In the 1960s, historian Donald Horne coined the phrase “the lucky country” to sum up Australia’s abundance of natural resources and the economic opportunities they provide. Many of our international clients still regard Australia as a relatively safe haven for resource sector investment, including in renewables. But the country does not always live up to this reputation.
True, Australia does not have the same type of political, operational and security issues as other mining jurisdictions. Yet investments in both traditional mining as well as new energy projects can still carry significant risks, which should be analysed and mitigated through due diligence and assessment.
Asian investment in energy transition projects
The development of Australia’s iron ore and liquefied natural gas (LNG) industries would not have happened without the investment and support of key Asian partners in the form of project financing and long-term sales agreements. That relationship continues today, as evidenced by USD 105bn in iron ore exported to China in the financial year 2022/23 and Japan’s sourcing one third of its energy mix from Australia.
And this relationship is taking on a new shape, with investments and partnerships growing at pace. The United States and the United Kingdom were the top two sources of foreign direct investment into Australia during 2023. They were closely followed by Japan, mainland China/Hong Kong, and Singapore. The Republic of Korea is also within the top 20. The investment flows from Asia reach across several sectors but there is a growing trend towards energy, critical minerals and the transition to renewables. In recent years Japanese giants like JERA, Sojitz, Mitsubishi and Mitsui have invested in traditional energy, but also hydrogen and ammonia projects and other forms of renewable energy and decarbonisation. According to international law firm Herbert Smith Freehills, 2023 saw a record number of M&A deals involving Japanese companies investing in Australia.
Greater skin in the game here can also help Japanese investors be heard on issues such as the domestic gas mechanism set up by the Australian Competition and Consumer Commission, which prioritises local supply at the expense of export contracts. The debate over domestic requirements versus foreign exports is exacerbated by a lack of new supply. Japan Inc. is concerned that Australia is walking away from gas, and with good reason: since 2020 Australia has provided 40% of Japan’s total LNG imports.
Asia backing big Australia: new challenges
Australia has a reputation for developing globally significant energy and resources projects at scale, and foreign investors are hoping that this will continue to be the case in the energy transition. While there is a long and trusted relationship between the major Asian economies and the Australian resource sector, the shift from customer to investor, joint venture partner and even operator or proponent of projects in the renewable energy and decarbonisation space presents new challenges.
Investors can find themselves caught in a confusing regulatory and policy landscape, requiring multiple, sometimes overlapping, approvals by environmental bodies and other authorities. And major capital projects in Australia are running high on costs, not least because of the tight labour market: the national unemployment figure is sitting at 4.1%.
Australia goes to the polls again in 2025, and a hung parliament is a real possibility. The mixture of minority parties, independents and the Greens may lead to greater regulatory oversight in the coming years.
Navigating the approvals maze and community stakeholders
Resource projects face two main obstacles in Australia: the approvals process and challenges from local communities. Industry bodies representing the traditional mining and energy sectors have recently ramped up criticism of Australian governments, both state and federal, over the length of time required for a project to be approved, citing out of date and often competing legislation. And despite agreements and/or approvals being in place, there have been instances in the last 12 months where environmental activists together with Indigenous groups have challenged and appealed mining and energy projects in the courts and before regulators. Two such cases are the Santos-led Barossa gas project in northern Australia and a gold mine in regional NSW being developed by Regis Resources.
Renewable projects face these challenges, too. The construction of a new port in the state of Victoria to receive wind turbines was rejected by the Commonwealth Environment minister on environmental grounds at the beginning of 2024. Planned floating wind developments offshore NSW have also been the subject of campaigns by environmental activists. Solar projects, carbon offsets and the installation of upgraded transmission lines, many of which need access to private land and pastoral leases, are also subject to increased community and stakeholder backlash.
The Foreign Investment Review Board (FIRB), a non-statutory body that advises the Australian Treasurer on the Foreign Acquisitions and Takeovers Act, is another potential stumbling block. In September 2024, Korean group Hanwha walked away from an offer to buy the Australian ship builder and defence contractor Austal. Unresolved regulatory issues in Australia and the United States were reportedly a key issue for the deal not progressing. In both 2023 and 2024, the Australian FIRB also rejected the acquisition of battery mineral projects by Chinese groups. Investors are increasingly vocal about the lengthy delays they are encountering with FIRB clearance, even in sectors perceived as relatively free of national interest considerations, such as agriculture and critical minerals.
Due diligence is critical
The lesson for foreign investors in Australian resource and energy transition projects is clear. Despite Australia’s reputation as a safe, politically stable investment destination where the rule of law applies, there are endemic challenges that demand close attention. Alongside the usual financial, commercial and reputational checks during due diligence and post investment, foreign investors in greenfield projects should develop an understanding of the path to final approval and the prospect for obtaining the support of key government, community, and Indigenous stakeholders.