Australia: The next era of energy

Bullish on LNG

With a worldwide push towards low-carbon economies underway, LNG has steadily crept into the global energy mix, acting as a prominent and cost-effective source for diversifying and securing energy supplies, particularly for gas-hungry nations across the Far East. According to the International Gas Union, natural gas now accounts for around 1/4 of global energy demand, of which 10 percent is supplied in the form of LNG. Meanwhile LNG supply has proliferated faster than any other source of gas-averaging 7 percent per annum growth since the turn of the millennium. Australia, for it's part, having shrewdly invested USD 200 billion - a full 12 percent of the nation's GDP-in a plethora of large-scale LNG projects, looks well set to reap a windfall from the anticipated uptick in demand.

With an expected capacity exceeding 85 mtpa after the completion of these projects, the rise in local natural gas production places the nation on a steadfast trajectory to overtake Qatar as the world's largest LNG exporter by 2020-a truly impressive endeavor. "In fact, we're the only country in the world to be producing LNG from conventional wells, unconventional wells and of course floating platforms when the Prelude facility is up and running," exclaims the recently appointed Minister of Energy and Resources, the honorable Josh Frydenberg. "Australians should be proud of the sheer enormity of these projects. For example Gorgon, at USD 54 billion, constitutes the largest single private sector investment ever in Australia. It also enjoys a 99 percent Australian workforce, and you're seeing this sort of phenomenon replicated around the country. Meanwhile Ichthys project in Darwin has deployed some 750,000 tons of steel to construct its gas pipeline, which is testament to the scale of what's going on when you consider that the Eiffel Tower required only 7,500 tons," he enthuses.

Both economically and politically, Australia appears smartly positioned to gain enormously from the export income that is accrued from LNG. "We will be tripling our production from now until 2020 and by then it is expected to be worth more than AUD 40 (USD 28.9) billion in annual export income. Meanwhile we are also providing critical energy supply to a demand-heavy region, which affords us ever-greater strategic strength. By 2020, Australia will be supplying around 40 percent of Japan's gas needs, 40 percent of China's, and 25 percent of Korea's," he predicts.

However, with receding global gas prices, a contraction in demand from key Asian consumers, and increasing competition from US shale producers, there seems to be a never-ending myriad of factors conspiring to undermine the country's grand ambitions. "Current expansion efforts to widen and deepen the Panama Canal will likely further boost American LNG exports to Asia, as larger ships will be able to harness this lower cost delivery path to their advantage," analyzes Greg Vesey, CEO of LNG Limited (LNGL) and that's not to forget the strong immediate competition already posed. "North America already constitutes an agile, business friendly environment highly responsive to shifts in market demand and strategically situated close to many major LNG off-take markets," he warns.

Despite these manifold challenges, the Premier of Western Australia, the honorable Colin Barnett remains optimistic of his nation's ability to capitalize upon the LNG fever. "We're talking about a growth industry for the next 20 years bearing in mind Australia's offering is robust for customers, producers, and investors alike: a significant undeveloped resource base, political stability, sound rule of law, an established business culture underpinned by integrity and trust, and close proximity to major Asian consumer markets," he declares.

While recognizing that the commodity price fade out may slow down the penetration of gas in various markets, Barnett is nonetheless confident that the fundamentals for long-term gas demand will prove enduring, especially in large consuming turbo economies such as India and China. "The pride and political will, particularly in these emerging nations, will become increasingly important as environment-related, health-driven reforms edge into the global spotlight. Therefore, though the inherent cyclicality of price may indeed prove troublesome to the most fragile actors, LNG actually offers genuine supply security, especially in coastal countries, while serving as a pivotal medium in transitioning to a low-carbon economy," he confidently assesses.

After the Party: What next for EPC?

Attracted in by Australia's unprecedented pipeline of supersize LNG projects over the last decade and the country's stable governance, most of the major multinational engineering, procurement and construction (EPC) players have long considered it worth their while to establish a strong footprint Down Under to fulfill the enormous construction needs that the Australian LNG revolution generated.

