Australia emphasizes efficiencies amid lower prices, official says

March 1, 2016
The unprecedented plunge in global crude oil prices poses significant challenges for producers that previously benefited from using technologies considered unconventional, an Australian government official said. “What’s really interesting is the decline in exploration expenditures—around 20% in 2015 and 20% so far in 2016,” said Josh Frydenburg, Australia’s minister for resources, energy, and northern Australia.

The unprecedented plunge in global crude oil prices poses significant challenges for producers that previously benefited from using technologies considered unconventional, an Australian government official said. “What’s really interesting is the decline in exploration expenditures—around 20% in 2015 and 20% so far in 2016,” said Josh Frydenburg, Australia’s minister for resources, energy, and northern Australia.

“This means that down the track, there won’t be the supply to meet the increase in demand,” he said during a Feb. 19 discussion at the Brookings Institution. “What we are thinking as a country is how we attract the level of investment which will see us position Australia as a valuable supplier, not just with the existing projects, but with the ones going forward. And that’s about decreasing the cost of doing business.”

Paraphrasing Mark Twain, Frydenburg said that rumors of Australian energy and minerals’ death are greatly over-exaggerated. “International demand for Australian resources remains strong,” he maintained. “Our companies remain resilient and the depreciation of our dollar has acted as an automatic stabilizer increasing our competitiveness. The reality is that over the decades ahead, hundreds of billions of dollars will flow to Australia as both demand and supply increase.”

He said he expects there to be significant demand for the country’s energy and resources going forward. “It’s the consequence of simple arithmetic: Between 2010 and 2030, the world’s population will increase by 23%, its urban population by 42%, and its class by more than 100%—all of which fuels demands for hard commodities,” Frydenburg said. “The biggest movements are occurring in emerging economies right on our doorstep, putting Australia in an ideal position to capitalize.”

The demand dynamic emphasizes the need for the country to focus on what it can control, which includes decreasing the cost of doing business as a means of boosting the country’s competitive position, streamlining regulatory processes, making labor markets more flexible and productive, and enhancing infrastructure projects, he said.

Major LNG suppliers

Frydenburg said he finds what has happened with LNG in the US fascinating because import terminals were being built only a few years ago. “Just a couple of days ago, you had your first LNG export cargo going to Brazil out of Louisiana,” he said. “And so 90% of all the new production capacity in LNG over the next 5 years will come out of two countries, Australia and the US. But you are absolutely vital in this space as a supplier of energy going forward.”

There are many questions about what’s happening in shale oil and gas production because $30/bbl crude is putting heavy pressure on unconventional producers’ balance sheets, Frydenburg said. “I got the sense, when I was in Houston earlier this week, about how much money American banks in particular are lending to that sector,” he said.

“As covenants are being broken and loans are being called in, that’s going to have an impact on the ability of the sector to stay strong,” he predicted. “Some 400,000 b/d of production have been removed from the shale oil sector sense mid-2015 as a result of low prices.”

Saudi Arabia clearly was motivated to increase its crude production to drive higher-cost shale oil producers out of business, he suggested. “But as has been pointed out with shale gas, shale oil technology now is in existence,” Frydenburg said. “It was a leap to do it, but it’s there. So even though rigs might be dismantled and crews sent home, the technology exists so when prices actually go back up, shale oil and gas production will too.

“I’m starting to think there’s been a structural change now in the oil and gas markets as a result of what’s happened in the US, which is very significant,” he said. “The geopolitics of this is fascinating, because Iran has made it very clear that it doesn’t want to be part of any [Organization of Petroleum Exporting Countries] deal. So OPEC has lost the currency that it had, right? No doubt about that.”

Contact Nick Snow at [email protected].