ACIL Water Reform and Industry May07

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Water Reform and Industry

Implications of recent water initiatives for the

minerals, petroleum, energy, pulp and paper

industries

Prepared for Department of Industry, Tourism

and Resources

April 2007


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ACIL Tasman Pty Ltd

This work is copyright. The Copyright Act 1968permits fair dealing for study, research, news reporting, criticism or review.Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgment of the source is included.

Permission for any more extensive reproduction must be obtained from ACIL Tasman on (03) 9600 3144.Reliance and Disclaimer

The professional analysis and advice in this report has been prepared by ACIL Tasman for the exclusive use of the party orparties to whom it is addressed (the addressee) and for the purposes specified in it. This report is supplied in good faith andreflects the knowledge, expertise and experience of the consultants involved. ACIL Tasman accepts no responsibility whatsoeverfor any loss occasioned by any person acting or refraining from action as a result of reliance on the report, other than theaddressee.

In conducting the analysis in this report ACIL Tasman has endeavoured to use what it considers is the best information availableat the date of publication, including information supplied by the addressee. Unless stated otherwise, ACIL Tasman does notwarrant the accuracy of any forecast or prediction in the report. Although ACIL Tasman exercises reasonable care when makingforecasts or predictions, factors in the process, such as future market behaviour, are inherently uncertain and cannot be forecastor predicted reliably.

advantage of the client or to the advantage of the client to the degree suggested or assumed in any advice or forecast given byACIL Tasman.

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Implications of recent water initiatives for the

minerals, petroleum, energy, pulp and paper

industries

Prepared by ACIL Tasman


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Contents

Executive summary x1 Introduction 1

1.1 Report structure 11.2 Background 21.3 Water use and economic contribution 3

1.3.1 Water use

1.3.2 Economic contribution by sector 6

1.4 Characteristics of water use in the MPEPP industries 81.4.1 Minerals industry 81.4.2 Petroleum 101.4.3 Electricity generation 101.4.4 Pulp and paper manufacture 11

2 Australian water market arrangements 132.1 Overview 132.2 Queensland 152.3 Victoria 2.4 New South Wales 252.5 Western Australia 2.6 South Australia 312.7 Tasmania 2.8 Northern Territory 39

3 The National Water Initiative 433.1 Key elements 433.2 Key points from the NWI for the MPEPP industries 433.3 Current state of implementation of the NWI 46

3.3.1 Report to Council of Australian GovernmentsJuly 2006 463.3.2 Status of implementation 47

4 Case studies 504.1 The current water situation for the industries 504.2 Cadia Valley Operations 51

4.2.1 Water use and sources 53


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v

4.2.2 Water supply/access arrangements 55

4.2.3 Water management issues 564.2.4 Policy issues 57

4.3 Norske Skog Albury 574.3.1 Water use and sources 584.3.2 Water supply/access arrangements 584.3.3 Water management issues 594.3.4 Policy issues 59

4.4 Loy Yang A 624.4.1 Water use and sources 634.4.2 Water management issues 644.4.3 Policy issues 65

4.5 Coal seam gas case study 664.5.1 Water use and sources 664.5.2 Water supply/access arrangements 674.5.3 Water management issues 684.5.4 Policy issues 68

4.6 Yabulu Nickel Refinery 4.6.1 Water use and sources 694.6.2 Water supply/access arrangements 704.6.3 Water management issues 714.6.4 Policy issues 71

5 Future water requirements from industry 735.1 Proposed developments 735.2 Water demand for anticipated projects 74

5.2.1 Water requirements for mining projects 745.2.2

Water requirements of electricity generators 77

5.2.3 Water requirements of pulp and paper projects 77

5.3 Projections of future water demand from the MPEPP industries 795.4 Location of future water demands and selection of priority case

study regions 806 Case studies of four catchments 82

6.1 The Hunter catchment 6.1.1 Water access arrangements 846.1.2 Demand and supply 856.1.3 Hydrology, droughts and some qualifications 89


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6.1.4 Water prices

6.1.5 Policy issues 91

6.2 Fitzroy Basin catchment 916.2.1 Water access arrangements 926.2.2 Demand and supply 946.2.3 Water prices 6.2.4 Policy issues 98

6.3 Moreton catchment 986.3.1 Water access arrangements 1006.3.2 Demand and supply 1016.3.3 Water prices 6.3.4 Policy issues 104

6.4 Goldfields 1056.4.1 Water access arrangements 1066.4.2 Demand and supply 1076.4.3 Water prices 6.4.4 Policy issues 114

7 Economic issues and implications 1167.1 Economic efficiency of water use 116

7.1.1 Principles 1167.1.1 Evidence 1187.1.2 Implications of time of day pricing in electricity 1207.1.3 Conclusions on the efficiency of water allocation 120

7.2 Impact on economic growth 1217.2.1 General equilibrium modelling 121

7.3 The value of reforms 1247.3.1

Estimates of value added per ML 124

7.3.2 Estimate of economic impacts of NWI 125

7.4 General observations 1308 Conclusions and recommendations 131

8.1 General observations 1318.1.1 Water use and sources 1318.1.2 Potential new projects 132

8.2 Summary of policy issues 1338.3 Priorities 136


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8.4

Recommendations 137

Attachments

A National Water Initiative A-1B Water use and access arrangements for case studies B-1C Estimates of value added C-1D Glossary D-1

Boxes, figures and tables

Box 1 Definitions 14

Box 2 Value of marginal product 117

Figure 1 Water use (per cent industry) by industry and State/Territory: 2004-05 5

Figure 2 Gross value added by industry type for 2000-01 and 2004-05 6

Figure 3 Estimates of gross value added per ML of water consumption byindustry sector, 2004-05 7

Figure 4 Progress of water planning activities in Queensland at mid 2006 16Figure 5 22

Figure 6 Water management areas in Tasmania 36

Figure 7 Water control districts in the Northern Territory 40

Figure 8 Cadia Valley operations location (left) and historical gold production(right) 51

Figure 9 Lachlan River catchment 52

Figure 10 Cadia Valley operations annualised water balance 54

Figure 11 Map of the Latrobe Basin 63

Figure 12 Projected water demand from the MPEPP industries 2006-2015 80

Figure 13 Map of the Hunter catchment 83

Figure 14 Projected water demand for the Hunter catchmenttotal andincremental water demand from new MPEPP industry projects 87

Figure 15 Projected water demand for the Hunter catchment 88

Figure 16 Location map for the Fitzroy Basin catchment 92

Figure 17 Projected water demand from MPEPP industry projects in the FitzroyBasin catchment 96

Figure 18 Total water demand projection in the Fitzroy Basin catchment 96

Figure 19 Map of the Moreton catchment 99

Figure 20 Cumulative and annual incremental demand from MPEPP industryprojects in the Moreton catchment 102

Figure 21 Projected water demand for the Moreton catchment 103


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Figure 22 DNRW forecasts of water demand and supply in South EastQueensland, to 2050 103

Figure 23 Annual incremental and cumulative water demand from MPEPPindustry projects 109

Figure 24 Water demand projection for the Goldfields region, 2005-2015 109

Table 1 Case studies x

Table 2 Statistics of water use in Australia 2000-01 and 2004-05 3

Table 3 SunWater supply and delivery charges for 2006/07 19

Table 4 Usage and licence fees set by water suppliers for selected (available)regions 24

Table 5 Prescribed water areas with completed water allocation plans in South Australia, as at February 2007 31

Table 6 Summary of water charges in South Australia 33

Table 7 Irrigation schemes in Tasmania 35

Table 8 Selected actions in implementing the NWI 48

Table 9 Case studies analysed for current market assessment 50

Table 10 Summary of key points in the Petroleum and Gas Act (Qld, 2004)covering water 67

