Summary: The buzz surrounding the conference was all about big Gas and the likelihood that Australia will be the leader for global LNG supply by 2020 ahead of Qatar with production at about 90 million tonnes p.a. of LNG.
However, the dynamics of the global markets are evolving. New entrants in the USA and East Africa are poised to enter the global LNG market within the next decade, but with very different competitive cost structures and contract terms. These new entrants (or market disruptors) are driven from the client-market demand perspective and they include investors and traders who rapidly organise the supply chain logistics and supply contracts to satisfy that demand. They may not be traditional E&P companies!
The market liquidity for LNG is evolving at a rapid pace. That encourages stakeholders to trust the LNG technology and systems to deliver long-term reliable and economic energy supplies. As well, the changing market conditions permit arbitraging on the uncontracted volumes and prices to develop spot price markets not linked to oil pricing, but to regional market supply and demand fundamentals. Gas is a transitional energy source. It ticks the environmental boxes for lower global carbon emissions and is a vast resource capable of underpinning energy security for power and transportation to at least 2050.
The May 2015 Palliser Report is a compilation of the discussions and views expressed at this year’s APPEA Conference in Perth. The Conference attracted more than 2,500 delegates, down some 30% from 2014 reflecting the substantial reductions in the companies’ expenditure plans for 2015/2016. The Exhibition Area was similarly down in booth numbers and participants, but the changing phase of the oil and gas energy industry (“Industry”) was evident with the expansion of the service company sector tending its high tech services. Again, not unexpectedly, there were few small medium enterprises (“SMEs”) explorers/producers demonstrating their capabilities, which as I mentioned last year, puts a question mark around where the next series of risked ideas for exploration will materialise from.
Conference theme…“Fulfilling our Potential”
Whilst this APPEA Conference was all about gas and LNG global markets, commentary also focused on the oil supply/demand picture in 2030 and the need to understand the significantly different and changing parameters in the market for the supply and demand for oil products. Whilst there is a prevailing view that prices will remain static in the medium term, discussions centred on the factors that may produce a recovery of the oil price to around US $80/barrel faster than previously predicted. These factors are:-
ü Global supplies will be affected by the fact that:
o USA oil production from non-conventional resources is likely to peak in the next 2-3 years and the role of Saudi Arabia in maintaining current production levels of conventional resources to protect is share of global oil demand is unknown.
o Company capital expenditure budgets are down some 25% -30% for the next 2 years or until there is a clearer view of the oil price direction and stability. With reduced exploitation activity, this will aggravate the already low level of new discoveries, pushing new field contributions from exploitation down to about 20% of the total annual global production. Continuation of these capital restrictions and low discovery rates for new fields will exacerbate the tightening of longer term market supply. Based on past oil price volatility, this tightening of supply is likely to be more rapid than previously thought.
o The market overhang of spare capacity of supply has dropped to 1-2 million BOPD, down from 15 million BOPD in the 1980s. The market has grown consistently over that time, so with the lower available spare capacity that can be used to meet supply disruptions, it is now less able to absorb rapidly market disruptive events without the likelihood of sudden price volatility
o New supplies from frontier areas and deep-water plays will have long lead times before they make significant contributions to the supply equation. They will rely heavily on the advent of new technology to make them economic (such as in Brazil), and be at the whim of arising problems in currently unresolved regional geo-political matters (such as in Iraq, Iran and Kurdistan).
ü Global oil and liquids demand will be dominated by the GDP growth in the Asian Tigers, particularly China and India as their middle class expands. The higher demand figures will also be offset by the lower OECD oil demand that has emerged following technology advances and the shifting fuel mix in the GDP profiles of the industrialised OECD countries.
Oil price forecasting is a mug’s game but be prepared for unexpected changes in the supply/demand fundamentals that will impact on budgets and profitability notwithstanding the inevitable long term escalation in oil prices as supply tightens!
LNG Demand and Supply
The Conference theme focused on the expansion of gas (LNG) as a transition fuel to lower carbon emissions and on the evolving liquidity in the LNG market essential to ensure its long term viability which is built on:
ü expanding global offtake degassing facilities,
ü growing investor confidence in the technology and processes to deliver product reliably and cost effectively,
ü varying contract terms for the percentage of the project gas volume contracted and the duration of the contracts with different trading & conditions,
ü new pricing formulas not linked to JCC oil price equivalence allowing supply and demand fundamentals to place the marginal volumes into the market at spot market prices. The development of the spot market prices will attract the interest of global regulators who will look carefully at the trading relationships between the contract counter parties to ensure they are not Related Party Transactions with artificial pricing and shifting tax obligations. Regulators demand commercial contract terms and conditions that are at “arm’s length “.
