Australian Offshore Market Changing Under Pressure
“The Australian economy is in transition. This structural change is becoming more apparent and being more widely acknowledged,” said Rob Cole, chairman of the Australian Petroleum Production and Exploration Association (APPEA) at the organisation’s annual conference on April 7.
“Rising development costs today cast doubts on our industry’s ability to keep expanding within Australia. And we today also face lean and hungry competitors, who enjoy significant cost advantages over us.”
He pointed to the value of the industry. In 2011-12, Australian LNG cargoes earned almost $12 billion in export revenue and put $29.4 billion dollars into the Australian economy. In the same year, the oil and gas industry also paid more than $8 billion in tax. There is now $200 billion worth of new projects under construction, so the industry’s contribution will grow even further.
“Between now and 2018, Australia’s LNG production will more than triple. Growth in LNG production is expected to increase the value of Australia’s LNG exports from around $15 billion to almost $60 billion over the same period.”
But, Australia must improve its productivity and competitiveness, says Cole. There are many LNG projects on the world’s drawing boards, more than twice what is needed to meet the next decade’s forecast demand growth globally. “Our traditional LNG rivals remain strong, and new ones are emerging in North America and East Africa. These competitors can build LNG projects for 20-30 per cent less than Australian proponents.
In addition, the pricing dynamic is shifting. Given the current low United States domestic gas prices, the prospect of US LNG deliveries is resulting in calls for changes to traditional pricing mechanisms and for lower prices. “Against the backdrop of increased competition, it is clear that the Australian LNG industry must reduce costs and improve productivity if we are to maintain – let alone increase – our prosperity. Our challenge is to re-examine our operational practices and seek ways to cut costs and enhance productivity.”
Also speaking at the conference was Wood Mackenzie's vice president of exploration, Dr Andrew Latham. He drew attention to the affect global competition is having in the offshore exploration market in Australia. Companies are progressively prioritizing value over volume, which has led to a change in exploration focus, he said. Investors assessing Australian opportunities in their global portfolios are concerned about high discovery costs and the anticipation of declining returns. While frontier exploration may now attract less interest, Australia's established unconventional gas industry is likely to rank highly, when benchmarked against other unconventional plays outside North America.
Latham said, "We are seeing a trend of companies adjusting course, after several years focused on high impact frontier exploration. The market wants more cash returned to shareholders at a time when rising costs and taxes have eaten into companies' free cash flow. This renewed emphasis on value is leading many Independents and Majors to fine-tune their portfolios, creating a buyers' market for exploration assets."
Wood Mackenzie observes that in the new exploration environment, interest has waned in themes with high discovery costs and developments with long-term, uncertain returns. There is greater interest in short-term opportunities, oil-rich plays and conventional exploration in emerging and mature basins, which provide an earlier return on risk capital.
Australian exploration is currently dominated by long-term gas plays and unproven frontiers - two themes of declining interest for many companies. Those that continue to invest will be hoping to improve on the modest discovery sizes in recent years - typically less than 1 trillion cubic feet (tcf) - and the five to ten year lead time to commercialization. These factors have supressed full cycle returns from Australian exploration to less than 10 per cent, much less than recent global industry averages of 12-15 per cent.
"There is some positive news for Australia with regards to both conventional exploration and unconventional resources. Appraisal of promising offshore gas discoveries could push some projects towards development and fits with the new emphasis on accelerating returns. Progress with onshore unconventionals in the Cooper Basin is another area to watch." Latham explains, "Queensland's coal seam gas is the largest unconventional resource business outside North America. Australia's shale plays are still far from achieving such scale, but we forecast that 2014 will be the most active year for international shale drilling yet. Australia, having had some success in the Cooper basin, will rank third of 18 countries this year, behind only Argentina and China, with plans to drill 25 shale exploration wells.”
In conclusion Latham said, "We think this year marks a change in exploration tactics, with the industry moving towards more valuable plays with higher returns. Divestments of non-core assets will create a buyers' market and provide widespread opportunities. Although Australian basins are weighted towards themes of higher risk or longer timeframes, there are plenty of plays with quality exploration potential that remain appealing under the country's attractive and stable business environment."