APPEA: Costs compound industry challenges in Australia

May 12, 2006
The Australian petroleum industry must overcome a number of challenges if it is to prosper and arrest its country's rapid decline in oil production over the next few years, the new head of the Australian Petroleum Production and Exploration Association told the group's annual conference.

Rick Wilkinson
OGJ Correspondent

GOLD COAST, QUEENSLAND, May 12 -- The Australian petroleum industry must overcome a number of challenges if it is to prosper and arrest its country's rapid decline in oil production over the next few years, the new head of the Australian Petroleum Production and Exploration Association told the group's annual conference.

Belinda Robinson, APPEA executive director, said high on the list of challenges is a rapid rise in costs—up to 40% in the past year in categories such as drilling, labor, equipment, and fabrication. The increases have been aggravated by limited availability of equipment, especially rigs.

Other speakers at the conference discussed the future course of the Australian gas industry, remaining potential of the country's oldest producing area, vulnerability of oil and gas infrastructure to terrorist threat, and international issues such as transparency and the long-term outlook for global oil supply.

Australian activity
Robinson pointed to several signs of diminishing oil and gas activity in Australia.

Australian drilling totaled only 98 wells on and offshore in 2005, down from 130 in 2004. An increasing share of spending by Australian companies occurs outside Australia. And exploration in Australia focuses on proven areas, not in the vast sedimentary basins offering potential for discovery of a new oil province.

In addition, while the country is finding much less oil than it is producing, discoveries are shrinking; there was no find in 2005 larger than 10 million bbl.

Robinson said there is no doubt that Australia's attraction for oil exploration and production investment is declining in comparison with other parts of the world. And growth of LNG output doesn't offset declining oil production.

These are matters of crucial national interest, not just industry issues, she said, yet high oil and gas prices might make Australian governments complacent.

APPEA has established a Government-Industry Leadership Group to oversee development of a joint industry strategy. The aim is to bring industry and governments closer together and to set common objectives and aligning messages.

Robinson said Australia remains underexplored.

"This sets Australia apart as one of the few politically stable regions with significant exploration and production potential," she said.

"Australia is also very well placed to meet the huge demand for energy in the Asia-Pacific region. Over the next 10 years some of Asia-Pacific's traditional LNG suppliers, including Indonesia, will wind down as reserves expire. Traditional markets like Japan are thinking long-term and will continue to expand, as will the demand in other parts of the region."

Robinson said new projects might add 30-50 million tonnes/year to Australian LNG output by 2015. They would primarily target markets in Japan, South Korea, China, the US, and India.

Gas options
Given Australia's vast natural gas resources, emerging opportunities for gas-based manufacturing must be viewed as a national priority, said Clare Martin, Northern Territory chief minister.

Gas reserves in Australia exceed 150 tcf and have potential value of $500-750 billion (Aus.), she said.

Martin asked whether long-term economic development would be served better by a gas industry dedicated to LNG exports or one with a broader mix of LNG and gas-based manufacturing.

She said she does not hold to the prevailing national view supporting a hands-off approach to economic development of the energy industry. This approach relies on the taxation system to guide development.

"I think we need to balance interests and consider the needs of the future," Martin said. "We need to look at our policy settings and encourage more diverse economic development. This does not involve taking from one industry to build another. It is more about creating incentives and a framework that will deliver diversity in the industry."

She said Australia has the opportunity to develop projects based on ammonia, methanol, olefins, and their derivatives.

"Trinadad and Tobago, Qatar, Indonesia, Malaysia, and Thailand have successfully attracted downstream gas industries," she noted.

She pointed to the potential for a methanol plant complementing the new ConocoPhillips LNG facility in Darwin as an example for Australia. The methanol and other industries can deliver up to 4.5 times the capital investment and 10 times the employment per unit of energy when compared to LNG.

"I am aware that these industries have historically expected much lower gas prices than are currently available," she said. "But it is a reasonable assumption that these expectations will adjust over time."

