Top gas executives and energy experts weigh in on oil price debate

May 12, 2015 Energy

Gas Today asks gas executives and energy experts why the low oil prices will not reverse the Australian gas industry’s progress over the last few years.

The recently commissioned Queensland Curtis LNG (QCLNG) facility, the prospective completion of Australia Pacific LNG (APLNG) and Santos GLNG towards the second half of the year, and the subsequent opportunities this will bring for the Australian east coast gas market mean the outlook for local gas is not as dire as initial forecasts may suggest.

Senex Managing Director and Chief Executive Officer Ian Davies says the company is not walking away from its aspirational 2018 fiscal year targets of 3–5 MMboe* oil and gas production and 100–150 MMboe* net 2P reserves. He says the company will continue to move its key growth projects along, and that it has allotted $85–$90 million of capital spend in the 2015 fiscal year to sustaining core operations, exploration, and progressing high-reward growth projects.

Mr Davies remains optimistic and says any Australian oil and gas operator would be well aware of the cyclical nature of the industry.

“Political and economic challenges will come and go; it’s part of doing business in the energy sector. We continue to see strong fundamentals for the east coast Australian gas market – given the expected unprecedented demand growth, supply pressures, and available infrastructure.”

In a word of advice, Mr Davies says gas operators should go back to the basics of what they can control – a healthy cash position, careful spending and efficient operations.

“The fundamentals of the gas industry remain solid and a reflection of this view is our continued commitment to the company’s Western Surat Gas Project in Queensland. For Senex, staying competitive will come from maintaining a healthy cash position, keeping low operating costs, and spending and allocating capital carefully.

“Competent and efficient operators are always the last standing in any market.”

Other gas companies have in recent months reported positive financial outcomes, despite the plummeting oil prices, including Santos who delivered record sales revenue in its fourth quarter report. Santos’s GLNG project was more than 90 per cent complete as of the end of January 2015, with firing of the first gas turbine having already taken place.

Similarly, Blue Energy Managing Director John Phillips expressed an optimism about the oil and gas company’s upcoming gas exploration activities, despite the dwindling oil prices.

“With the first three LNG trains in Gladstone likely to be in operation by the September quarter and with the already intense upstream gas swap arrangements between the LNG producers on feed gas, Blue Energy’s acreage position in the Bowen, Maryborough and Surat basins is ideally located to take advantage of the massive gas demand developing in Gladstone,” Mr Phillips said in a statement on 29 January 2015.

AWE Managing Director Bruce Clement says the last six months have been positive for the upstream oil and gas exploration and production company, notwithstanding the “dramatic fall in global oil prices”.

“We have a portfolio of quality assets that provide good cash flow and valuable growth opportunities and the company remains focused on delivering value to shareholders,” Mr Clement says.

Eni Chief Executive Officer Claudio Descalzi says the multinational oil and gas company’s strategy is to work on exploration. On a local front, Eni has the capacity to expand the Blacktip Gas Plant, which is located 110 km off the northern coast of Australia in the Timor Sea’s Bonaparte Basin. The Blacktip field holds approximately 933 billion standard cubic feet of raw gas and 5.7 million barrels of condensate.

Mr Descalzi remains optimistic about the oil prices, low as they are, and says Eni can do well with oil at $US65 to $US70 per barrel.

“The range is still safe if you are in conventional assets. Oil prices will probably rebound by the end of this year and could reach $US70 to $US90 in a couple of years.”

Reflecting Wood Mackenzie’s predictions for 2015 (read our gas trends article on page 16), Mr Descalzi says once oil prices stabilise, there will be a “good window of one year” in which mergers and acquisitions may occur in the industry as gas companies take advantage of opportunities.

INPEX General Manager External Affairs and Joint Venture Bill Townsend says Australia remains an attractive area of investment and is expected to continue to play a central role in fulfilling INPEX’s ambitious global growth aspirations.

