A hydrocarbon future
Australia has experienced a shift in production of its hydrocarbons from oil to gas since oil production peaked in 2000. Gas production volumes are forecast to show consistent growth to 2030 as demand for LNG exports increases. While the oil and gas extraction industry (including exploration and additional services) was worth $28.3 billion in 2011, it contributed around 2 per cent to national output, with value-added of approximately $32 billion in 2012-13. By 2029-2030 the production (on the basis of current and forthcoming capacity) and prices should stabilise, and the economic contribution of the oil and gas industry is expected to account for 2.6 per cent of national output- an increase of over 0.5 percentage points in the industry’s current contribution to the national economy.
In dollar terms, the oil and gas extraction sector is projected to reach approximately $67 billion by 2029-2030. Factors such as continued product demand and improved recovery technology may push peak production to 2035 and beyond.
At present, approximately two-thirds of total world LNG liquefaction capacity currently under construction is located in Australia. Australia’s LNG export capacity is set to more than triple to reach 106.6 bcm/y before 2020, which would make the country the largest exporter of LNG in the world.
Underpinning the industry has been a long run of capital expenditure (the capex phase) on projects located mainly in northern Australia. As these facilities become operational, the industry will witness significant opex spending.
Australia has four operational LNG plants and a further six under construction, as the new LNG projects could boost condensate production by an estimated 200,000 bbl/d by 2020.
The current capex-intensive phase will reduce as facilities come online towards 2020. Continued investment in the Australian LNG sector faces increased international competition, decreasing oil prices, rapidly rising costs for new LNG projects and a sharp decline in production of oil and gas, which may threaten further investment in greenfield LNG projects over the next few years. However, brownfield project extensions would be more likely to proceed, ensuring project-related opportunities continue beyond 2017.
Every new facility effectively builds on the volume of operational infrastructure and therefore the opex value in the oil and gas industry. This trend is likely to continue as long as global demand for oil and gas continues to rise, meaning the opex market (including maintenance and inspection services) will develop as more key projects start up and new reserves come on-stream.
Opex-intensive phases provide a relatively stable financial environment given that facilities undergo regular shutdowns and maintenance due to the need to maintain operational efficiency and abide by statutory regulatory requirements. Forecasting opex is often difficult as it is dependent on the final level of capex investment and timings of proposed projects. However, once facilities are underway, the experience of UK North Sea operators shows that aging infrastructure requires more maintenance, a factor that has seen a year-on-year increase in operating costs.
As well as being driven by capex (eg, additional infrastructure), existing opex grows independently, and whereas capex is susceptible to oil prices, opex typically provides a more stable environment in which to operate. As a result, companies are likely to keep existing infrastructure in operation during periods of low oil price as they attempt to maximise returns from their sunk costs.
The lifespan of an oil and gas installation is not definitive—there are many around the world that are operating well beyond their initially engineered lifespan. With increased recovery rates from reservoirs, improved technology and higher demand for hydrocarbons, this trend is likely to continue internationally as well as in Australia.
The hydrocarbon industry moving from the capex to the opex phase is an exciting time for Australia. It augurs well for profitable opportunities as the country cements its position as one of the world’s major energy suppliers.
Written by: Howard Woolcott Director of Calash Australia Pty Ltd.
Calash is a leading provider of commercial due diligence and advisory services in the energy sector on a global basis with offices in Aberdeen, London and Sydney. Visit www.calash.com for more information.
The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.