Table 11 Summary of future projects (new projects and existing projectexpansions) in the MPEPP industries over the period 2006-2015 73

Table 12 Estimates of water extractions by minerals projects 75

Table 13 Unit water consumption measures for mining and minerals processing 76 Table 14 Estimates of water consumption for power generators 77

Table 15 Proposed new pulp and paper manufacture projects and associated waterconsumption 79

Table 16 Summary of potential future MPEPP projects in catchments by projecttype 81

Table 17 Areas selected for analysis 82

Table 18 Existing water licences for the Hunter catchment 84

Table 19 Permanent water trading in the Hunter catchmentSeptember 2005 toSeptember 2006 85

Table 20 Anticipated MPEPP industry projects in the Hunter catchment2006-2015 86

Table 21 Water charges in the Hunter catchment 90

Table 22 Water trades in the Fitzroy Basin catchment (2004-05) 93

Table 23 Anticipated new MPEPP industry projects in the Fitzroy Basincatchment (2006-2015) 95

Table 24 Anticipated MPEPP industry projects in the Moreton catchment -2006-2015 101

Table 25 MPEPP industry projectsGoldfields Region (2006-2015) 108

Table 26 Goldfields palaeo-channel water availability and use 111

Table 27 Average prices for water trade 2002-03 118

Table 28 production 119


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Table 29 Sectoral differences in value added from expanded water tradeMurray-Darling Basin 122

Table 30 Change in value added with the introduction of inter regional trade by2030 compared with 2001 123

Table 31 Impact of expanded water trade on urban shadow water prices in 2032Dec 2005 prices 123

Table 32 Estimates of value added per ML 125

Table 33 Change in water use by mining and industry, the Hunter Catchment, ML,2007-2015 126

Table 34 Value added from new projects in the Hunter catchment 126

Table 35 Increase in water use in mining and industry in the Fitzroy Basincatchment, ML, 2007-2015 127

Table 36 Value added from additional projects in the Fitzroy Basin catchment 127 Table 37 Increase in water use in mining and industry in the Moreton Catchment 128

Table 38 Value added from additional projects in the Moreton Catchment 128

Table 39 Increase in water use in mining and industry in the Goldfields region 129

Table 40 Additional value added from mining projects in the Goldfields region 129

Table 41 Water uses and sources- case studies B-1

Table 42 Water access arrangements and infrastructurecase studies B-2

Table 43 Change in value added and water use by selected sectors C-1

Table 44 Mining example C-2

Table 45 Estimates of additional value for coal mine C-3

Table 46 Value added per ML in electricity generation C-3

Table 47 Gross margins in agriculture C-4

Table 48 Average prices for water trade 2002-03 C-4


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Executive summary x

Executive summary

Over the last decade or so, there has been a significant shift towards managing

economic, social and environmental objectives are pursued in a balanced way.

objectives.

In Australia, ownership of water is vested in the Crown. Development,management and allocation of water resources are subject to relevant State and

Territory legislation. Water users are granted the right to extract water from a

surface or groundwater resource under water access entitlements which are

generally classified into the following three categories:

high reliability entitlements;

general reliability entitlements; and

volumetric entitlements on unregulated streams.

The amount of water that a user in each entitlement category can take in each

year is subject to an annual water allocation, which is determined by theavailability of water within the system (see Section 2).

Water has been a target for significant reform. As a consequence, water

management in Australia is currently undergoing dramatic change, with the

progressive implementation of the National Water Initiative (NWI) reforms

(see Section 3).

A central focus of the policy to date has been on the impact of reform on

water use and management in the urban and agricultural sectors, particularly

irrigated agriculture, and sustainable environmental flows. However, the water

needs of other sectors are also coming into focus for policy makers.

This study considers the potential implications of water reform on the mining

and petroleum, energy and pulp and paper industries (the MPEPP industries).

These industries, which made up 7 per cent of Australia's Gross Domestic

Product (GDP) in 2004-05, are not major users of water in absolute terms1.

They account-

05 (this is the most recent national water consumption data released by the

1 The value added, GDP and water consumption figures quoted in this report relate toAustralian Bureau of Statistics (ABS) industry definitions, unless stated otherwise. These

definitions may differ in scale and scope from other industry definitions.


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Executive summary xi

Australian Bureau of Statistics). In the same year, agriculture accounted foraround 65 per cent of water use. While total water use within these MPEPP

industries is relatively small, these industries make an important contribution to

both water use and infrastructure development in the areas in which they

operate, and are the single largest user of water in some catchments.

A key objective of this study is to examine the regulatory environment the

MPEPP industries are currently facing in respect to water, and the likely

benefits and costs from the full implementation of the NWI for these

industries and the Australian economy as a whole.

It should be noted that the engagement of MPEPP industries in watermanagement runs more broadly than the scope of this study. For example,

within the minerals industry there is ongoing work to restore the ecological

condition of priority catchments (particularly groundwater) and joint work with

government is also underway to improve industry water management and

recognise water as a community resource.

An important finding of this study is that current water access arrangements

are a constraint on efficient investment by MPEPP industries. Full

implementation of the NWI reforms should provide the necessary market and

other arrangements, to ensure these industries have access to a water supply in

a market which reflects both demand and and the opportunity cost of supply.The NWI reforms should create opportunities for MPEPP industries to make

a significant contribution to regional and national economic growth.

However, some of the issues of greatest importance to the MPEPP industries

under the current reform agenda are likely to be addressed later in the NWI

reform program. The implementation priorities may need to be reviewed to

ensure the full economy-wide benefits of the reforms are achieved.

Water use and value added production

Water is not the main input used by the MPEPP industries. Nevertheless,

that the average value added generated per megalitre (ML) of water used in the

MPEPP industries is significantly higher than for some other water users2.

According to Australian Bureau of Statistics (ABS) figures, in 2004-05 the

average value added per ML of water used was around $86,000/ML for coal

2 The gross value added of an industry is the difference between the value of output and thevalue of goods and services (intermediate input) used up in the process of production - it iseffectively returns to capital and labour and is the building block of Gross Domestic

Product.


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Executive summary xii

mining, $71,000/ML for wood and paper, $52,000/ML for electricity and gassupply (ABS category) and $50,000/ML and $25,000/ML for metal mining and

other mining, respectively (see Figure ES 1). The value added per unit of water

consumption for the oil and petroleum industry, according to ABS data,

exceeds $1 million/ML. This high figure reflects the high value added

contribution of the industry and that water is only a minor input to production

relative to other industries.

By comparison the value added generated per ML of water used in agriculture,

production to $3,870/ML for vegetable production. The relatively low value

added generated per ML used in irrigated agriculture does not downplay the contribution to the economy. In many respects, this

reliance on water to produce its output. It should also be pointed out that the

data used to undertake these calculations is highly aggregated. It is likely that

value added generated per ML for certain irrigated fruits, vegetables or grapes

etc could be much higher than reported here. Other estimates, for example,

suggest that the value of water in some irrigated agriculture sectors (eg

horticulture) may be as high as $15,000/ML, which is greater than the

estimates shown in Figure ES 13.

3http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/5B8D05A86A3D4C21CA2571F6

00018FC6/$File/46230_2000-01%20to%202003-04%20v5.pdf, accessed April 2007.


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Executive summary xiii

While these estimates are not sufficient to conclude that the current water

access arrangements have resulted in major economic inefficiencies, the large

sectoral differences between the average value added generated per unit of

water used suggests that significant economic benefits are likely to be gained if

water can be more freely traded between users. This issue is examined in

greater depth in the catchment case studies in this report (see Section 6).

Key water issues for MPEPP industries

Five case studies were undertaken to analyse the current water access

arrangements in the MPEPP industries and assess the potential impact of thefull implementation of the NWI (see Section 4). The projects studied are

shown in Table 1.

