Australian Oil & Gas investment: down and out down under?
The Australian government’s latest oil and gas exploration expenditure is grim reading for industry, showing that the number of exploration wells drilled offshore is at its lowest in nearly 20 years. Continued low oil prices explain some of the decline – but what else is stifling exploration investment offshore Australia and can the trend be reversed?
Over the last two years spending on onshore and offshore oil and gas exploration in Australia has fallen by almost two thirds, according to data released by the Australian Bureau of Statistics (ABS) in September. This means that exploration activity in Australia now stands at its lowest level since the first quarter of 2006.
Furthermore, shortly after the bureau released its report another blow was swiftly delivered to prospects of future growth. On 11 October, BP Developments Australia (BP) announced it would no longer continue with its exploration drilling programme in the Great Australian Bight offshore South Australia.
BP said the decision followed a “review and refresh of BP’s upstream strategy earlier this year” but the project has faced a lot of opposition from environmentalists and the public. It had also been further delayed by environmental regulator the National Offshore Petroleum Safety and Environmental Management Authority after the regulator requested further information from BP at the beginning of October.
The Australian Petroleum Production & Exploration Association (APPEA), the national body representing Australia’s oil and gas exploration and production industry, said the decision by BP was ‘disappointing’.
Just days before the group had warned that something must be done about Australia’s falling oil exploration activity.
APPEA chief executive Dr Malcolm Roberts said in a statement at the beginning of October: “The latest data continues a worrying trend that has been evident for many years, even when commodity prices were much higher. If the slide in exploration continues, Australian gas users will face more uncertainty about future supply and higher gas prices.”
The Australian Energy Update 2016 by the Office of the Chief Economist, also published at the beginning of October, noted that Australia had increased its reliance on oil imports, with imports now accounting for 85% of refinery input and 45% of refined products consumption being met by imports.
Why is exploration stalling?
Senior manager at consulting agency IHS, Frances Cullen, says spending offshore Australia has fallen in most part due to the low oil price, which has led to a decrease in CAPEX spending across the industry globally, but noted that there are other factors at play, too.
“Several of the large liquefied natural gas (LNG) projects that have dominated activity offshore in the last decade have been moving into the development phase in the last few years and this has had an impact on the levels of exploration and appraisal drilling because we see more activity on the development side – including the drilling of development wells,” says Cullen.
Indeed, the ABS report says higher export volumes of LNG will be driven by the addition of around 15 million tonnes (mt) of LNG export capacity, bringing total operational capacity to around 66mt by mid-2017. The value of Australian LNG exports is forecast to increase by 41% to $23bn in 2016-17.
According to the government, Australia has about 0.3% of the world’s oil reserves. Most of Australia’s known remaining oil resources are condensate and liquefied petroleum gas (LPG) associated with giant offshore gas fields in the Browse, Carnarvon and Bonaparte basins. Oil resources are also identified in the Perth, Canning, Amadeus, Cooper/Eromanga, Bowen/Surat, Otway, Bass and Gippsland basins.
Although BP has pulled out of the Great Australian Bight, Statoil, Chevron and Murphy Oil all have permits to explore the region, which Wood Mackenzie estimates could contain up to 1.9 billion barrels of oil equivalent — worth at least $87bn at current oil prices.
However, due to the decrease in oil prices, many companies have also applied to defer exploration well commitments, particularly offshore, where costs are typically higher. In August Cue Energy Resources became the latest company granted approval to defer its permit offshore Western Australia.
“These deferments are likely to also have had an impact on the drilling levels currently observed,” Cullen says.
Offshore Australia also has a number of frontier exploration regions, which are either unexplored or underexplored. “These frontier areas will take time for investment to return to as they are riskier places to invest and explore,” Cullen adds.
Australia is generally considered an expensive place to operate – for example, in 2013 it was revealed that oil rig operators in Australia are the highest paid in the world, according to a survey by recruitment firm Hays.
“Australia has been an expensive place to operate in the past and becoming more competitive globally would attract more investment,” Cullen agrees.
Can the industry be rescued?
The oil price is forecast to be a long way off the highs of 2014, if indeed it can ever reach them again. Considering this, and increased public hostility to oil exploration in areas such as the Great Australian Bight, how can Australia ramp up activity in its waters?
Cullen says, quite simply, the industry needs to become more cost-competitive and collaboration might help it achieve this goal.
“Collaboration may be likely to play a key role in future developments to cut costs for companies and to make the best use of the resources and projects, particularly offshore,” explains Cullen. “Various groups can play a role in this, and it may help attract future investment if successful project collaborations, which make better financial sense, can be demonstrated.”
The government can, no doubt, help the offshore industry to become more cost-effective. The government is set to examine the exploration and development framework for offshore exploration, especially in frontier areas, through the Offshore Resource Management Review, which APPEA says it welcomes.
However, more needs to be done.
“Governments can’t create more demand or higher prices, but governments can reduce regulatory and other costs, helping to make Australia a competitive place for investment,” says Roberts. “Now is a good time to redouble efforts to remove red tape, improve tax efficiency, remove regulations hampering better productivity and streamline project approval times to increase our competitiveness on the global stage. Where we have sound policies in place, policy stability is essential.”
One way to do this, Roberts suggests, would be to amend the Fair Work Act to reduce the cost of building major projects as “restrictive workplace laws entrench low productivity and lead to the continual escalation of costs”.
But Roberts is also keen to point out that Australia’s oil and gas industry is “definitely not declining” and that Australia is blessed with abundant natural resources within close reach of domestic and Asian energy markets.
“We will soon be the world’s largest LNG exporter,” says Roberts. “While the construction boom is tapering off, the $200bn investment in new LNG projects has created thousands of permanent, high wage, highly skilled jobs – the local supply chain supporting Australia’s LNG industry is now worth an estimated $29bn.”