 480 000 barrels a day.

Growing production from these projects and other projects due to commence in 2013, such as

Parque das Beleias, Papa-Terra and Roncador module 4, are expected to support a 2 per centincrease in Brazils oil production, which is forecast to total 2.4 million barrels a day in 2013.

For the remainder of the outlook period, Brazilian oil production is projected to increase at anaverage annual rate of 7 per cent. Production increases will be underpinned by the installation

of additional production systems in several offshore oil fields including Baleia Azul, GuaraNorth, Cernambi, Lula Central, Lula High and Maromba, which combined have a peak capacity

of 760 000 barrels a day. In 2017, Brazilian oil production is projected to average 3.2 millionbarrels a day.

Oil production in the Russian Federation is projected to remain relatively unchanged overthe medium term, despite changes to its oil export taxes in October 2011 that enhancedthe profitability of upstream projects. Production from the Russian Federation is projected

to fall from 10.6 million barrels a day in 2011 to 10.4 million barrels a day in 2017. Decreasedproduction from maturing fields in Western Siberia is projected to offset production growthfrom new oil fields in Eastern Siberia.


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Box1: Unconventionaloilnotsounconventional

Unconventional oil is set to play a growing role in world oil production. High oil prices over the

medium term are projected to encourage exploration development activity by improving theeconomic viability of unconventional methods. Generally, the cost of producing unconventional oil is

higher compared with conventional oil.

The IEA presently characterises unconventional oil as including extra-heavy oil (also known as natural

bitumen or oil sands), kerogen oil, and derived liquids such as coal-to-liquid (CTL) or gas-to-liquid

(GTL). Interestingly, tight oil, which is produced increasingly in the US, is considered conventional oil,

but its producers face challenges similar to producers of unconventional oil.

Extra-heavy oil

The extraction of extra-heavy oilor bitumenfrom a deposit generally requires heat to reduce

viscosity. The worlds largest deposit of extra-heavy oil is found as naturally occurring bitumen

in Canadian oil sands at shallow depths. Canadas largest oil sands deposits, which are located in

Athabasca, Cold Lake and Peace River, contain an estimated 170 billion barrels of recoverable oil.

These deposits can be extracted using two alternative methods: mining and in-situ. Mining is used

to extract oil sands that are on or near the surface and the ore is treated with hot water to separate

the bitumen. The in-situ method is used for deeper deposits. It employs steam-injection technology

and solvents to reduce the viscosity of bitumen before extraction.

Extra-heavy oil is also found in the Venezuela Orinoco belt, which is the worlds second-largest

deposit of extra-heavy oil. The deposits are generally deeper than in Canada, and oil is extracted

using in-situ methods.

Kerogen oil

Kerogen oil is often referred to as oil shale, but should not be confused with shale oil. Kerogen oil

is derived from sedimentary rock containing kerogen, which when heated and processed releases

hydrocarbons similar to oil. Deposits near the surface are mined in a similar way to oil sands and

the environmental challenges are comparable. The costs of producing kerogen oil are high due

to the amount of energy required to heat the shale to between 350C and 450C before oil can be

extracted. Only around 15 000 barrels of kerogen oil is currently produced worldwide.

CTL

Coal-to-liquid is a process of deriving oil from coal, usually via the gasification of coal into syngas.

While the technology is well established, CTL is one of the most costly sources of unconventional oil.

South Africa is the most notable producer of CTL, with a facility that produced 160 000 barrels a day at

capacity. Two commercial scale CTL projects are being proposed in Australia. The Amber CTL project,

has an expected capacity of around 20 000 barrels a day and is scheduled for completion in 2014. The

Clinton project has a capacity of 15 000 barrels a day and is scheduled for completion in 2015.


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GTL

Gas-to-liquid technology is similar to CTL, uses the reaction of natural gas with steam and oxygen

to create syngas. The Pearl GTL project in Qatar commenced in 2011 and is expected to ramp up

to peak capacity of 140 000 barrels a day in 2012. Currently low gas prices in North America havereignited interest in GTL, with a feasibility study underway for a GTL plant fed by shale gas in

Louisiana.

Tight oil

Tight oil is also known as shale oil. It is conventional oil trapped in geological formations with low

permeability (e.g. shale rock). Special techniques including horizontal wells and multi-stage hydraulic

fracturing are used to extract tight oil. Growth in tight oil production is most prominent in the US,

from the Bakken formation around the North Dakota, Montana and Canadian boarders, the Eagle

Ford formation in Texas, and the Niobrara formation on the boarder of Wyoming and Colorado.