Figure ES 1 Value added per ML of water used by industry, 2004-05

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

$/ML

Gross value added/ML 717 3,867 376 2,744 1,833 498 162 255 86,127 49,906 26,175 70,759 1,200,151 51,552

Dairy

farmingVegetables Sugar Fruit Grapes Cotton Rice

Livestock,

pasture

and grains

Coal miningMetal ore

mining

Other

mining

Wood and

paper

Oil and gas

extraction

Electricity

and gas

supply

1,200,000

1,1190,00

Note: The value added and water consumption figures quoted in this report relate to ABS industry definitions using the Australian and New Zealand Industrial

Classification (ANZIC), unless stated otherwise. These definitions may differ to those used by industry.

Data source: ACIL Tasman estimates using ABS data from Water Account Australia, 2004-05, Cat. No 4610.0 and Australian National Accounts, Cat. No.

5206.0


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Executive summary xiv

Table 1 Case studies

Project Description Output Catchment

location

Newcrest Cadia Valleymine operations(NSW)

Low grade Cadia Hill openpit gold mine and highergrade Ridgewayunderground gold mine

690,000 ounces ofgold and 72,000tonnes of copper

Belubula (NSW) surface water andminorgroundwater

Norske Skog AlburyPaper Mill (NSW)

Integrated thermo-mechanical pulp and paper

mill at Albury

265,000 tonnes perannum newsprint

Murray River(NSW) surface

water

Loy Yang 'A' powerStation (Loy YangPower) (Victoria)

Brown coal-fired powerplant and associated coalmine in the Latrobe Valley

2,160 MW nameplatecapacity

Latrobe Basin(Vic) surfacewater andgroundwater

CSG (Queensland) Coal seam gas (CSG)operations in the SuratBasin

Approximately 23 PJof sale gas

Fitzroy Basin(Qld)

Yabulu nickel andcobalt refinery (BHPBilliton) (Queensland)

Nickel and cobalt refinerynear Townsville

32,000 tonnes ofnickel and 2,000tonnes of cobalt

Black River wellfield (Qld) groundwater and

surface water

Data source: Norske Skog, Loy Yang Power, Newcrest, BHP Billiton, APPEA

The case studies reveal important differences between the regulations relating

to the access, use and discharge of water by these industries and those that

apply to other water users.

Water availability

Access to high reliability entitlements and allocations is critical for the efficient

operation of the MPEPP industries. The case studies reveal that availability of

water is a constraint on further investment and expansion of the MPEPP

industries. The case studies suggest that the potential value of lost production,

due to the unavailability of water of suitable quality, is high.

In three of the case studies, the project operators are examining a range of

supply options, including purchase from the market, investment in storage,

recycling and use of treated effluent.

All projects examined in the case studies have already invested extensively in

water use efficiency measures. MPEPP industries recognise that additional

water efficiency measures may be needed in response to increasing competition

for water resources.

With the existing inconsistencies in market arrangements, there is a risk that

the most economically efficient investment outcomes will not be realised. The

extent to which water efficiency measures are implemented by all water users

should, ideally, be determined primarily by price signals in efficiently operating

water markets.


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Executive summary xv

Legislative inconsistencies

The case studies revealed inconsistencies between water legislation and

legislation applicable to the minerals industry and petroleum sectors, mainly in

relation to access arrangements and trading. The report's findings suggest that

mining and petroleum legislation in all jurisdictions should be reviewed as a

matter of priority. The aim should be to achieve consistency with the water

access and trading principles of the NWI across all sources of water, including

groundwater and treated and untreated water produced from mine dewatering

and petroleum operations.

The case studies demonstrate that differences in the application of waterlegislation can occur between water sources within water planning areas. This is

relevant to the treatment of groundwater and surface water but the case studies

suggest the findings also apply to discharge water (discussed below). Under the

current program of reform these differences may persist for some time.

Constraints on trade

The case studies demonstrate the importance of developing efficient water

markets and trading principles for all sources of water used by MPEPP

industries, including groundwater and discharge water.

The Norske Skog case study reveals a thin market for trade in high reliability

entitlements in the Murray River catchment. The reasons for this situation are

difficult to identify with certainty, particularly in the current drought. However,

impediments to trade in water in the lower Murray-Darling Basin have been

identified (for example exit fees) and could be a contributing factor. The

reform timetable will address these impediments in the course of implementing

the NWI. However, this report finds the issue is a high priority for MPEPP

industries.

The Yabulu minerals processing and Coal Seam Gas (CSG) case studies

demonstrate that trading rules in surface water, groundwater, re-use anddischarge water are not always consistent. As a result there may be distortions

in water allocation decisions within projects and between industries.

Removal or rationalisation of ongoing constraints on trade will be essential to

improve the efficiency of water markets. The Productivity Commission has

made recommendations on issues deserving early attention in priority

catchments, including:

unbundling of water use approvals and entitlements;

unbundling of water access entitlements and delivery entitlements;

removing restrictions on who can participate in water trade;


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Executive summary xvi

phasing out exit fees in the longer term; decoupling exit fees from entitlements in the medium term;

reviewing constraints on trade in seasonal allocations; and

benchmarking processes and costs for transfer of water accessentitlements4.

The Australian Competition and Consumer Commission (ACCC) has also

developed recommendations for reform to distribution charges and exit fees

over a nine year timeframe5. A report on Water Tradingreleased by the

Department of Prime Minister and Cabinet in June 20066 further develops

these themes. In addition, the National Water Commission (NWC) has beenassessing the States' progress on removing barriers to trade.

It is important for MPEPP industries that governments give early

consideration to these recommendations in high priority catchments.

This report finds that the establishment of well structured water markets is

critical in some regions if the future water requirements of MPEPP industries

are to be met in an efficient way. Water markets provide a mechanism for

water to be traded to its highest value use. Therefore, they also provide the

opportunity for existing entitlement owners to receive a return from sale of

entitlements and allocations they no longer require either in the long or shortterm.

Groundwater access

This report finds that the different arrangements for water access entitlements

and water allocation between groundwater and surface water increases

investment risk for MPEPP industries. The general immaturity of reform with

respect to groundwater access arrangements, relative to surface water, increases

risks and uncertainty for current and future users of groundwater.

Governments have recognised that integrated management of surface andgroundwater requires improvements in groundwater monitoring and

accounting, and that this will take time to achieve. In particular, the impact of

better understood. Resolution of these issues should be given a higher priority.

4 Productivity Commission, Rural Water Use and the Environment: The Role of Market Mechanisms,Research Report, Melbourne, 11 August 2006.

5 ACCC,A regime for the calculation of exit, access and termination fees charged by irrigation water deliverybusinesses in the Southern Murray-Darling Basin, 6 November 2006.

6 Price Waterhouse Coopers,National Water Initiative -Water Trading Study, for Department of

Prime Minister and Cabinet, Final Report, June 2006.


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Executive summary xvii

Joint work with government, the NWC and the MPEPP industries is likely tobe an important factor in delivering the NWI reform agenda. It should be

noted that these industries have a broad base of technical expertise in

groundwater management and its integration with other water resources (such

as surface water).

Discharge water

One case study analysed in this project demonstrated that the terms for sale of

discharge water to third parties under petroleum legislation are not consistent

with the principles of the NWI. It seems that trading principles and

mechanisms applying to discharge water may be undeveloped compared withthose applying to surface and groundwater. This policy gap may:

impede the further use and value of discharge water;

constrain trade of discharge water produced from petroleum productionand dewatering of mines; and

impede efficient decision-making in the use or sale of discharge water andreturn flows.

The case study suggests that a better understanding of the impact of mine

dewatering on groundwater resources is required. This should ensure more

informed management of potential impacts on groundwater and surface waterassociated with discharges from mining and petroleum operations.

