Palliser Report - APPEA Brisbane 2016

 Palliser Report – APPEA Brisbane 2016:

 

  • Industry leaders demand advocacy from within to provide reasoned debate on its safety record and other achievements to underscore successes against sophisticated resourced and passionate demonstrators.  But where is this advocacy?
  •  The conference theme of “Competing for Growth” again demands Industry collaboration but when will it start to materialise?

 Introduction

The June 2016 Palliser Report is a compilation of the discussions and views expressed at this year’s APPEA Conference in Brisbane. The Conference attracted more than 2,000 delegates, down some 20% from 2015 (which in turn was down 30% from 2014) reflecting the substantial reductions in the companies’ expenditure plans for 2016/2018.  There appeared to be a “changing of the guard” in the mix and age of the conference delegates: improved diversity in age profile and gender are both important issues for the Industry as it maintains and sources new talent to meet the challenges of the 2020s.

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 enterprise (“SME”) explorers/producers demonstrating their capabilities. This has been a trend over recent years and highlights the question:  where will the next set of risked ideas for exploration come from?  The APPEA Conference & Exhibition is now an event primarily for the large and multinational companies.

CONFERENCE SUMMARY: 

Natural Gas

Looking ahead for the next 35+ years, Natural Gas is entering a Golden Age, but it is the resource where Industry will be competing for growth in the energy sector.  Gas is not a transition fuel because it is a fundamental component of the energy mix on the way to a low emission based economy. It has achieved important market share, versatility and acceptance demonstrated by increasing LNG processing and logistic systems globally and it has a place in carbon emissions reduction. However, gas needs to enhance its status in the energy mix.  It complements the growth of renewable energy which is eroding the use of coal for base load electricity generation. In fact, the growth of renewable energy as a fuel mix in electricity generation has added greater market price volatility through its interruptible supply operations; gas fills the electricity generation gap when renewables cannot meet demand.

Carbon Emissions

The Conference provided a platform to highlight the importance of Industry adjusting to the expected global imposition of even tougher regulations restricting carbon emission if the global temperature increases are to be kept to less than 2 degrees C by the end of this century.

Plenary commentary indicated the recent Paris Climate Agreement (likely in force by 2018 with global government approvals) provides a viable way to focus global attention on carbon emissions.  Gas has a role in achieving these results.

Notwithstanding, that gas has demonstrated a great benefit in reducing power plant emissions  at the expense of coal, particularly in USA, significant challenges lie in the  potential establishment of  new regulatory Climate Related Financial and Risk Disclosures  currently being canvassed by Regulators for companies’  forward-looking statements in this area.

How large is the role of gas in lowering carbon emissions and for how long will gas play a part in this important adjustment to a lower carbon emissions economy? It will depend on external factors such as renewable energy’s erosion of the base load coal generation/ GDP growth. It will also require an overhaul of Industry operation practices, such as gas flaring and attention to gas leakages to reduce emissions from logistics and transportation systems.

Gas will face a closing window of opportunity over the next 35 years from stiffening energy mix competition. Technology will be a key driver in replacing fossil fuels in this energy mix.   It will be crucial for renewable energy systems dependent on associated storage and recovery systems to find “breakthrough” changes for scalable and commercial options. Industry must also work with the renewable energy supply chain to part of the conversation that delivers reliable and affordable energy.

Renewable Energy

Industry needs to work with renewable resources as their greater share of the energy market undermines the base load electricity generators, yet creates interruptible supply to consumers with consequential price volatility during demand surges. Gas is the logical fuel to provide peaking capacity to work with renewable sector to reduce carbon emissions.

The electricity market in SA is a working example of a State that can potentially be supplied 100% by renewables energy (RE). However RE has become the majority energy source for the electricity market at the expense of base load coal generation, and created a market with interruptible supply. The end result is significant price volatility where gas generation plays a vital role in providing peaking or back-up capacity to supply the market to smooth out some of this price volatility. The evolution of the SA electricity market based on RE will be an important commercial crucible to understanding how both the consumer and the Industry respond to volatile pricing signals from an interruptible energy source.