Impediments to growth in unconventional and tight oil

By 2017 unconventional and tight oil are projected to account for 7 per cent of world oil production,

up from 4 per cent in 2010. However, growth in production could be limited by lower crude prices,

increased extraction costs including specialist services, infrastructure constraints and environmental

costs. The future of unconventional and tight oil production over the longer term will be increasingly

shaped by market conditions and policy responses to infrastructural and environmental concerns.

OPEC oil production underpinned by NGL in the short term

OPEC oil production is forecast to increase by around 1.2 per cent in 2012 to average36.2 million barrels a day. Increases in OPEC oil production are forecast to be underpinnedby growth in the production of natural gas liquids (NGL), while OPEC crude oil production is

expected to remain largely unchanged. In 2013, as non-OPEC production stalls, OPEC oil willmeet any expected gap. OPEC oil production is forecast to increase by 4 per cent in 2013 to

average 37.5 million barrels.

Between 2014 and 2017, OPEC oil production is projected to increase at an average annual rateof 1.8 per cent. Growth in OPEC NGL is projected to weaken towards the end of the outlook

period, with OPEC crude oil production comprising an increasing share of additional OPEC oilproduction.

OPEC crude oil production is forecast to be underpinned by increased output from Iraq. By the

end of 2012, Iraqs oil producing capacity is expected to reach 3.1 million barrels a day, up14 per cent from an average production rate of 2.7 million barrels a day in 2011. Oil output from

the Rumaila, West Qurna-1, and Zubair oil fields, which together accounted for over two thirdsof Iraqi production in 2011, is expected to support Iraqs oil growth. Iraqs national oil company

plans to further expand these fields further over the medium term. Official production targets


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for Iraqi oil production are ambitious at 6.5 million barrel a day by 2015 and 12 million barrels

a day by 2017. Export infrastructure and logistical constraints are likely to limit output growthto below official targets. Between 2014 and 2017, Iraqs oil production growth is projected to

increase at an average annual rate of 6 per cent to reach 4.3 million barrels a day in 2017.

Libyan crude oil production has increased significantly since the end of the 2011 civil war. Libyanproduction in the December quarter of 2011 averaged 550 000 barrels a day, 12 times higher than

it was in the September quarter. Libyan crude oil production is projected to rebound to pre-civilwar levels of around 1.6 million barrels a day by early 2014. For the remainder of the outlook

period, growth in Libyan crude oil production is projected to slow and reach 1.9 million barrels aday in 2017.

Increases in crude oil production in the UAE and Angola are projected over the outlookperiod. Over a dozen new projects in Angola are expected to offset production declines in

more mature offshore fields and support an annual growth rate of 3 per cent over the outlookperiod. By 2017, crude oil production in Angola is projected to average 1.9 million barrels a day.

In the UAE, crude oil production is projected to increase 4 per cent a year to reach 3.1 millionbarrels a day by 2017. Production growth in the UAE is expected to be supported by increased

output from the Upper Zakum and Lower Zakum fields, and greater production from matureonshore fields following the employment of enhanced oil recovery techniques.

Oil production in Saudi Arabia during 2011 averaged 9 million barrels a day, well below its

capacity of 12 million barrels a day. Saudi Arabias production capacity is projected to f luctuatebetween 11.6 and 12 million barrels a day over the outlook period. Forecast falls in capacity

during 2012 and 2013 reflect lower output from maturing fields. Projected increases in 2015 will

be underpinned by the expected development of the second phase of the Manifa project. By2017, Saudi Arabian oil production is projected to average 8.7 million barrels a day.

Irans crude oil production is projected to decrease at an average annual rate of 5 per cent overthe outlook period. International oil sanctions recently imposed on Irans oil exports may have

several effects. They are likely to lead to a redistribution of its oil trade with Irans exports beingredirected from Europe to China and India, cause a discount in the price of Irans oil, contribute

to the flight of foreign investment, and reduce the number of projects coming online before2017. Production declines from maturing oil fields are projected to offset new production from

several small capacity projects.

Production of NGLs by OPEC is forecast to increase by 10 per cent and 6 per cent in 2012 and2013, respectively, as projects in Qatar, Saudi Arabia and the UAE ramp up to peak capacity.

For the remainder of the outlook period, growth in OPEC production of NGLs is projected toslow to 3 per cent a year, and average 7.5 million in 2017. Production growth is expected to

be supported by new projects in Iran, the UAE and Saudi Arabia including the Integrated GasDevelopment project and the Manifia project.


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Box2: Downsiderisk:theStraitofHormuz

On 27 December 2011, the Iranian Government threatened to block the transportation of oilthrough the Strait of Hormuz, limiting trade of oil between producers in the Middle East andconsumers in Asia. The threat was made in retaliation to proposed international sanctions

designed to prevent the exportation of Iranian oil and to persuade the Iranian Government tocease its alleged nuclear weapons program.