Consistent trading principles

The case studies indicate that trading principles do not always apply

consistently across different sources of water. For example, from the

perspective of the MPEPP industries, consideration should be given to:

extending the development of water markets in a consistent way togroundwater, discharge water, waste water and treated effluent;

harmonising legislative and administrative arrangements so that tradingrules are consistent; and

removing or reducing any unnecessary impediments to the commercialarrangements for the sale of treated or untreated discharge water frommining and petroleum operations.

Clarification of property rights

While the NWI is making progress in separating water access entitlements

from land, this report finds that continued clarification of property rights to

water access entitlements and allocations is required.


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Executive summary xviii

For example, the case study of the Cadia Valley mine indicates that lack of

its additional supply ha

decisions. Such uncertainty could impede further mining development.

The case studies suggest that clear policies and practices for defining the

resource share of the consumptive pool are required. This is of particular

importance for defining resource shares in water storages developed by

MPEPP industry operations, as well as for the consumptive pool in general.

Paragraph 34 of the NWI provides scope to deal with market inefficiencies

that have the potential to affect mining and petroleum industries. The optionto activate paragraph 34 should be retained for as long as the policies and

principles of the NWI are not fully implemented.

Market interventions

MPEPP industry projects often attract community opposition to their use of

water resources. The case studies describe specific examples of community

pressure to limit the access to water supplies. In response to these concerns,

governments at all levels may seek to intervene in water supply arrangements

for MPEPP industry projects. In such circumstances, administrative decision

processes may override market driven outcomes.

Examples cited in this report include:

the Eastern Water Recycling Proposal being developed by the VictorianGovernment which, if implemented, would change water supplyarrangements for the Latrobe generators;

local appeals by community groups against the purchase of waterentitlements by the Cadia project, which have delayed decisions on furtherinvestment; and

the Yabulu minerals processing plant has had to explore options for taking

recycled town water in place of its current lower-cost groundwater supply.

It is recognised that for some time to come, there are likely to be significant

externalities in water markets that may justify intervention by governments in

the distribution of water between consumptive uses. However, there is a risk

that regulatory and market failure will produce non-optimal outcomes from

such interventions. For example, pricing policies that do not reflect full

opportunity costs may impede the efficiency of government investment in

regional schemes which are intended to support communities and local

development.


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Executive summary xix

There is a corresponding need to address regulatory and market failure and,where possible, to move towards improving market mechanisms to the point

where constraints and interventions can be progressively minimised.

As far as possible, in the absence of market based mechanisms, the use of

administrative intervention in the allocation of all water resources, whether

surface, groundwater, re-use or effluent water, should be based on a cost

benefit analysis that identifies the full opportunity costs of different water

supply options.

Regional projects to interconnect catchments and facilitate transfers in critical

areas funded by governments (for example, through the AustralianGovernment Water Fund), should aim to adopt best practice pricing policies.

Such policies should facilitate efficient investment decisions by market

participants.

Our analysis suggests that better community understanding of water resource

management issues, as they affect different users and the operation of water

markets, would assist in reducing the pressures on governments to intervene.

The challenge for government is to build community confidence in the

operation of well designed water markets as the most efficient means of

distributing water entitlements and allocations between users from within a

sustainable consumptive pool.

Implications of future water demand and supply

The study explored the water access implications for new investment by the

MPEPP industries in particular catchments (see Section 5).

A total of 252 potential new MPEPP industry projects over the next ten years

were identified across Australia. The majority of the new projects are

concentrated in Queensland, NSW and Western Australia. The study found

that water availability is constrained in some cases, such as in the Hunter

catchment and the Murray-Darling Basin. In these cases the option to trade inwater access entitlements will be critical if new investment is to proceed.

At the upper limit of estimates, these potential projects could increase total

water demand by the MPEPP industries from the current level of 830

GL/anum in 2006, to around 1260 GL/annum in 2015 an increase of

around 50 per cent. This change in demand would increase water consumption

by MPEPP industries from around four per cent of total water consumption to

approximately six per cent.

For some catchments, meeting future water requirements entirely through

water trading may be of concern to local communities. There will be a


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Executive summary xx

continued need for all major users to engage with communities to address theirconcerns.

Four catchments or regions with future MPEPP industry developments have

been analysed in this study (see Section 6):

the Hunter catchment (New South Wales);

the Fitzroy Basin catchment (Queensland);

the Moreton catchment (Queensland); and

the Goldfields region (Western Australia).

An embargo on applications for new commercial water licences has been inplace for the Hunter Regulated River catchment since 1982. The Moreton

catchment is located in a region where there is considerable pressure on water

supplies and there is consideration of future transfers between catchments.

In general, water supplies in the Goldfields region in Western Australia and the

Fitzroy Basin catchment in Queensland are not constrained in the short term.

However, there is evidence in the Goldfields region that mining and processing

could be constrained in the future by the cost of accessing good quality water

and there remain concerns over the supply of potable water. There may also be

localised constraints on supply and competition for access to water of suitable

quality between users.

In some cases, serious consideration is being given to seawater desalination as a

-

processing sites, including in the Goldfields. For example, United Utilities is

looking to expand potable supply to the region from a desalination plant in

Esperance. Again, the report highlights that best practice pricing policies are

important for efficient investment decisions in such circumstances.

Uncertainties associated with drought periods are critical factors in

consideration of water availability for MPEPP industries. Management of risk

associated with periods of water shortage is important in all catchments,regardless of the degree to which they are fully allocated. As water markets are

reformed, options such as desalination for non-consumptive uses in some

MPEPP industries may become more attractive. However this will depend on

consideration of the opportunity costs of all supply options.

Inefficiencies in water markets are likely to transfer to electricity markets. The

value of water to power stations in periods of high pool prices is likely to be

very high. Any inefficiency in water markets is likely to be particularly critical in

drought periods.


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Executive summary xxi

Economic implications

The potential economic benefits of the implementation of the NWI are mainly

related to the trading of water to its highest value use and the efficient use of

all sources of water, including discharge water.

There is currently insufficient data on the respective marginal values of

production for all water uses to provide an accurate estimate across all

industries. Some broad estimates were made, based on ACIL Tasman models

and information from industry. The estimates support a conclusion that the

current distribution of water between industries is unlikely to be optimal in

terms of economic efficiency.

The report finds that there is little information available to assess the economic

implications of reform for MPEPP industries. Most of the current general

equilibrium modelling focuses on irrigated agriculture, urban supplies and

environmental flows. Estimates were made of the increase in value added that

could accrue if the potential projects identified in each of the regions were to

proceed. For example, new projects in the Hunter catchment could add

between $215 million and $410 million to GDP annually by 20107. However,

with an embargo on applications for new commercial licences in this

catchment, it is likely that most projects would need to meet their water

requirements through the purchase of access entitlements from current usersas well as from improvements in water use efficiency. This finding underlines

the importance of developing an efficient trading market, as provided for

under the NWI, to ensure that efficient decisions are made in regard to these

investments.

The findings of this report suggest that, to realise the potential economic

benefits of longer term investment, MPEPP industries will need policy changes

to create an environment that allows for efficient investment decisions on a

range of water supply options. These changes will include facilitation of intra-

and inter-regional trade, surface and groundwater access entitlements, purchase

of treated effluent, re-use and/or sale of discharge water and investment inwater use efficiency measures.

The reforms to be introduced over the next ten years offer the potential to

achieve such an environment. Some of the important reforms may take some

time to implement and consideration should be given to assigning a higher

priority to those of greatest importance to MPEPP industries.

7 These estimates are for direct value added associated with the trading of water betweenirrigated agriculture and the MPEPP industries in the Hunter catchment and do not take

account of indirect effects such as output changes in other sectors of the economy.


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Executive summary xxii

Recommendations

The following recommendations are drawn from the priority issues identified

in the study. They are consistent with the NWI principles, reinforcing

implementation in some cases and suggesting some areas for higher priority.