That's not, of course, to imply that the Australian market has not posed its own unique challenges requiring distinctive workaround solutions. "The primary hurdle has always been the comparatively high costs associated with Australia's operating landscape," recalls Peter Bennett, the recently appointed CEO of Perth-based Clough, while noting that the prevailing low oil and gas prices currently hampering the industry only serve to further exacerbate this impediment. When grappling with this sort of external environment, it thus "makes a lot of sense to orientate towards solution-based rather than process-based services which entails listening intently to the real needs of your customers, and being bold enough to consider fresh, novel, outside-the-box responses that may provide for more efficient and productive outcomes," counsels Scott Cummins, CEO of Melbourne-based McConnell Dowell.

Some Australian LNG projects straddling 'Class-A nature reserves' have also presented an additional layer of technical and regulatory challenges for the engineering companies servicing these mega-projects. "Environmental considerations and requirements on Chevron's Gorgon project were probably among the highest and most stringent ever implemented on any project of this type," expounds Brian Kelly, regional leader Asia Pacific at SNC Lavalin. Nevertheless, most EPC actors agree that Australia still possesses the right foundations to remain attractive over the long run - with the slight twist being that now much of the major infrastructural apparatus has already been completed. "Will we ever see a recurrence of those fabulously heady investment levels witnessed over the past decade? I doubt it in the foreseeable future," muses Bennett.

The pending completion of all major LNG construction projects indeed forces locally implanted EPC players to adapt their strategies to a 'new normal,' where fresh projects will continue to arise, but most certainly in a smaller and scarcer fashion than during the 'big boom' period of mega-constructions experienced over the last decade. The "gold-rush of yesteryear has now passed" as one commentator bluntly puts it. Many of the main EPC players will now be looking to leverage through operations and maintenance (O&M) contracts the experience they accumulated during the assembly phase. "As the capital-intensive build side of things inevitably enters slow down, we'll be focusing our efforts on redeploying our resources elsewhere…right now, we are witnessing a decisive shift in demand from construction, installation and commissioning to O&M projects so are naturally seeking to bolster our capabilities in areas such as assisting clients to mitigate and avoid shutdowns," reasons Mitchell Buswell, regional manager of Brunel, which delivers specialist manpower to EPC operations.

"We've also been anticipating the end of the boom for some time," agrees Eric Jas, managing director of engineering consultancy, Atteris. "The scope of our work has gradually shifted from primarily servicing mega greenfield projects, where we designed new-for-new infrastructure, to engineering support for existing infrastructure and also to smaller brownfield sites," he recalls. "Businesses that came strictly for the boom shall either wind up, or exit the country, leaving behind the better, more competent, wiser professionals that can service the hydrocarbons sector more specifically by targeting asset integrity management and smaller tieback projects," he calculates.

When it comes to fully capitalizing on Australia-bred expertise to benefit from new opportunities, many players are now squarely swivelling their gaze abroad. "We firmly believe our successful [Australian] track-record will significantly increase the likelihood of being involved in other major LNG developments across the Asia-Pacific region, while this expertise can now also be appropriately mobilized across other geographies displaying similar challenges such as Canada or West-Africa," attests SNC Lavalin's Kelly.

Following the money, even the local, homegrown EPC players are now ramping up their overseas footprints. "Our next growth markets will be found internationally... some aspects of our strategy will consist of organic growth and deploying resources from Australia to the US, while Africa represents another fast emerging strategic market where we forecast a lot of potential," explains Clough's Peter Bennett.

As the golden age of big-ticket Australian infrastructure construction enters the twilight zone, giving rise to the new phase of O&M opportunities, the modus operandi of EPC companies is also undergoing profound transformation. "One of the key components of this new era will be renewed attention to collaboration. We're talking about the smooth operation of highly complex, multifaceted, big money projects. The industry simply cannot afford anymore to have the sorts of high-profile and immensely costly blowouts that we have sometimes witnessed in the past," analyses Cummins. More than ever, EPC players are being called upon to provide an increased level of certainty to their clients, which can only be attained through a genuine pooling of minds and resources. This new industry paradigm indeed implies that entities seeking to hoover up the next batch of contracts will have to show themselves adept at assuming a completely new array of responsibilities. "We are presently very focused on increasing our presence and our connectivity at the front-end of our business with all our customers… The sooner that we can apply the knowledge from our innovation, as well as fresh ingenuity from increased collaboration into a project development scenario, the greater the impact we can potentially make," concludes Cummins.