Around one fifth of the worlds crude oil is transported by tankers from ports in the Persian Gulfthrough the Strait of Hormuz. The closure of the Strait would result in considerable increasein import prices throughout Asia and the Pacific due to the limitations of alternative transportroutes and already constrained supply to the region.

In the highly unlikely event that Iran carried out its threat and was successful at blocking theStrait of Hormuz, oil import prices in Asia would likely increase, and result in lower than forecastgrowth in oil consumption. Price increases would depend on the length of the closure and theresponse by the international community.

According to the IEA, most military analysis believe that any closure of the Strait of Hormuzwould be short term, as the US and UK would not allow the Strait to be closed given itsimportance to global energy markets.

IRANIRAQ

SAUDI ARABIA

YEMEN

OMAN

UNITED ARABEMIRATES

JORDAN

KUWAIT

BAHRAIN

QATAR

ISRAEL

LEBANON

CYPRUSSYRIA

TURKEY

EGYPT

PersianGulf

Gulf ofOman

Gulf ofAden

ARABIAN SEA

RED SEA

MEDITERRANEAN SEA

StraitofHormuz


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Australian production and exports declining until 201516

Australian production of crude oil and condensate is forecast to contract by 4 per cent in

201112 to 23.7 gigalitres. Lower production reflects planned shut-ins on the North West Shelf

that occurred in the September quarter 2011 and declines from maturing fields. Output fromthe Kitan project in the Bonaparte Basin, which commenced in October 2011, is expected topartially offset these declines. In 201213, Australian crude oil and condensate production is

forecast to increase by 1 per cent as a result of the commencement of crude production fromthe Montara/Skua project and condensate from the Kipper gas project.

From 201314 to 201516, Australian production of crude oil and condensate is projected

to decrease at an average annual rate of 6 per cent. Declining production from maturingfields is projected to more than of fset new production from several small fields includingConiston, Fletcher-Finucan, Turrum, Crux and Balnaves. In 201617, Australias crude oil and

condensate production is projected to rebound by 8 per cent to 19.1 gigalitres, underpinnedby condensate production associated with the Prelude and Ichthys projects.

Australian exports of crude oil and condensate over the outlook period are projected to follow

a similar profile to production. Exports are forecast to contract by 4 per cent in 201112 anda further 1 per cent in 201213 to total 18.7 gigalitres, reflecting lower production from the

north-west coast of Australia. From 201314 onwards, oil exports are projected to decline at anaverage rate of 6 per cent a year to total 13.9 gigalitres in 201617.

The value of Australian oil exports is forecast to increase to $12.6 billion in 201112, reflecting

forecast higher prices compared with 201011. Between 201213 and 201516, the real value

of Australian oil exports are projected to decline to by 12 per cent a year, reflecting projectedlower export volumes (see Figure 6). In 201617, Australias oil export earnings are projected toincrease to $8 billion (in 201112 dollars), supported by condensate exports from the Prelude

and Ichthys projects.

Figure6: Australiancrudeoilandcondensateexports

GL

5

10

15

20

25

volume

2016-172012-132008-092004-052000-011996-97

2011-12A$b

3

6

9

12

15

value (right axis)

Sources: BREE; ABS.


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Table1: Oiloutlook

2010 2011 2012 f 2013 f 2014 z 2015 z 2016 z 2017 z

World

Production b mbd 87.4 88.5 89.8 91.1 92.2 93.3 94.3 95.4

Consumption mbd 88.3 89.1 89.8 91.1 92.2 93.3 94.3 95.4

West Texas Intermediate crude oil price

nominal US$/bbl 79 95 105 114 115 113 112 112

real c US$/bbl 85 98 105 112 111 108 107 105

Brent dated crude oil price

nominal US$/bbl 79 110 117 119 117 113 112 111

real c US$/bbl 85 114 117 117 114 109 106 104

2009

10

2010

11

2011

12 f

2012

13 f

2013

14 z

2014

15 z

2015

16 z

2016

17 z

Australia

Crude oil and condensate

Production b ML 25 583 i 24 752 i 23 690 23 905 23 743 20 944 17 713 19 059

Export volume ML 18 064 19 638 18 944 18 682 18 252 15 560 12 652 13 945

Export value

nominal A$m 9 534 11 772 12 621 12 698 12 893 10 699 8 435 9 152

real d A$m 10 159 12 166 12 625 12 350 12 195 9 841 7 545 7 961

Imports ML 27 284 31 766 30 326 30 999 26 663 26 858 27 269 27 303

LPG

Production e ML 4 097 3 907 3 915 3 841 3 815 3 365 2 846 3 062

Export volume ML 2 776 2 471 2 281 2 237 2 222 1 960 1 658 1 784

Export value

nominal A$m 1 105 1 068 1 040 1 113 1 147 985 808 856

real d A$m 1 177 1 103 1 040 1 082 1 085 906 723 745

Petroleum products

Refineryproduction

ML 37 200 38 393 37 993 37 907 33 963 34 048 34 133 34 218

Exports g ML 850 760 804 1 232 1 104 1 106 1 109 1 112

Imports ML 19 967 18 762 21 393 19 961 24 972 25 970 26 968 28 100

Consumption h ML 50 929 52 095 53 516 53 541 54 489 55 458 56 449 57 465

b One megalitre a year equals approximately 17.2 barrels a day. c In 2012 US dollars. d In 201112 Australian dollars.

