Palliser Report - Good Oil Conference Fremantle, WA, September 2012.

The Palliser Report is a compilation of the discussions and views expressed at this year's Good Oil Conference ("GOC")in Fremantle and the observations of the Palliser Group.

1. Good Oil Conference:
The GOC has been held annually in Fremantle since 2002 and from my attendance since then, I have seen it evolve to an important energy conference for the SME ("small-medium enterprises") explorers and producers to "pitch" their business to investors in the energy market.

 It is well attended and operated efficiently. This year SMEs included some new companies from Canada as well as those listed on the AIM which presented on their global operations in the Caribbean, West Africa and Latin America.
The early conferences were often in the vanguard of industry trends as they showcased SME explorers and producers struggling for solvency and using it as a place for businesses to negotiate with each other on commercial transactions. They also indicated macro trends that directed the industry, e.g., the movement of Australian companies to USA to get deals particularly east of the Rockies, the sudden emergence of non-conventional gas with CSG for LNG in Queensland and the growing sophistication of companies to focus on cash flow and operations are to name but a few. The life cycle of the GOC has flattened and there is now sameness about the conferences that could harm its future attraction as the focus has turned away from B2B presentations and more to appeal to the financial community. Is that is what is intended? The majority of the company presentations are a recycling of plans from the past two to three years. It is time to refresh the GOC with its intended direction as well as variations in presentations and format so as to signal its future relevance to the industry.

2. Conference Themes:
The opening remarks of the GOC set the stage by highlighting the continued focus on China demand growth in the longer term notwithstanding the current cyclical trend downwards in their GDP growth and the consequential impact on global commodity demand and prices. The countervailing impacts on the global economy are the Asian Century for prosperity, the financial malaise in the European Union and the pending financial crisis in the USA with looming deficits. These were noted for their collective impact on providing a higher risk profile for investment decisions and funding for large resource projects.
In Australia, this has translated to a "capital strike" by investors who are staying on the side lines until the global position becomes clearer or their risk appetite changes.
In 2010, the change of the Federal Government leadership prompted some analysts to suggest there could be sovereign risk issues for investors in Australia. Now, with the constant adjustments to regulatory conditions and changes to higher resources tax regimes coupled with ad hoc Federal Government spending priorities unsupported by the continued long-term tax receipts from the "resources boom", the issue of sovereign risk is firmly in the minds of investors.
The importance of participating in the "fraccing" debate was highlighted by the Schlumberger presentation which noted the trend in the company's scientific "green products & solutions" and the need to raise the community discussion on this subject. On the other hand, industry presentations made little reference to the debate and one assumes that it will not be a hindrance in the longer term for exploitation activities.

Non-conventional resources were a focus of presentations and the SME's drive to establish 2C resources for commercialisation was evident. These players are focussed on the East Coast gas market dynamics that require more gas, particularly for projects at Gladstone LNG. The successful exploitation of this resource requires companies to acquire a substantial acreage position covering large parts of a sedimentary basin to justify risks and economics of development. The land positions in the major onshore non-conventional basins have been "locked up" and there appears limited opportunity for new entrants at a basement entry point.

The global demand for gas is estimated to grow by 55% to 2035 with non-conventional gas resources accounting for 66% of the demand growth. China is expected to take the "lion's share" of the demand growth in this "Golden Age for Gas".
As a consequence of the boom in the non-conventional gas resources in the USA, gas is cheap and provides a competitive resource for its manufacturing base and for further exploitation of resources in the USA. For instance, tertiary recovery techniques used in California's heavy oil and gas fields have enabled an increase in gas production and hence a future rise in exports of LNG to global markets which in turn has put US LNG in direct competition with Australia's exports of LNG to Asia.
Not only will the USA be a strong competitor in the LNG gas market, but so will the Shell/Apache LNG projects in Kitimat in Canada. In addition, competition will come from the recent gigantic gas discoveries offshore East Africa, especially in Mozambique and Tanzania where upwards of 100 TCF of gas resource has been discovered dominated by 40-60TCF found by ENI in the giant Mamba field. Production is likely to commence in the 2018-2020 time-frame at substantially lower development costs than in Australia and with easy access to Asian markets!
Also customer countries such Japan are starting to demand a rethink/renegotiation on existing LNG contracts to get new pricing mechanisms for LNG pricing away from oil parity. This is being driven by the fact that the USA competitive source is priced on the cheaper "Henry Hub" system. This issue has some way to play out as it will dramatically affect the future viability of LNG projects.
The Australian industry has a number of other key challenges to deal with to increase productivity to cover the high-cost environment. There is a scarcity of qualified and trained labour. There are technical risks in exploitation because of regulatory interference in stimulation technology (fraccing). There is a proliferation of regulatory approvals governing the environment. All this is exacerbated by poor contract service quality. And still the industry has not won the social licence from the communities to operate in these sensitive areas.
These LNG developments for the producers are very dependent on estimated well head netbacks of $6-9/GJ by 2015 which are needed to justify economics/risks and attract supply away from LNG projects. However, this will have huge impacts on the domestic gas pricing and be compounded by the likely scarcity of reserves for the domestic market. The community debate on these issues has barely begun. Finally, the industry is short of quality investment opportunities for SME exploitation in Australia. There are very few deals materialising and those that are being offered are considered overpriced

For the national economy, notwithstanding credible national economic performance based on strong resources demand spurred on by on some $415 billion of investment expenditure for all sectors to about 2020, the pipeline of energy investment $180 billion will peak in 2013/2014 . Thereafter, there is nothing on the horizon to replace it. Another resource "boom" is difficult to forecast given the global competitive landscape for LNG and any other resources projects would require new technology and markets that are not readily evident.
Other sectors such as manufacturing, housing and transport infrastructure are not expected to have sufficient impact to sustain the economy post 2015. This evolving situation will hinder the ability to pay for escalating Federal Government programs against a back drop of surging demand for services to the aging population and the mantra of balanced budgets