Citing a Wood Mackenzie for an Australian shortfall of about 400,000 b/d in petroleum liquids within a few years, Martin said conversion of 1.5 tcf/year of gas to synthetic fuels could fill the gap.

Bass Strait potential
ExxonMobil Australia Chairman Mark Nolan told APPEA that the venerable Bass Strait, although its oil fields are 90% depleted, still has a long-term future. Current production from the region is 70,000 b/d.

ExxonMobil added 10,000 b/d to Bass Strait production last year through infill work on existing fields. And gas reserves of about 7 tcf remain in the offshore Gippsland basin under Bass Strait.

"Gas is the fastest-growing sector," Nolan said, "but to ensure this gas can be developed effectively and compete on an equal basis with other fuels such as coal, there needs to be an adjustment of taxes. At the moment there are distortions that see offshore gas taxed at more than six times the rate applied to coal.

Citing a new study for ExxonMobil Australia by independent economic modeling consultant Econtech, Nolan said the Bass Strait region has accounted for 63% of Australia's oil production and 28% of its gas production since production began in the 1960s.

Terrorist vulnerability
Australia's offshore rigs and platforms are vulnerable to terrorist assault because of lapses in the country's defenses, John Oldfield of Ball Solutions, Canberra, warned APPEA.

Current patrols of Australia's oil and gas assets are equivalent to having 50 police officers covering the country's entire landmass, Oldfield said, noting that an obvious method of attack would be small fishing boats laden with explosives. He said information-sharing is insufficient, and there is no coordinating body to deal with a threat.

The federal government has committed $140 million (Aus.) toward improving security of Australia's offshore energy assets and introduced laws requiring operators to implement security plans. But current measures would do little to improve or fill the surveillance gap, Oldfield said.

A trial of unmanned spy planes, which was part of the 2005 budget commitment, has been delayed until at least the third quarter because the planes chosen were not capable of maritime surveillance, he noted.

Push for transparency
Transparency of financial transactions needs to become the norm for managers in the petroleum business throughout the world, according to Ben Mellor, head of the International Secretariat for the Extractive Industries Transparency Initiative (EITI).

EITI, launched by UK Prime Minister Tony Blair in 2002 at the World Summit for Sustainable Development in Johannesburg, promotes disclosure of payments by oil, gas, and mining companies to host-country governments and of revenue received by expatriate companies.

Mellor said transparency efforts need to occur in more countries and become more effective in countries already committed to EITI. While EITI is being implemented in 20 countries, all 53 countries that the International Monetary Fund identifies as obtaining more than 25% of their revenue from oil, gas, or minerals would benefit from increased transparency of revenue management, he said.

"At its heart, EITI is about disproving the accusation that the extractive industries are an inevitable 'curse' to the economic performance, governance and stability of developing countries," Mellor said. "Oil and mineral wealth, if managed transparently, has the potential to play a major role in the sustainable economic development of countries. However, too often we have seen weak governance of these revenues leading to poverty, corruption, and conflict."

World supply
International Energy Agency Executive Director Claude Mandil said strong world oil prices and limited supply will remain for the next 4-5 years.

The major question is whether the Organization of Petroleum Exporting Countries can increase production enough to supply a market forecast to grow by 1.5-2 million b/d/year, Mandil said. OPEC's spare production capacity has shrunk from 3-4 million b/d in 2003 to less than 2 million b/d, about 2% of consumption.

In its business-as-usual scenario, IEA projects that global demand will rise from 82 million b/d at present to 99 million b/d in 2015, with most of the growth in developing Asia.

Mandil believes that fossil fuels will continue to dominate energy supply, especially if carbon-capture projects are successful. However, nuclear and renewable energy are essential to a sustainable energy mix.

Mandil said Australia is expected to play an increasing role in the future energy supply, especially LNG. From its current position of 6th largest LNG producer, Australia is likely to move into third place behind Qatar and Nigeria by 2010.

Because it no long is a net exporter of crude, he noted, Australia under IEA rules must establish a strategic oil reserve able to cover 90 days of net imports.