The matters for further consideration are:

1. Given the importance of trade in entitlements and allocations to theseindustries, development of water markets should be given high priority.Key objectives include:

clear specification of entitlements and trading rules with minimal

impediments to trading; secure and enforceable entitlements that are transferable and divisible;

separation of water access entitlements from water allocation anddistribution;

trading rules that maximise participation; and

rationalisation or removal of impediments to the efficient operation oftrading markets, such as exit fees and restrictions on marketparticipants.

2. Development of markets for water trading should be made consistentbetween surface water, groundwater, waste water and treated effluent:

governments should harmonise legislation and administrativearrangements so that trading in all sources of water is consistent; and

impediments to the sale of treated and untreated effluent from minesand water produced from mine dewatering should be addressed.

3. Legislative amendments and water resource plans should be extended to allwater sources, including surface and groundwater in priority regions.

4. Petroleum and minerals industry legislation should be amended, wherenecessary, to bring it into line with the principles of the NWI, particularlythe principles for trading set out in Schedule G of the NWI.

5. The full development of market instruments and products will beimportant for risk management in all sectors but particularly for theMPEPP industries:

This should be taken into account in reform of water markets.

6. Development of consistent, and possibly joint, management of accessarrangements for surface water and groundwater should be given higherpriority.

7. To the greatest extent possible, governments should aim to allow welldefined water markets to resolve the distribution of available waterresources between users. While market mechanisms are being developed,


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Executive summary xxiii

governments should ensure that interventions in the market are based on afull and rigorous cost benefit analysis of available options:

projects assisted by governments (for example, through the AustralianGovernment Water Fund) should adopt best practice pricing policies asformulated in response to jurisdictions' NWI commitments.

8. Improving community understanding of the advantages of well designedwater markets, as the most efficient means of distributing waterentitlements and allocations between users from within a sustainableconsumptive pool, should be given higher priority. In addition, there willbe a continued need for all major water users to engage with communitiesto address any areas of concern, and where practical, accelerate efforts to

improve the efficiency of water use and management of all water resources.

9. The option to activate paragraph 34 of the NWI should be retained as anavenue for addressing issues of specific concern to mining and petroleumindustries that will remain for as long as the reforms under the NWI arenot fully implemented.

10.High priority catchments should be identified for early attention in relationto the above recommendations. Additional work should be undertaken ona national basis to identify catchments where a major increase in waterdemand is expected.


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Introduction 1

1 Introduction

ACIL Tasman was commissioned by the Department of Industry, Tourism

and Resources (DITR) to undertake a study of the implications of recent water

initiatives for the mining, petroleum, energy, pulp and paper industries (the

MPEPP industries). The study was conducted under the guidance of a Steering

Committee comprising DITR, the National Water Commission (NWC), the

Minerals Council of Australia (MCA), the Australian Petroleum Production

and Exploration Association (APPEA), the National Generators Forum

(NGF) and the Australian Plantation Products and Paper Industry Council

(A3P).

The overall objectives of the project were to:

provide an analysis of how the current Australian water managementarrangements and water market applies to the MPEPP industries,particularly in the non-urban sector, including an examination of access,pricing and cost recovery issues;

analyse future water demand arising from forecast investment in theMPEPP industries and assess the implications for water competitionbetween sectors;

assess the manner in which access to water (often of poorer quality andremotely located) for the MPEPP industries is provided in watermanagement plans; and

investigate issues associated with the operation of the National WaterInitiative (NWI) that are of particular relevance to the mining andpetroleum sectors (i.e. paragraph 34 of the NWI).

1.1 Report structure

This report begins with an introduction to water in the MPEPP industries in

Section 1. Section 2 contains an overview of current water access arrangementsin Australia and Section 3 provides an outline of key elements of the NWI.

Section 4 contains case studies of existing operations in the MPEPP industries,

to characterise water supply arrangements and any associated issues or

problems. Section 5 analyses the likely future investment in each of the

industries and projections of future water demand by these industries. Section

6 contains case study analyses of catchments or water management areas,

where significant future investment in the MPEPP industries is scheduled or

where water allocation issues are illustrated. Section 7 includes an indicative

analysis of the economic implications of the NWI at the catchment and


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Introduction 2

business level. A summary of findings and recommendations is provided inSection 8.

1.2 Background

Over the last decade or so, there has been a significant shift toward managing

is now a greate

economic growth and ecological sustainability are pursued in a balanced way.

To this end, the water industry has been a key target for significant reform, to

ensure its sustainability in the future.

The first major steps in the water reform process were the signing of the

Council of Australian Governments (COAG) Agreement on Water Resources

Policy (Water Reform Framework) in 1994, and later the Competition

Principles Agreement in 1995. The COAG framework set out a reform

process, which addressed the perceived economic and environmental

inefficiencies in the administration of water resources.

Water reform was subsumed within the National Competition Policy (NCP) to

provide clear and significant financial incentives for States and Territories to

implement these reforms.

In 2003, COAG announced its intention to extend the water reform agenda

and the Intergovernmental Agreement on the NWI was signed by the

Australian Government and the Governments of NSW, Queensland, Victoria,

South Australia, the Northern Territory and the ACT on 25 June 2004.

Tasmania signed the agreement in June 2005 and Western Australia in April

2006. The NWI establishes a framework for wide ranging reform in the

sustainabl

A central focus of the policy debate to date has been on the impact of reform

on the agricultural sector, particularly irrigated agriculture, environmental flowsand urban water use and re-use. However, the industries discussed in this

report are now coming into focus for policy makers.

The sponsorship of this study by the members of the Steering Committee

reflects the importance attributed by these sectors to the water reform process.


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Introduction 3

1.3 Water use and economic contribution

1.3.1 Water use

The Water Account Australia, issued by the Australian Bureau of Statistics

(ABS), provides data on water use in different industries8.

ABS released its report on water use in Australia for the year 2004-05 on 28

November 2006. This is the most recent comprehensive national water

consumption data from ABS. The previous water account released covered

2000-01. The breakdown between different categories of consumptive water

use is summarised in Table 2.

Table 2 Statistics of water use in Australia 2000-01 and 2004-05

Sector Sub sector 2000-01 net water

consumption

2004-05 net

consumption

GL GL

Agriculture 14,989

Services to agriculture;hunting and trapping

4 4

Forestry and Fishing 40 48

Mining Coal Mining 99 118

Oil and gas extraction 9 12

Metal ore mining 173 230

Other mining 39 54

Total 321 413

Wood and paperproducts

105 99

Manufacturing 444 490

Electricity and gas 255 271

Water supply,sewerage and drainageservices

2,165 2,083

Other industries 1,102 1,059

Household 2,278 2,108

Total 21,703 18,767

Note: Does not take account of un-metered water consumption

Data source: Water Account Australia 2000-01 and 2004-05

Key findings from the Water Account Australia 2004-05 include:

total water consumption was 18,767 GL in 200405, a decrease of 14 percent from 21,703 GL in 200001;

8 Water Account for Australia, Australian Bureau of Statistics (2004-2005).


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Introduction 4

the agriculture industry consumed the largest volume of water with 12,191GL, representing 65 per cent of total water consumption in Australia in200405. Consumption by this sector has fallen from 14,989 GL in 200001 when it represented 69 percent of the total;

water consumption by the minerals industry was 413,266 ML in 200405,two per cent of total water consumption in Australia. Water consumptionby the minerals industry has increased from 320,848 ML in 2000-01 reflecting the mineral commodities boom and increased productionassociated with existing and new projects;

the State or Territory with the highest total water consumption within themining industry was Western Australia (182,552 ML), followed by

Queensland (83,057 ML), New South Wales (62,868 ML) and Victoria(31,736 ML).

total water consumption by electricity generators was 271,220 ML, or oneper cent of total water consumption in Australia;

total water consumption by the wood and paper products industry (ABSconsumption; and

in 2004-05, 1,053 GL of water was temporarily traded and 247,000 ML ofwater was traded permanently.