e Primary products sold as LPG. g Excludes LPG. h Domestic sales of marketable products. i Energy Quest. f BREE

forecast. z BREE projection.

Sources: BREE; ABS; IEA; Energy Information Administration (US Department of Energy); Energy Quest; Geoscience

Australia.


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Gas

Nina Hitchins

Global gas consumption is projected to increase at an average annual rate of 3 per centover the outlook period, underpinned by increasing use of gas in electricity generation.

Imports of LNG into Asia-Pacific region are projected to increase by an average of 7 percent a year to reach 217 million tonnes in 2017. China is projected to account for a third of

the total increase in the regions LNG imports.

Projected increases in the global demand for LNG and the establishment of bindinglong-term contracts to secure future supplies have underpinned investment in additional

liquefaction capacity. Global liquefaction capacity is projected to increase at an averageannual rate of 5 per cent, to reach 366 million tonnes a year by the end of 2017.

Australias LNG export earnings are projected to increase by an average of 20 per cent a

year to total $30 billion (in 201112 dollars) in 201617. The growth will be underpinned byhigher export volumes supported by the start up of 66 million tonnes a year of additional

LNG production capacity over the outlook period.

Growth in world gas consumption to continue

Over the last decade, global gas consumption increased at an average annual rate of 3 per cent

and totalled 3.3 trillion cubic metres in 2010. These trends are expected to continue over themedium term, with the International Energy Agency (IEA) projecting world gas consumption to

reach 3.8 trillion cubic metres by 2016. Historical and projected increases in gas consumption

reflect greater use of gas in electricity generation, industrial production and in the residentialsector.

Gas-fired electricity is an attractive option because it is characterised by low capitalexpenditure, short construction times, f lexibility in meeting peak demand, and low carbon

emissions relative to other fossil fuels. While the majority of global increases in gas demand areprojected to be used in electricity generation, the extent of gas use in the electricity sector

will depend on the price of gas relative to alternative fuels, as well as domestic policy settingsregarding nuclear energy, renewable energy and carbon pricing.

The majority of incremental gas consumption is projected to occur in emerging economies,where gas-fired energy is projected to support strong economic growth. Expanding gasdistribution networks are also inducing a switch away from more expensive heating fuels

such as kerosene. Demand for gas in more mature OECD markets is projected to increasemoderately, reflecting the increasing share of gas used in the electricity generation sector.


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LNG to underpin global trade growth

The majority of the worlds gas production is confined to a few regions including the Former

Soviet Union, North America and the Middle East. Gas consumption, however, is more

decentralised and many regions supplement domestic gas production with imports. Projectedincreases in global gas consumption, centralised production and associated regional pricedisparities are projected to underpin an expansion of global gas trade.

Investment in inter- and intra-regional transport capacity will facilitate trade and enable greater

gas consumption, particularly in Asia. Greater transport capacity will take the form of additionalpipelines and the construction of LNG liquefaction and regasification terminals. LNG trade in

2010 totalled 209 million tonnes and represented 9 per cent of global gas consumption, anincrease from 6 per cent in 2000.

LNG is projected to comprise an increasing proportion of global trade over the medium term,as it can be transported over longer distances and allows for a greater diversification of supply

compared with gas transported through pipelines.

Grow in Asia-Pacific LNG imports to continue

LNG markets are of particular interest in an Australian context as the geographical distance

between Australia and its export markets prevents the transportation of gas via pipelines.Australias LNG exports are delivered mainly to Japan, the Republic of Korea, Chinese Taipei and

China. These markets accounted for over half of world LNG imports in 2010.

In 2011, world LNG trade increased by 14 per cent, relative to 2010, to total 238 million tonnes.Growth of LNG imports was greatest in the Asia-Pacific region, and is estimated to have

increased by 15 per cent to total 147 million tonnes. In all Asia-Pacific economies, LNG importsare increasingly used to supplement insufficient domestic gas supplies to meet growing

demand. In Japan, increases in LNG imports were underpinned by greater gas-fired electricitygeneration following the March 2011 earthquakes and tsunami and the

BRE Resources & Energy Quarterly (March 2012)

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