Big Continent, Junior Ambitions

All too often, junior oil and gas explorers are considered the minnows of the hydrocarbons ecosystem: small speculative and opportunistic start-ups and undercapitalized risk-takers aspiring to tap into big rewards. Australian juniors, however, have proven to be anything but small. Many have been paving the way with big ambitions, rolling out shrewd and successful business strategies despite times of great oil price uncertainty, and projecting a positive brand image based on a potent mix of audacity, technical prowess and agility. "The pedigree of Australian junior E&P ventures is simply second to none," assesses one commentator.

Some of the most performing Australian small and mid cap explorers share a common thread as demonstrated by their notable ability to engage in expeditions in some of the most remote and inhospitable places on earth. Whether it is the nation's well-ingrained heritage in mining or the unforgiving outback terrain that have given these feisty young players the gumption to tap into success not only domestically, but abroad as well, it is undeniable that many have progressed into a league of their own. "Australia constitutes a land of extremes of weather and distance... thus the characteristically Australian aptitude for solving stubborn problems is borne out of hands-on experience," reflects Todd Martin, general manager of the independent outfit, Ixom.

While the targeted regions of Australian junior players are diverse, in many ways their motives and attributes remain similar. Many Australian juniors seek to capitalize upon the opportunities of being listed on the Australian Stock Exchange (ASX) and leverage this to accrue stable shareholder support. When seeking sources of oil and gas to expand shareholder value, regardless of where in the world exploration is taking place, the drivers ultimately remain the same. For Adrian Cook, managing director of Carnarvon, project selection is determined by the presence of a number of factors. "Essentially we gravitate towards places where there are adequate hydrocarbon volumes to attain our financial aspirations, effective governance, attractive fiscal regimes, a high deal frequency and tempo and the requisite oil and gas services ready in place to enable ultimate project realization," he reveals.

The success of Australian juniors is not created in a vacuum, and many are discovering that there is strong interplay between the unique expertise and technology being developed throughout Australia, and contemporary market dynamics on which to capitalize. Carnarvon's own strategy, for example is grounded upon 3 core pillars, namely: "early positioning into new untested resources, applying latest generation technology to discovered resources, and improving cost structures to enhance project economics."

When working outside of Australia, however, sometimes it is not just the remote and difficult environment that poses a challenge. As Matthew Allen, CEO of Otto Energy points out, navigating the business climate of a foreign site, such as working with American counterparts in the Gulf of Mexico, requires its own type of skills and strategy. Despite the Gulf of Mexico being "a highly interesting place to do business," notes Allen, "a number of foreign entities have tried to do business there and have spectacularly failed." As the US is a mature oil industry where landowners have the rights to title for their crude, business operations are very different to Australia where, as Allen believes, there is an increased "focus on engineering, geoscience and expertise." "In the US," he contrasts, "land men are just as important as the technical skills used to operate a business. Finding a partner that has a good mix of both technical capability, and the ability to manage and grow a business is thus very important - and this is not something that can be done from Perth. It is vital to go out and meet partners on the ground, in places in the region, such as Houston, and create a business this way."

Imparting wisdom for other juniors, Allen believes that "it is a trap for junior companies to become too attached to their assets, and become weighed down by them." To refrain from being blindsided from other assets and opportunities that may be available, Allen prescribes cycling in and out of assets as an integral strategy by which all juniors should abide. One of the key elements of flexibility in this regard is that juniors in Australia can offer a highly liquid investment with pure play leverage. For Australian juniors, being listed on the ASX provides many positive opportunities to attract further investment. Even in bearish scenarios, 50 cents or 10 cents a barrel when multiplied by the resource potential is still several times many of these entities' market capitalization.