Grant King, Origin Energy Limited, offered an importance customer perspective for uptake of renewable energy when he said that “It must be reliable, affordable and sustainable in that order”. These are the challenges that need to be addressed to provide solutions that customers will embrace.

Advocacy and Collaboration

The Conference heard  pleasfrom industry leaders to provide  a counter balance  to the misinformation programs emanating from  well organised, well-funded and passionate protestors who are here for the long haul. The mismatch of State-based regulations that exist on fracture stimulation used in non-conventional resources is driving a wedge between industry and the population at large.  Companies, using the full spectrum of their employees, must use earth science and technology to explain the industry’s excellent track record on safety and environment. This will enable industry to develop and maintain community confidence in its exploitation activities and its sustainability.

Industry leaders in the plenary sessions extolled the importance of collaborations in the development cycle to drive down costs (labour and forex) and improve efficiency. It was cited that costs have been as much as 30- 35% higher than a comparable facility in the USA.  Unless Industry adopts new cost effective development models, obtains paradigm shifts in scope, timing and construction, with the ability to re-invent itself every 2 to 3 years and use new technologies, then it will not be sufficiently cost competitive to attract the next wave of LNG investment.

The petroleum engineering consultancy RISC provided a counter view to this tenet when it declared that cost overruns had more to do with decisions before FID. These decisions centred on  project planning issues, project scope definition, timetables and a dearth of project partner’s collaboration.

Whilst there is agreement that collaboration is needed, it has been an often repeated mantra from Industry “heavyweights” at previous APPEA gatherings to have greater Industry collaboration and risk sharing approaches. HOWEVER, the real issue here is that words seem louder than actions. The same words are reproduced every year without any evidence of a demonstrable change by Industry to this key issue. Repeatedly saying something will not make it happen!

What will be the “tipping- point” in this sector that results in real collaboration? Even the current oil and gas pricing downward volatility has not prompted Industry to make any meaningful headway in this crucial issue.

Community Social Responsibility (CSO)

On the other hand, the Industry is learning and adapting rapidly as it embraces the need for effective CSO policies to gain stakeholders’ confidence to operate in their community areas. The prominent example is Arrow Energy’s success in demonstrating through good science and stakeholder participation that both irrigation and CSG production can exist in the same geological basin without impacting adversely on each others operation and water quality.  Arrow’s approach enabled it to develop this resource with stakeholder approval without large scale community confrontation. Land holders rights were protected.

The technical assessment involved the source and water quality of an important irrigation aquifer called the Condamine Alluvium and the impact (if any) of CSG production from beneath it.   This was an extremely important exercise done with the involvement of all stakeholders in the Condamine Alluvium (landowners/ farmers/ governments) to prove conclusively the tenet of non-contamination of the irrigation supply in this case. Notwithstanding one of the key land owner’s initial objections to CSG activities, the overall public acceptance of the scientific results without rancour was a key demonstration of the importance to the Industry of open and transparent processes to advance the CSG exploitation arguments.

Results may vary from area to area, but the important issue is the proven triparty process.

To win the public’s confidence in other CSG and non-conventional extraction programmes, this process will need to be repeated across Eastern Australia where the science should be the standard as the basis for decisions made.

Energy Prices

Predicting the forward pricing curve for oil for 3 to 5 years is fraught with difficulties and generally thought to be a “mugs game”.  The forecaster will almost certainly be wrong. So why do it?

Industry looks for pricing signals to determine if and when projects could be economic and when it is time to commit to long lead time equipment orders and regulatory approvals. This is important as liquid demand continues to grow by about 1.3% p.a. based on Asian GDP growth which will need to be serviced partly from new projects.

On the other hand, a protracted contraction in Industry activity will inevitably lead to another boom cycle in the mid-2020s as companies compete for scarce resources and professionals to provide infrastructure to satisfy consumer demand. This is a situation that Industry wants to avoid. Thus a forward price curve with sustained growth is an important tool to aid Industry participants in considering their positions. It is like being on a F1 Grid: “Gentlemen start your engines!”