Usage of water by industry for Australia and each State/Territory is illustratedin Figure 1. In all cases except the Northern Territory (34 per cent), Western

Australia (38 per cent) and the ACT (two per cent), the agriculture, forestry

and fishing industries accounted for more than 60 percent of the total water

use for 2004-05 (the majority being for agricultural usage).


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Introduction 5

Figure 1 Water use (per cent industry) by industry and State/Territory: 2004-05

NSW water use 2004-05

Household

10%

Electricity

and gas

1%

Other

18%

Mining

including oil

and gas

extraction

1% Wood and

paper

products

0%

Agriculture

forestry and

fishing

70%

Vic water use 2004-05

Household

8%

Electricity

and gas

2%

Other

23%

Mining

including oil

and gas

extraction

1%Wood and

paper

products

1%Agriculture

forestry and

fishing

65%

Qld water use 2004-05

Agriculture

forestry and

fishing

67%

Wood and

paper

products

0%

Mining

including oil

and gas

extraction

2%

Other

18%

Electricity and

gas

2%

Household

11%

SA water use 2004-05

Household

11%

Electricity and

gas

0%

Other

13%

Mining

including oil

and gas

extraction

1%

Wood and

paper

products

0%

Agriculture

forestry and

fishing

75%

WA water use 2004-05

Household

24%

Electricity and

gas

1%Other

25%

Mining

including oil

and gas

extraction

12%

Wood and

paper

products

0%

Agriculture

forestry and

fishing

38%

Tas water use 2004-05

Household

16%

Electricity and

gas

0%

Other

12%

Mining

including oil

and gas

extraction

4% Wood and

paper

products

8%Agriculture

forestry and

fishing

60%

NT water use 2004-05

Household

22%

Electricity

and gas

1%

Other

31%

Mining

including oil

and gas

extraction

12%Wood and

paper

products

0%

Agriculture

forestry and

fishing

34%

ACT water use 2004-05

Household

56%

Electricity

and gas

0%

Other

42%

Miningincluding oil

and gas

extraction

0%

Wood and

paper

products

0%

Agriculture

forestry and

fishing

2%

Data source: ABS, Water Account Australia 2004-05


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Introduction 6

1.3.2 Economic contribution by sector

In 2004-05, the MPEPP industries (including wood products) contributed

$62.6 billion (chain volume measures, reference year 2004-05) in gross value

(GDP)9. Mining, including oil and gas extraction, accounted for five per cent of

GDP in that year. Other manufacturing (including textiles, machinery and

equipment manufacture) contributed 11 per cent of GDP, while the

agriculture, forestry and fishing sector contributed three per cent (see Figure 2).

Figure 2 Gross value added by industry type for 2000-01 and 2004-05

Australia value added 2000-01

Other

manufacturing

12%

Wood and paper

1%

Other (inc

services)

75%

Mining (includingoil and gas

extraction)

6%

Electricity and gas

2%Agriculture,

forestry & fishing

4%

Australia value added 2004-05

Agriculture,

forestry & fishing

3%

Electricity and gas

2%

Mining (includingoil and gas

extraction)

5%

Other (inc

services)

78%

Wood and paper

1%

Other

manufacturing

11%

Note: Figuresrelate to ABS industry definitions using the Australian and New Zealand Industrial Classification (ANZIC), unless stated otherwise. These

definitions may differ to those used by industry.Data source: ABS, 5206.0 Australian National Accounts.

Using ABS figures, the gross value added per ML of water used by MPEPP

industry sectors is illustrated in Figure 310. These figures show a marked

difference in the average value added per ML of water used between the

MPEPP industries and other water users. The average value added per ML in

agriculture is significantly less that in the MPEPP industries. The value added

for coal mining, for example, is $86,000 per ML of water used and for wood

and paper and electricity and gas it is $71,000 and $52,000 respectively. Metal

ore mining is $50,000 per ML. The value added per unit of water consumption

for the oil and petroleum industry, according to ABS data, exceeds $1,000,000ML. This high figure reflects the high value added contribution of the industry

and that water is only a minor input to production relative to other industries.

9 The value added, GDP and water consumption figures quoted in this report relate to ABSindustry definitions using the Australian and New Zealand Industrial Classification (ANZIC),unless stated otherwise. These definitions may differ to those used by industry.

10Value added is the value of gross returns to an industry less the value of inputs. In practicethe value added by an industry is the value of salaries and wages plus depreciation and interest

expenses plus certain taxes and subsidies.


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Introduction 7

Value added per ML of water consumed in agriculture varies from $162/MLfor rice production, to $498/ML for cotton production and $3,867/ML for

vegetables.

Other estimates by ABS suggest that the value of water in irrigated agriculture

may be as high as $15,000/ML, which is greater than the estimates shown in

Figure 3.

Recent research by CSIRO confirms the large differences between the average

values of water across different industries11. According to the CSIRO research,

the average economic value of water used by the minerals industry is

$80,000/ML, compared to average values of $40,000/ML for other industry

and $5,000/ML for the agricultural industry.

Some analysts have concluded that the extent of these differences between the

average value added across industries is so large as to suggest that the water

may not be allocated to its highest value use in all cases12. This issue is explored

in more detail in the catchment case studies.

11 www.csiro.au/files/CSIROau/Publications/ProcessFeb07.pdf

12 Australian Treasury, , Roberts, Mitchell and

Douglass, 2006

Figure 3 Estimates ofgross value added per ML of water consumption by industry sector, 2004-05

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

$/ML

Gross value added/ML 717 3,867 376 2,744 1,833 498 162 255 86,127 49,906 26,175 70,759 1,200,151 51,552

Dairy

farmingVegetables Sugar Fruit Grapes Cotton Rice

Livestock,

pasture

and grains

Coal miningMetal ore

mining

Other

mining

Wood and

paper

Oil and gas

extraction

Electricity

and gas

supply

1,200,000

1,1190,00

Data source: ABS ABS4610.0 Water Account Australia 2004-05, ABS 5206.0 Australian National Accounts


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Introduction 8

1.4 Characteristics of water use in the MPEPPindustries

Water access arrangements for the MPEPP industries, and associated issues

that arise, will be illustrated by five case studies in Section 4. However, there is

a key set of water use issues that are fairly generic, both within and across the

industries in question. For example, water is an integral part of the continued

operation of all of the MPEPP industries. As such, many projects have

invested in purpose-built water supply infrastructure such as pipelines and

storage facilities. In many cases projects draw on multiple water sources,

including surface and groundwater and recycling and re-use measures.

Some issues not covered in the case study analysis are also introduced and

described here. The information here is largely drawn from policy position

papers and submissions prepared by MCA, APPEA, NGF and A3P.

1.4.1 Minerals industry

A number of key themes emerge about water and the minerals industry,

including:

water is a critical input into all aspects of the sector, particularly forminerals processing, which is the major component of water use withinmost operations;

the minerals industry operates in a wide range of environments, fromtropical rainforest to desert. As a result, there is a wide range of approachesto water management within the industry, reflecting both climaticconditions and community expectations;

groundwater is a particularly important area of use, being the major sourceof water for the industry. It presents complex policy issues, because, inaddition to extractive use, some operations need to dewater aquifers toaccess the resource;

an essential part of many minerals operations is the pumping ofgroundwater out of the mine to allow ore extraction, known as minedewatering;

the industry is often able to make use of water that is unavailable orunsuitable for other users, due to remote location, poor quality or otherfactors;

the industry is responsible for sourcing its own water in many cases, and isalso responsible for building and maintaining a significant amount ofinfrastructure. Arrangements for third party access to this infrastructure is avery significant issue for the industry;


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Introduction 9

the industry is recognised by governments as an efficient and high-valueuser of water resources. It has an ongoing program of engagement andjoint work with all levels of government, focused on the sustainabledevelopment of water resources; and

the industry recognises the rights and interests of Indigenous Australianson lands and waters, and supports the provision of continued access towaters for cultural purposes.