Operating as a junior still poses many risks, with exploration more often than not equating to a trial and effort process. The skill and expertise of Australian juniors, however, in deploying state-of-the-art seismic scanning and surveying technology to lessen the risks of a gamble associated with exploratory drilling is in also notable. In some instances, accepting failure - or at least being able to judge when the potential for success is limited - and moving on to new opportunities is a key factor that allows for certain Australian independents to attain productive outcomes for their teams and respective shareholders. As David Wall of 88 Energy proffers regarding the company's strategy for their flagship Icewine #1 project based in Alaska, it was designed for one purpose, "and that was to tell us if we were going to fail, and if so, to fail as quickly as possible."

"As opposed to some of the larger companies that might undertake an extended multi-well drilling program before realizing feasibility, we juniors must adopt a more agile mentality in order to limit liabilities and sustain operations," he continues. Whereas a "fail fast" philosophy may at first sound counterproductive, the ability to prepare for both successes and missteps allows for companies like his to work as efficiently, and cost-effectively as possible and even turn potential setbacks into advantages.

Counter-Cyclicality in the "New Normal"

"The oil industry has changed for good." This, at least, is the perspective of many an analyst when contemplating an oil price stubbornly languishing below USD 50 per barrel. The price of oil has, of course, dropped many a time in the past, but current market dynamics and geopolitical tendencies suggest a full rebound will not be forthcoming any time soon. This harsh reality poses significant challenges for an Australian market addicted to what John Griffiths, CEO of Gas Energy Australia refers to as "gold plating of infrastructure investments" where "contractors are guaranteed a rate of return just for undertaking a particular project regardless of cost inputs." Moreover it completely flips mega-project initiatives on their heads, built under the assumption of a stable USD 80 per barrel or higher market price. Despite this, many of Australia's leading energy sector protagonists - whether the junior explorers, oilfield service providers or EPC outfits - have proven unexpectedly resilient, in rendering their market strategies 'fit for forty'.

In some instances, E&P players are even choosing to take advantage of the current market dynamics as the basis for new prospects, as Canarvon's Adrian Cook notes, believing, "that current distressed market conditions offer the most advantageous window in which to accumulate quality opportunities. We definitely see it as a window of opportunity and have been building and diversifying our portfolio during this downturn." Rather than being pessimistic, a more proactive approach has been implemented to "identify what could be undervalued, quality projects and try to capitalize on such opportunities."

"When life gives you lemons...," as the saying goes, the moral is always to make the most out of what opportunities you can. This has been very much the outlook of Matthew Allen of Otto Energy, whose team found that the "oil price shift had created a vacuum in the market, and an opportunity for companies that had capital." Otto took the initiative to sell their Filipino Galoc asset for USD 108 million, "which put us in a very positive position where we boasted a substantial balance sheet while many of our peers have been struggling with debt." This allowed for the company to refrain from any negative repercussions that come with difficult market conditions, and rather capitalize on endeavors with promising future potential.

One of the major repercussions of the low oil price environment has been the curtailment and shelving of many greenfield developments and corresponding refocusing on ongoing operations. Geeta Thakorlal, senior vice president Global offshore Consulting & ANZ, INTECSEA posits that, "operators all over the world are currently focused on developing their existing portfolios and, given the current pricing context, they indisputably need to assess development options with more scrutiny than ever." Whereas capital expenditures are generally being slashed across the board, "operators still need to generate new sources of production to fulfill their requirements, which on the other hand bolsters a certain upturn in consulting services," she reasons.

The 'new normal' of the current low oil price market is thus shaking up the foundations of effective strategies to succeed in the oil and gas industry. Thakorlal emphasizes this fact in regards to how her company addresses clients, pointing out that, "low prices force us to rule out most of the solutions we would have historically advised, and to look at new technologies and processes that would better fit with our clients' evolving needs." Part of this fact is that previously higher oil prices initiated a culture in the industry eager for constructing larger projects in much faster times, with operators, "looking for faster project delivery and wanting to get their return on investment much sooner." This is not to say that projects will no longer be able to enjoy the benefits of expedited construction phases, but rather, new strategizing will need to be considered.

One technique under increased consideration is the use of predictive analytics. "Many companies are now able to take data from their respective databases and utilize new algorithms to build insights to optimize their plants operations," notes Ken Fitzpatrick, chairman of National Energy Resources Australia (NERA). "We are also hearing of exemplary cases in process engineering, where data is synthesized and interpreted to prevent shutdowns and considerably enhance productivity and competitiveness," he adds.

