The 10th annual Good Oil Conference (GOC) had a series of very clear messages:-
1. The steady rise of unconventional gas and oil resources as the new Holy Grail for enterprise value given
a. The market confidence in this resource as a secure future energy resource to offset diminishing conventional resources.
b. The advances in technology to lower risks of exploitation.
c. Enhanced resource value with associated liquids ,
d. Its sheer size and ability to transform a company.
2. China is the big issue in terms of it economic performance as it is a key component in the engine of global growth. There are GDP growth risk concerns about the Chinese economy as the key drivers for its exceptional performance during the GFC were its strong export performance, strong private sector demand and a high level of Government stimulus. There key factors are not performing strongly in 2010 and there is a debate about the need now for a significant Government spending stimulus to remove the uncertainly of the economic growth in China and keep it performing strongly. A delay in the timing of this Chinese Government spending stimulus as a result of this debate being bogged down in policy paralysis is a real risk to the global economy and the aspirations of other foreign Governments to reflate their economies- reduce deficits and unemployment.
Oil demand in China will be sustained (see point 5 below) but the Government is re-balancing the energy mix to increase gas consumption to about 35% within the decade.
3. Presentations indicated that the Australian SME companies have largely repaired their balance sheets and repositioning themselves for growth opportunities with more balanced exploration areas and play types in their exploitation portfolios.
4. The SME explorers are looking to growth opportunities outside Australia/Asia to Africa and Eastern Europe and not the USA. The Australian hard rock miners are showing the way in Africa already with 170 companies there now in 500 projects notwithstanding the commercial risks and infrastructure issues in a large number of these countries. It will be interesting to see how the Australian energy SMEs get involved to explore in these parts of Africa.
5. Investment decisions on exploitation budgets for 2011 onwards will be underpinned by oil supply/demand fundamentals favouring an oil price circa $US 80-95/bbl into 2011 firming annually thereafter as demand in China and India stretch supply. As a result there will also be significant oil price volatility over the next 5+ years as the supply /demand equations tries to rebalance. Oil demand globally is estimated to increase at a rate of 2.2% p.a. until 2040 mainly driven by energy demand in China(In China an estimated 380 million cars in 2030 from 80 million in 2010); this supply demand scenario with price volatility is a continuing theme from these Australian energy conferences. However, the community at large are generally unaware of these long term impacts particularly on future bowser price pressure and its impact on the family budget.
6. The exchange rate A$: US$ will not work in favour of the industry in revenue terms as the strong A$ price compared the US $ is likely to remain in the high 90s range for the foreseeable future given the strong Australia trade fundamentals underpinned by the resources boom in China (both in terms of volume and commodity prices) and the USA Federal Government working to reduce the US to improve their export competitiveness.
7. A theme from the presentations was that SME explorers on the East Coast are looking to unconventional gas ( CSG, shale gas) for the LNG markets as a means to attract shareholder value to their share price given the perceived reserve shortfall of about 20TCF( Bow Energy estimate) over the life of the 4 LNG projects at Gladstone. It is likely there will continued M&A activity with these SMEs as their resource thresholds increase to levels where they will be attractive to a corporate play from the Majors. Developments in the LNG export markets will continue to attract wide attention given their significant impacts on the local and national economies both in economic and environmental terms.
Geoffrey R Widmer
15th September 2010
The preceding commentary is a complication of views and data expressed at the 7th-8th September 2010 Good Oil Conference expressed by the various participants. The Palliser Group has not verified these facts as presented to the conference and has not made independent enquiries as to the validity of the statements made or of the data presented. The Palliser Group recognises the authors of the various views as detailed in the Good Oil Conference Program.