Mines often need to use the full gamut of water supply options available to

secure a reliable water supply. This may include dams, weirs and pipelines,

using waste water from surrounding towns (by pipeline), recycling process

water from the mine, collecting rainfall run-off and using water released fromthe mine. In these circumstances, water quality is often a key issue,

necessitating either significant treatment (and associated concentrated brine

stream management) and/or using lower grade water, sometimes both.

Once mining is completed, one closure option is to allow mine pits (known as

final voids) to fill with water to create an artificial lake. While this approach can

economic, social and environmental needs of the broader landscape and local

communities must be considered, and this technique may not be appropriate in

some cases.

In October 2006, Strategic Water Management in the Minerals Industrya Framework

was released, following joint development by industry and government13. The

Framework represents a jointly agreed view between the MCA and the

Ministerial Council on Mineral and Petroleum Resources, on approaches to the

effective management of water in minerals operations and the intersection

between industry, community and environmental needs.

A key concept running through the Framework is water as a community

resource, advocating a life cycle approach to management within sites to

ensure that water is put to its most appropriate use. Case studies throughout

the Framework provide practical examples of these principles in action withinthe minerals industry.

The development of the Framework will be complemented by a range of

existing and planned initiatives, such asEnduring Value-The Australian Minerals

Industry Framework for Sustainable Developmentand the upcomingLeading Practice

Water Managementbooklet. The latter is due to be produced during 2007 under

the Leading Practice Sustainable Development for the Minerals Industry

Program.

13Strategic Water Management in the Minerals Industry A Framework can be found at:

http://www.minerals.org.au/environment/water


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Introduction 10

The Framework identifies a range of critical issues for the minerals industry inthe evolving national water debate, including:

the increasing competition for limited resources;

protection of water quality;

rising water prices;

changing community expectations;

impacts of climate change; and

shifting policy context.

The uncertainty of the availability of water for existing and future projects andrising water prices pose serious risks to the industry.

1.4.2 Petroleum

Petroleum operators require access to water for operations, although the

quantities required may be relatively small and only for limited duration, such

as during the drilling stage in exploration. Despite not being a key input to

petroleum production, water is still a critical factor. For example, water is

essential to maintaining petroleum reservoir pressures, which allow petroleum

to be brought to the surface.

In the petroleum production stage, water from the geological formation being

targeted is actually released, along with the petroleum product. This water,

known as formation water in the case of oil, is bound up within a geological

unit and it is generally accepted that it is not connected to, and is therefore

distinct from, groundwater aquifers. Most petroleum legislation has provisions

for dealing with water produced from petroleum operations, mostly related to

environmental aspects of the water discharged, but there are some limitations

on the sale of this water in some States.

Typically the water released from petroleum production is re-used within the

petroleum operation, returned to the ground or released into nearbywaterways. It is worth noting that the quantity and quality of this discharge is

already strictly controlled by environmental regulations. In some cases the

water is used by local farmers for stock water. The petroleum industry is

interested in exploring opportunities for the sale of this water.

1.4.3 Electricity generation

Management of cooling water and water for steam generation in power

stations is a major design task. The power industry has been working to

significantly improve water use and re-use, treatment and disposal. With strong


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Introduction 11

growth in electricity demand, particularly for intermediate and peak powerstations, there is expected to be significant new power station development.

While much of this development will be gas peaking power plants, which use

little water, any further development of coal stations will create more pressure

on water for cooling purposes.

Generation plants, such as Millmerran and the soon to be commissioned

Kogan Creek in Queensland, will employ relatively high capital cost air cooled

condensers. This technology means that water is only required for steam

generation and not for cooling purposes. This enables water consumption to

be as much as 90 per cent lower than in similar sized, wet (water) cooled,

power stations. While these generators have allowed vastly more efficient usageof water, it has increased power plant costs and greenhouse gas emissions. The

majority of electricity generators in the National Electricity Market (NEM) are

likely to continue to rely on water cooling and to compete for water access in

the foreseeable future.

Water issues for electricity generators include the following:

opening up trade in existing water entitlements to provide more equitableaccess to water supply options;

the greater use of market interventions that require the use of recycled

water (largely urban treated sewage and stormwater) in thermal plants; administrative interventions that require the use of dry cooling for new

plants, impacting on thermal efficiency (and associated carbon emissions)in most situations; and

the need to address community concerns over the use of indirect re-use ofwater as a supply option for urban use which is leading governments toconsider substituting treated effluent for existing supplies in powerstations.

In response to some of these issues, the National Generators Forum (NGF)

Environment Working Group has released policy statements on water and

recycled water14.

1.4.4 Pulp and paper manufacture

Water is a critical input into both pulp and paper manufacture, as process

water, cooling water and for steam generation.

The pulp and paper industry in Australia has already achieved significant

reductions in water usage through large capital investments in re-use and

14http://www.ngf.com.au/html//index.php?option=com_remository&Itemid=32&func=fileinfo&id=90


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Introduction 12

recycling technologies. In 200304 the industry used an average of 26.7kL/tonne of production. This is a 65 per cent reduction in water use per tonne

with water use by the industry elsewhere in the world. The use of fresh water

by European papermakers averages 40 kL/tonne of product and the Forest

Products Association of Canada reports a water use figure of 67 kL/tonne of

production.

The scale of pulp and paper mills can, in some cases, make them a substantial

water user in their local area. Accordingly, any increase or decrease in water use

will have significant impacts on the supply infrastructure and the water

available for other uses, including environmental flows. There are strongfinancial and community pressures to increase the level of water recycling

within pulp and paper mills. All mills recycle water within the process to some

extent. The risks to the industry from poor management of water use in paper

processing include: higher production costs through inefficient use of water,

increased costs per unit of water, and community opposition to access to water

if the industry is perceived as being an inefficient user.


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Australian water market arrangements 13

2 Australian water marketarrangements

This section provides an overview of water access in Australia and a discussion

of the current water access arrangements in each State.

2.1 Overview

In almost all cases, ownership of water is vested in the Crown and the

development, management and allocation of water resources is subject torelevant State and Territory legislation. In some cases, such as in Western

Australia, ownership of unconfined surface water (overland flows) is vested in

the landowner. In general, large water users are granted the right to extract

water from a surface or groundwater resource under a water access

entitlement. The amount of water that such a user can take is subject to an

annual, or seasonal, water allocation, which is determined by the overall

availability of water from the hydrological system and varies with rainfall and

temperature.

Some MPEPP industries may acquire a property right to water under a supply

contract with a water authority. In this case the water authorities own the wateraccess entitlements transferring the property right to the user under contract.

Terminology for entitlements and allocations varies between the States. The

NWI established the definitions of water access entitlement and water

allocation. That terminology has been adopted in this report. Some key

definitions are provided in Box 1.


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Box 1 Definitions

Consumptive use use of water for private benefit consumptive purposes,

including irrigation, industry, urban and, also, stock and domestic use.

Consumptive poolthe amount of water resource that can be made available for

consumptive use in a given water system under the rules of the relevant water plan.

Water access entitlementa perpetual or ongoing entitlement to exclusive access to

a share of water from a specified consumptive pool, as defined in the relevant water

plan.

Water allocationthe specific volume of water allocated to water access

entitlements in a given season, defined according to rules established in the relevantwater plan.