Another trend is to devote more energy to Enhanced Oil Recovery (EOR). "There are a lot of people walking away from assets leaving more in the ground than they actually took out," proclaims Brad Lingo, managing director and CEO of EOR specialist, Elk Petroleum. In the current operating environment, assesses Lingo, "the companies that come to this revelation and understand what it takes to excel using this type of oil production are the ones creating value…The notion that EOR is only profitable with high oil prices is a complete misnomer." Considering that "the first budget to get cut by senior management is exploration, EOR is actually born out of low oil prices," he concludes.

Even tangentially linked service providers have suddenly found themselves compelled to rethink their business models. "Our challenge in these straitened times is to retain relevance… increasingly our most formidable competitor is not another recruitment company, but rather a client's internal talent pool and hiring process, which is a typical cost-saving measure. So it is vitally important to demonstrate that we make our clients' lives significantly easier than if they had to do it themselves," reasons Brunel's Mitchell Buswell.

Australia has not experienced the challenges associated with a dip in oil prices alone, and the squeeze has been felt throughout many regions across the globe. The lessons to take away from the Australian model, however, has been the pragmatism to step back and review new strategies and opportunities that exist due to this new market dynamic, and remain both creative and adaptive to best achieve success and results. "If you're hiding under a rock because the sky is falling, then you're not going to be able to see the silver lining," jokes 88 Energy's David Wall.

Perth: Energy Hub at the End of the World

Rome wasn't build in a day, neither was Houston. In little over a decade, however, Perth has successfully, albeit rather abruptly, transformed itself into a thriving melting pot of hydrocarbons expertise. Today Western Australia's capital city boasts over 85,000 industry professionals spread across some 700 odd petroleum-focused equipment, technology and services companies. Moreover, far from merely relying on the wealth of natural resources laden throughout the region's prolific basins, the local government has been busily investing in state-of-the-art technologies and niche industry segments that further distinguish the city from other international oil and gas hubs and foster a mutual growth perspective geared towards projecting Australian LNG and FLNG prowess abroad.

Nor should Western Australia's role in real value creation be downplayed. "As befitting of a region where resources underpin the economy, we boast not only an incredibly sophisticated indigenous supply chain, but also huge wherewithal to innovate… to the point where we now possess the capacity to support first-in-kind projects for LNG, floating LNG, carbon capture and storage," observes Malcolm Roberts, CEO of APPEA. Already numerous examples abound of locally derived and validated gas technologies and know-how being exported worldwide. Greg Vesey, CEO of LNG Limited (LNGL), for instance recounts how the company has been growing into a pioneering global player in mid-scale LNG infrastructure investment, thanks to its Optimized Single Mixed Refrigerant (OSMR®) liquefaction process technology.

"We're talking about a country that has built its innovation 'off the sheep's back,' so to speak, meaning that innovation is truly initiated and inspired by direct market trends and affiliated needs," expounds Todd Martin, general manager of Ixom. He explains how his company's "renowned Pure MEG hydrate inhibitor, was a completely in-house innovation, initially forged in response to Chevron's hydrates challenges encountered on the Gorgon project before being scaled up and applied to Wheatstone project as well."

"For anyone seeking to invest in oil and gas, Perth is the obvious place to be," proclaims the honorable Bill Marmion, Western Australia Minister for Finance, Mines and Petroleum. "We're busy cultivating a global investment, thought leadership and technology hub, delivering high-skilled job creation and bountiful growth opportunities within the context of a face-to-face business culture underpinned by integrity, cooperation and goodwill."

The publicly owned 'Australian Marine Complex and its Common-User Facility's' waterfront and heavy load-out capability fully embodies the Western-Australian avant-garde streak and willingness to embrace fresh thinking. With its attentiveness to enlightened collaboration, cost-efficiency and risk sharing, the complex has already attracted the active participation of iconic entities such as FMC Technology and OneSubsea. "Our Common User Facility (CUF) is absolutely unique in its operating model and offers an unparalleled degree of affordable access to high capability infrastructure with companies only paying for usage as and when they require the facility. This model enables even less capitalized companies to hold their own within highly competitive international markets," reveals Jonathan Smith, general manager of AMC Management.