“The fall in oil prices will not directly affect the development of the Ichthys LNG Project. INPEX’s priority lies in continuing its development of the Ichthys LNG Project to achieve first production by the end of 2016, as scheduled,” Mr Townsend says.

WHAT THE ENERGY EXPERTS THINK

EnergyQuest Chief Executive Officer Graeme Bethune says most Australian gas operators have responded well to the low oil prices by cutting their capital expenditure and conserving their cash flow. He points to the example of Senex.

“Senex has said they will still be investing in Queensland gas projects. I think companies are keen to keep investing in things that are essential to their operations that are still very high priority,” Mr Bethune says.

Mr Bethune says it isn’t all doom and gloom for the gas sector – despite what mainstream media reports may suggest.

“Don’t forget – we’ve got this huge QCLNG development which will keep going, with the first cargo recently dispatched from this facility. We will see the first cargoes from the other two LNG facilities – the APLNG and the GLNG – towards the end of the year and this will more than triple the market for LNG, which is a positive development notwithstanding the low oil prices.”

Similarly, UBS Energy Analyst Nik Burns says that while there will be no new Australian LNG projects getting off the ground due to the currently low economic rate of return – with Shell’s Arrow LNG project “off the table” and projects such as Browse FLNG expected to struggle to get approval in a low oil price environment – there will not be any project cancellations.

“All projects have firm LNG contracts and on a go forward basis, they are economic, even at low oil prices,” says Mr Burns.

While there may be no further greenfield LNG projects approved in Australia in the medium term, Mr Burns says all existing LNG projects require long-term stable gas supplies.

“A number of projects have question marks over the scale and quality of the gas reserves underpinning them, and will likely require additional feedstock over the next five to 10 years e.g. Darwin LNG, GLNG, North West Shelf.

“The Queensland LNG projects will be progressively turned on and ramped up over the next two to three years, generating a massive demand sink in that state. We expect to see gas to physically flow away from as far away as Victoria into Queensland to take advantage of the gas needs of these LNG projects.”

Mr Burns says this will provide opportunities for eastern Australian gas companies to negotiate supply into Queensland or into the domestic gas market, where traditional supply has been diverted into LNG.

His advice for gas operators is to become as efficient as possible to reduce operating costs and negotiate lower prices when contracts come up for renewal, where possible.

Mr Burns says there could even be a silver lining to the price drop in that the focus on costs could see the onset of a new rational mindset in the industry.

“The oil and gas sector has experienced rampant cost escalation over the past six years as the LNG industry ramped up. But with industry employment now past its peak, we should hopefully see costs coming down, which will force companies to become more efficient and improve the economics of future resource extraction.”

Echoing Mr Burns’ comments, Citigroup Head of Energy and Utilities Research Dale Koenders says reduced oil prices would result in flat to lower industry costs, spurred on by a falling Australian dollar.

“A depreciating Australian dollar will help with projects which have a large component of Australian labour i.e. onshore Australian LNG. Lower oil prices often increase focus on cost control, and recycling engineering design to improve project returns,” Mr Koenders says.

Mr Koenders foresees a scenario where future gas projects could achieve similar returns to that anticipated in a $US90/bbl world, with the 15 per cent reduction in long-term oil prices offset by 15 per cent operating expense and capital expenditure savings.

With a view to the future, Mr Burns says the unprecedented growth in gas demand on the east coast, thanks to the start-up of the LNG export industry, is a huge untapped opportunity.

“We expect there to be a bigger focus on offshore Victorian gas exploration over the next five to 10 years – liquid content helps. Mid-tier acreage in Queensland could also be developed, given its proximity to the LNG projects.

“Focus needs to be on finding and developing the lowest cost gas resource, close to existing infrastructure and demand centres.”

Despite a number of high-profile project cancellations and major oil and gas companies having to substantially cut their expenditure due to the oil price drop, the natural gas industry in Australia seems set for some exciting times, low oil prices
or not.

Featured in Gas Today Autumn 2015