 In this regard, it was interesting to see WoodMac put its head well above the parapet and predict Brent oil price of US$85 a barrel by 2020. The prediction is based on a considered view of the many factors that impact on the global supply demand equation, such as a net decline of 25% in existing global oil production capacity by 2020 and simultaneous steady growth in world demand for liquids leading to material changes in the supply – demand equation.

It will be  fascinating to watch if and how this bold pricing forecast will be used by the Industry to reactivate  their key growth projects and keep professional staff.  Industry comments on the issue suggested that despite the recovery of Brent pricing to circa US$40/bbl. in 2016, companies held on to resources until the likely pattern of price recovery was more “settled”. This price recovery now appears to have been below their risk expectations. Consequently, there are likely to be more costly retrenchments and company contractions with a rise in M&A activity to occur in 2016 as companies react to subdued oil pricing and remain risk adverse to projected price stability and cashflows.

LNG Demand and Supply

The Conference theme again focused on the expansion of gas (LNG) as the benefits of the largest expansion in LNG capacity in Australia has peaked. More than AUS$200 billion has been spent within the last 5 years to develop LNG facilities in Australia and engineer production “ramps-up”. The list of projects is impressive:-

ü  3 CSG LNG facilities in Gladstone QLD which commenced production in 2015/2016.

ü  Massive Gorgon project (WA) with production in 2016.

ü  2 offshore gas fields with onshore LNG facilities at Ichthys (NT) and Wheatstone (WA) with production estimated in 2017.

ü  Shell’s Prelude offshore production and LNG facility with production in 2017.

In total Australia will have 10 LNG projects with 21 LNG processing trains producing 87 MMTPA by 2019/2020 worth an estimated AUS$44 billion p.a. in export revenues to the Australian economy. It will make Australia the largest LNG producer globally next to Qatar and provide about a 1% lift to GDP annually.

Notwithstanding the current low global gas prices, these projects have operation lives in excess of 40 years and will be used to service the expected gas demand in China which currently takes 38% of Australia’s energy exports. The Chinese demand is driven by its GDP industrialised and consumer growth and the need to improve environmental outcomes in their communities.

The expanding global offtake degassing facilities, especially in the Indian sub-continent, will provide customer diversity for added security to supply different markets. Customers are also demanding different trading terms for LNG pricing on fuel linkages, flexible volumes and payment terms. The benefits of the 2 FTAs with Korea and Japan will further enhance the access of LNG into these markets.

So LNG is entering a maturing market phase where the supply chain value is being “fought–over” by participants to sustain their operations. In the future, global customers and Industry disruptors in the supply chain will determine the market conditions for new or expanded LNG developments and not the solely the producer.

Political presence

Federal Minister Frydenberg gave a comprehensive coverage of the issues of his portfolio and sought to extend the bi-partisan approach to the resources industry. Unfortunately the Labor Opposition declined to appear and present what appear to be radically different policies embracing domestic gas reservation and regulations aimed at keeping gas prices low by applying a ‘national interest test’ for LNG developments. It was even more disappointing to learn that the Federal Opposition leadership was in the same Brisbane convention complex during the APPEA conference week. It was an opportunity lost for Labor to present its views.

At a time when the Industry needs all the “friends” in court to sustain itself and grow jobs, it seems that the previous high level of bi-partisan federal support is under threat. The gas and LNG projects are too big, too costly and have development time frames far exceeding election cycles to have the major parties out of step. Hopefully common sense will prevail in the aftermath of the 2016 election and that there will be a return to a bipartisan approach.

Overall, APPEA 2016 was a thought provoking Conference dominated by the changing nature of gas competition with renewable energy, the maturing of the LNG sector, Industry’s rising CSO uptake and the advocacy/collaboration challenges to be addressed by Industry post- 2020. 

Geoffrey R Widmer

Palliser Group

P: 61-3-9819-3995 E: This email address is being protected from spambots. You need JavaScript enabled to view it.

June 2016

Disclaimer:  The preceding commentary is a compilation of views and data of The Palliser Group from the 5th to 8th June APPEA Conference in Brisbane expressed by the various participants. The Palliser Group has not verified these facts as presented to the Conference and has not made independent inquiries 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 2016.