While it already contributed more than USD 2.4 billion of projects since 2003 - many of which are unlikely to have materialized without this facility, AMC's ecosystem is also stimulated by a large number of its clients having participated in the construction of two of the most complex Australian LNG projects: Chevron's Gorgon and Wheatstone. Primarily focused on oil and gas players, this unique facility now strives to bolster a valuable cross-sector interplay by coopting companies from other cutting-edge industries. "Even if the final use may differ from one industry to another, quality standards are, for instance, similarly applied across the oil and gas subsea segment and the submarine and shipbuilding industries," notes Smith. "We believe that, in the future, the most high performance companies will be adopting a broader business approach that entails finding solutions and closing strategic partnerships beyond the boundaries of their own narrow industry…our collaborative approach is already pioneering and supporting this increasing trend," he affirms.

Indeed, according to Kym Bills, CEO of the Western Australian Energy Research Alliance (WA:ERA), one of the defining characteristics that marks Perth out from other oil and gas cities is its status as "a truly diversified resource capital where knowledge, learning and expertise from the worlds of minerals, mining and hydrocarbons can intersect and collide." Complementary to the promotion of common use, shared infrastructure, Bills is keen to mainstream the practice of joined-up action when it comes to conducting research. "One of our overriding goals is to grow pre-competitive areas where research costs can be shared and expertise pooled," he elaborates.

This collaborative approach takes on a crucial importance as Perth truly emerges as a laboratory for pioneering gas and marine technologies, such as Floating-LNG (FLNG), propelled by Shell's flagship Prelude project in the region. "Significant technology is imbedded within [Western-Australian] projects. Shell's Prelude FLNG facility is an absolute world's first: a massive floating facility with a complex and integrated operation," underscores Bernadette Cullinane, managing director energy Australia at Accenture. "Together with the operator, we believe that we can build up Western Australia's capacity to be the world class center in FLNG knowledge," agrees John O'Hare, acting director industry and innovation, Western Australia Department of Commerce. "We are mobilizing the Western Australian educational structures to enable the up-scaling Australian oil and gas professionals so that they possess skills that are internationally transferrable so in turn Perth can encompass centers of knowledge where companies can go to solve not just Australian problems, but problems that may be faced in other fields and jurisdictions. Aberdeen and Stavanger have both proven to be excellent examples of this expertise export model, and this is very much a pathway we seek to emulate here," he confides.

Lifting the lid on an Australian exploration pioneer

While the vitality of Australia's exploration remains fruitful, many junior E&P have turned their sights on plays beyond the borders of the land down under. 88 Energy, together with JV partner Burgundy Xploration, has over the last year accumulated a substantial position in Alaska's Central North Slope, grossing 272,422 acres, in pursuit of a liquids-rich exploration opportunity coined Project Icewine. The primary objective is an untested, unconventional liquids-rich shale play in a prolific source rock, the HRZ shale (Brookian Sequence), that co-sourced the largest oil field in North America; the giant Prudhoe Bay Oil Field Complex.

Since spudding the first well, Icewine #1, on October 22, 2015, the company has taken core which has demonstrated very favorable characteristics in early lab evaluation. "We've been on the lookout for three 'Achilles' heels:' thermal maturity, permeability, and frackability," reveals 88 Energy's managing director David Wall. "The results from evaluation to date have confirmed that all three variables have been mitigated, and we are now planning for the next well (Icewine#2H), which will be a horizontal with a multi stage fracture stimulation. There's still an ample amount of work to be done, but we've gone a long way in de-risking a play, which could host a huge recoverable resource."

Geological data aside, the play is also further supported by several external factors. On top of relative proximity to existing infrastructure, generous exploration incentives are provided by the State of Alaska with up to 85% of exploration expenditure in 2015 cash refundable, dropping to 75% until mid 2016 and thereafter 35%. From this point forward, the company intends to initiate seismic acquisition to de-risk any localized faults in the area, while also finalizing funding / partnering for the of Icewine #2H.