LNG volumes are now about 10% of gas produced globally. By 2030, the figure is expected to be 15%, underpinned by demands for a fuel source with lower carbon emissions and higher transportation usage. Global gas demand in Asia is expected to grow over the next 20 years at about 2-3% p.a. and mostly centred in the India and Chinese markets’.
The source of this gas and whether it is transported as LNG or by pipeline infrastructure will depend on a number of factors. These include its affordability and margin control with low cost structures. There will be a focus on using a combination of existing technical solutions, innovative new technology, cutting edge project management skills and improved labour productivity. Geo-political factors and effective regulation will also come into play. Both conventional and unconventional gas from USA is an important source for the LNG global demand as the marker price for export gas – Henry Hub price - is expected to be less than US$5/MMBTU until 2020 due to the abundance of non-conventional gas resources. This expected price regime will underpin the affordability of this gas as a source for LNG exports. It will provide a competitive alternative to both oil-link and spot market pricing as noted above.
Plenary session… industry leadership for change
In the plenary sessions, the Industry “bulls” from large E&P companies, notably Woodside and Shell, wanted to exert their leadership in the Industry to give direction to areas most critical to its longevity.
Industry needs to realise that the long cycle times of up to 20 years for cash positive projects provides financial challenges over and above the needed project capital expenditure because stakeholders often have shorter time horizons built around annual yields and dividends which demand the use of the cash resources of the business.
This proposed new direction included a focus on the need for new business models to be adopted that give transitional services during lengthy project cycles such as commodity trading and rapid exploitation of small productive resources. These would provide cash flow and the profits to cover the “dips” in cashflow accruing from the long lead times and the expenditure needed to commercialise gas/liquids exploitation by embracing material cost efficiency and technology to improve productivity.
On the stakeholder side of the Industry, representing the SME group, their “bull” leadership led by Central Petroleum emphatically stressed the need to embrace social responsibility by endeavouring to understand community needs and by providing training and support for those company employees working in these areas. It is critical for the Industry to work alongside communities and traditional owners in harmony, otherwise companies will potentially face costly delays through attempts to pacify community mistrust.
These keynote leadership positions gave guidance to industry participants. They certainly provided a sharp commentary on the needs for material change in the Industry’s practices.
Normally, this conference is opened by the state Premier and there is strong representation from both the federal and state governments to engage with Industry on current and strategic issues. Disappointingly, the Victoria State Government was under represented. The Treasurer, The Hon Tim Pallis, gave the opening address which was a political speech extolling his 2015 State Budget. It was underwhelming in its understanding of the risks and technical challenges in the Industry to incentivise development of further reliable gas supplies. There was no vision about options or strategies to enhancing future gas supplies or associated industries in Victoria. Instead there was the confirmation of another parliamentary inquiry to further review the gas industry in Victoria and again defer the lifting of drilling bans until at least year-end.
Notwithstanding that many august global scientific and research Institutions in UK, Canada, USA and Australia, including the CSIRO, have come down on the side of fracture stimulation technology (FST) with appropriate regulatory oversight, the betting is that this decision will be deemed too hard/political and the resolution will kick the can further down the road. If this occurs, it will be further evidence that this state government is anti-infrastructure developments in Victoria.
Similarly, the Federal Minister for Industry and Science, The Hon Ian McFarlane MP, gave a lack-lustre speech focused on known achievements without providing much insight. It was left to the Opposition Spokesperson The Shadow Minister of Resources, The Hon. Garry Gray AO, and MP, to provide a sensible and considered speech on energy policy in Australia. He demonstrated his understanding of his portfolio and the dynamics of the Industry. He noted the importance of APPEA to represent the Industry as it navigates through a difficult period of volatile energy pricing, changing domestic markets and the transition to gas and LNG as the dominant energy source. He appears to be a friend, albeit a critical one, of the Australian Industry. Indeed, there seems to be a high level of bipartisanship support for the direction and importance of the Industry from the two federal energy ministerial spokesmen and the chairman of the APPEA Advisory Board, The Hon. Martin Ferguson AM. It is a positive relationship for stakeholder relations in the Industry.
Overall, APPEA 2015 was a thought provoking Conference dominated by gas/LNG and the challenges to be overcome to service this Industry post- 2020.
Geoffrey R Widmer
Disclaimer: The preceding commentary is a compilation of views and data of The Palliser Group from the 17th until 20th May APPEA Conference in Melbourne 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 program material of the APPEA Conference 2015.