Reliability the frequency with which water allocated under a water access

entitlement is

Data source: National Water Initiative

In general water access entitlements are classified into three categories:

high reliability entitlements;

general reliability entitlements; and volumetric entitlements on unregulated streams15.

High reliability entitlements generally receive the full allocation of their

entitlement except in drought conditions. General reliability entitlements

receive allocations subject to water availability. The extent to which water

allocations meet entitlement levels varies between States. In the current

drought conditions, allocations under general reliability entitlements are

severely constrained in some States. Landholders generally have the right to a

proportion of run off from their land.

Water legislation in each State and Territory establishes the arrangements foraccess to water entitlements. In some jurisdictions mining and petroleum

legislation may determine access arrangements for some projects.

The administration of water management functions varies between States. In

general, State agencies will be responsible for administering water access

entitlements, determining water allocations and managing bulk water supplies.

15 An unregulated stream is one with no control structures such as dams or weirs.


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Delivery of water to end users is generally managed by urban and rural waterauthorities or larger organisations such as SunWater in Queensland or State

Water in New South Wales (NSW).

The Murray-Darling Basin is subject to an agreement between governments

which provides the process and substance for the integrated management of

the Murray-Darling Basin16. The Murray-Darling Basin Ministerial Council

provides policy oversight for the management of water, land and

environmental resources in the Basin. The Murray-Darling Basin Commission

is the executive arm of the Ministerial Council which is responsible for

managing the River Murray and the Menindee Lakes system of the lower

Darling River.

The extent to which water trading has been established in each jurisdiction is

highly varied. For example, water trading in the Murray-Darling Basin began in

the early 1980s and has expanded considerably. However, in many catchments

water markets are yet to be established.

While most urban entitlements and allocations cannot be traded yet, a number

of urban water supply utilities are either considering, or already do, purchase

water from rural areas. Perth has purchased water on a temporary basis from

Harvey Water and South Australian Water has purchased entitlements to water

previously used for dairying in the Lower Murray swamps of South Australia.Governments are now considering investments in infrastructure to transfer

water from more remote catchments to meet the needs of major urban and

metropolitan centres. The infrastructure necessary to connect Melbourne to

the Southern Connected River Murray system, via the Goulburn River, is

comparable with that connecting Adelaide to the River Murray.

Some river basins are over-allocated and governments have set limits to bring

extraction back to sustainable levels. In 1995 an interim cap on withdrawals

was set for the Murray-Darling Basin in recognition of the limitations on

capacity in the basin and the need to maintain environmental flows. A

permanent cap was agreed in 1997.

2.2 Queensland

Legislative framework and planning

under the Water Act 2000 and the

Water Regulation 2002.

16http://www.mdbc.gov.au/about/murraydarling_basin_ministerial_council , accessed

September 2006.


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compilation of Water Resource Plans (WRPs) and Resource Operation Plans

(ROPs). A WRP sets out the environmental flow and water allocation

objectives for each catchment. A corresponding ROP details how water

resources will be managed to meet these objectives and defines the water

sharing and water trading rules for the catchment. Fully tradeable water

allocations are only created on commencement of an ROP. However, it is

possible to transfer interim water allocations to other land, in certain areas and

under certain circumstances as specified in the Water Regulation 2002.

Figure 4 shows the progress in Queensland towards meeting water planning

objectives. Where the water planning process has been completed (catchmentsshaded bright green), a market for water trading has been established. The

status of all water planning activities is outlined at

http://www.nrw.qld.gov.au/wrp/timetable.html.

Figure 4 Progress of water planning activities in Queensland at mid 2006

Data source: Queensland DNRW

Highly developed groundwater areas in Queensland are managed under WRPs

and ROPs. Those groundwater management units in Queensland that do not

have a WRP and ROP are managed through a formal management

arrangement between the Department of Natural Resources and Water


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(DNRW), local councils and minerals interests. Some areas, without welldeveloped groundwater resources, such as the Fitzroy Basin catchment, have a

WRP and ROP in place, but these plans do not provide for the management

of, or trade in, groundwater.

Water entitlements and administration

In Queensland, water is supplied to households and businesses in towns and

cities by local government authorities. Water is supplied to irrigators and other

users by water supply authorities and water service providers17. Most of the

storages which supply irrigation businesses are owned and operated by

SunWater, a government owned corporation and the largest single waterservice provider in Queensland. There are also a number of private water

storages, large and small, in cropping, grazing and mining. The Queensland

Government is responsible for the allocation and sustainable management of

water and oversees water industry regulation.

In Queensland, water access arrangements include:

water licences;

interim water allocations; and

water allocations.

In the past, water was allocated through water licences that were tied to a land

title and could only be traded seasonally or temporarily through leasing. In

most cases, only landholders could own water licences.

Under the current planning process, interim water access entitlements (referred

to as interim water allocations) are issued to landholders for a volumetric share

of water supplied by the operator of a water supply scheme.

These interim water allocations are tied to the land, and are converted to full

tradeable water access entitlements (referred to as water allocations) on the

completion of the water planning process in the catchment in which theinterim allocation is held.

Under these new arrangements the water allocations are assets separate from

the land and have their own title which is registered on the Queensland Water

Allocations Register. They can be traded permanently or seasonally,

independent of landownership.

17 For a complete list and description of Queensland water supply authorities see:http://www.nrw.qld.gov.au/compliance/wic/water_authorities.html , accessed August2006. For a list of water service providers see

http://www.nrw.qld.gov.au/compliance/wic/service_provider_list.html


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The allocation of water under water licences and water allocations is theresponsibility of DNRW. The transfer of water allocations involving changes

to resource elements of the allocation, is managed by DNRW (by contrast, the

transfer in ownership of water allocations is managed through a statutory water

allocations register). DNRW establishes water sharing rules to determine how

much water is available for extraction under water entitlements. There are high

and medium priority entitlements. In a water supply shortfall, medium priority

entitlements are curtailed before high priority entitlements.

Pricing

The Queensland Government has adopted the policy principles set out in theNWI which requires a move to full cost recovery where practical. Government

policy is to apply lower bound pricing for rural irrigation water with the

prospect of moving to upper bound pricing in the longer term18.

Queensland Government pricing policy covers both:

water supply and delivery; and

resource management and planning.

Water supply and delivery charges are currently levied on water users by water

service providers. These charges vary across the range of water service

providers and for rural or urban water supply. These charges are, in the main,

set on a per ML basis.

Table 3 shows the charges levied by Sun Water for rural irrigation water in

certain catchments.

18lower bound pricingthe level at which to be viable, a water business should recover, atleast, the operational, maintenance and administrative costs, externalities, taxes or TERs(not including income tax), the interest cost on debt, dividends (if any) and make provisionsfor future asset refurbishment/replacement. Dividends should be set at a level that reflectscommercial realities and stimulates a competitive market outcome;

upper bound pricingthe level at which, to avoid monopoly rents, a water businessshould not recover more than the operational, maintenance and administrative costs,externalities, taxes or tax equivalent regimes (TERs), provision for the cost of assetconsumption and cost of capital, the latter being calculated using a weighted average cost of

capital (NWI, page 29).


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Table 3 SunWater supply and delivery charges for 2006/07

Catchment Charge

$/ML

Burdekin 14-41

Burnett 12-24

Fitzroy Basin Catchment 12-60

Moreton 27-35

Condamine-Balonne 16-42

Warrego/Paroo/Bullo/Nebine 19

Pioneer 11-54

Logan 38

Mary 17-58

Border 28

Data source: SunWater

The charges levied on water customers around the State vary considerably,

depending on, for example, the amount of water storage and supply

infrastructure in place to deliver water. For example, industrial customers of

NQ Water pay up to $1,000/ML for the delivery of water and the urban

councils of Townsville and Thuringowa pay up to $750/ML19.

New water charges to recover resource management and planning co

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