Issue 17 May 2006

The oil quest

With Australian demand for crude oil and condensate officially forecast to rise 60 percent in the next 25 years and domestic production projected to decline from 2009, one of the biggest economic issues -- where will the nation's supplies be sourced -- has been getting an airing this month both at the annual Australian Petroleum Production & Exploration Association conference and in a Senate committee.

More than 1,250 paying delegates turned up for the APPEA conference on the Gold Coast where the Association chairman, Reg Nelson, managing director of Beach Petroleum, suggested that domestic oil production would peak in 2008 at 577,000 barrels per day and slide away to the point where in 2015 it is meeting only 20 percent of national needs compared with 60 percent today.

Nelson painted a picture of Australia in 2015 reducing the large and growing cost of importing oil and petrol products by exporting more than 50 million tonnes of LNG per year and argued that the opportunities exist, through new oil exploration using advanced technology, both to search more extensively in proven field areas and to extend the hunt in to "frontier" areas.

National Industry & Resources Minister Ian Macfarlane, speaking by video link because the conference coincided with the Federal Budget,  claimed that overseas companies are "queuing at the door" of Geoscience Australia to access the geophysical data being remastered to higher definition under a $61 million program. He sees the tax incentives for designated frontier exploration areas as proving increasingly attractive to explorers. The Government is also promoting investment through what the Minister calls more effective, consistent and efficient regulation of offshore exploration and production. Macfarlane is now urging the States and the Northern Territory to move swiftly to enact mirror legislation to the new Offshore Petroleum Act, which passed the Federal Parliament in March.

Queensland Premier Peter Beattie was conspicuous by his absence from the conference. APPEA traditionally attracts State premiers to do the conference opening honours. Beattie's failure to put in an appearance is the more odd given his March contribution to the Senate Rural & Regional Affairs & Transport References Committee, which is currently studying future oil supply and alternative transport fuels.  Beattie has personally sent in a State Government submission which highlights the trebling of Australia's petroleum trade deficit over the past 10 years and calls for continued investment in oil exploration and discovery. The submission presses for a review of all offshore areas, except those of environmental significance such as the Great Barrier Reef, for their petroleum potential.

His government's views would have got national media attention through a speech to the conference, which as usual drew more than a dozen journalists from around the country as well as the news agencies.

In the welter of national debate over petrol prices, Beattie's government staunchly supports world parity pricing for Australian oil.

Meanwhile the International Energy Agency's executive director, Claude Mandil, used his Gold Coast talk to warn that Australia, under present trends, will soon need to start building a strategic oil reserve. As a net exporter of oil, Australia has not been required to do so under IEA rules to date, but Mandil points to the requirement of Agency members to hold 90 days' net oil imports and says Australia's move to this stage is "fast approaching."

ExxonMobil pushes harder for gas tax changes

ExxonMobil Australia chairman Mark Nolan has used the APPEA conference to again publicise the world's biggest energy company's argument for tax changes here to enable natural gas to compete with coal for a share of the next increment of national electricity generation development.

With APPEA espousing a target for natural gas of 70 percent of new Australian electricity production capacity by 2015 -- which could represent a market for gas producers of about 400 to 700 petajoules a year -- Nolan points out that the current federal petroleum resource rent tax regime effectively taxes gas at up to six times more than the State royalties imposed on coal.

Nolan says the Gippsland Basin, where petroleum production has delivered some $300 billion (in today's money values) in tax income to the Australian Government since 1969, still contains an estimated seven trillion cubic feet of natural gas while its oil reserves are 90 percent depleted. The ExxonMobil Australia chairman says his company and other domestic gas producers are asking "not for special treatment, but for equal treatment" in competing with coal suppliers for the fast-growing electricity power market.

Bottom falling out of barrel

The Australian Government's lead petroleum scientific agency, Geoscience Australia, has told the Senate committee looking at future oil supply that, even allowing for undiscovered accumulations in known productive fields, the country will be producing barely 200,000 barrels of oil a day by 2025 -- a sharp collapse from a projected peak of just over 620,000 barrels a day in 2007-08.

At the same time, GA has told the Senate members, petroleum product consumption (excluding LPG) in Australia can be expected to rise from just over 760,000 barrels a day at present to about 1.1 million barrels in 2025 and more than 1.2 million barrels in 2030.

In another submission to the Senate Rural & Regional Affairs & Transport References Committee, CSIRO adds that Australian oil resources remain under-explored. "There is a need," it says, "for ongoing assessment of oil prospects, especially in frontier basins, along with improved exploration techniques and maximising of recovery from existing fields." Research is also needed, says CSIRO, in to techniques for reducing Australian transport fuel demand.

The Australian Government research agency says it is also pursuing technologies to convert coal to liquids and to bring about greater use of bio-fuels.

CSIRO adds that there is a circular problem in assessing the potential of undiscovered oil resources in Australian basins -- low drilling rates in frontier areas provide a low data resource which leads to these regions having lower perceived prospects for investment by explorers.

Meanwhile the Australian Academy of Technological Sciences and Engineering has pointed out to the Senate committee that the lead times for developing discoveries made in new provinces will be considerable. "A discovery today in a frontier would be unlikely to yield any oil production for at least six years," says the Academy, adding that the release and preliminary exploration of new acreage will take another four years. "A decision to commence exploration in a new area," the Academy comments, "would be unlikely to yield production under the most optimistic scenario in less than a decade." This, it says, emphasises the need to fully explore the potential of existing producing areas while facilitating frontier work.

25 years to go

Geoscience Australia has told the APPEA conference that, if the goal of supplying the Asia/Pacific LNG market with 62 million tonnes a year from this country by 2030 is realised, the current economic demonstrated resources of Australian are likely to be depleted in around 25 years. This is only slightly longer than the normal terms of an LNG contract.  Current economic and sub-economic resources, GA adds, will be depleted in 35 years, assuming the latter can be developed. "This," says the agency, "puts the focus on finding more gas."


The APPEA conference and the Senate oil inquiry, along with the challenges to be found in continuing to meet electricity supply needs, should create in the minds of policymakers the possibility, at least, that Australia's energy security is threatened -- not today, not even in the next five years, but certainly in the longer term.

While much of the current energy debate tends to focus on the price of energy -- whether petrol or electric power -- for ordinary citizens, the missing element in media and political commentary is the impact of potential price shocks on energy-intensive manufacturing, which contributes 12 percent of gross national domestic product and employs a million Australians.

The other major element of the debate is the greenhouse gas emission issue and here the environmental movement is continuing to argue that radical change towards carbon charges will be easy to implement and not have a debilitating effect on the economy. This ignores the fact that 70 percent of electricity used in Australia is consumed by business and a large portion of it by energy-intensive manufacturers, whose energy bills are 20 to 25 percent of their operating costs.

Accusing the environmental movement of behaving over greenhouse gas emissions like witchdoctors urging primitive people to sacrifice their sheep and goats to mollify the wrath of the gods is not hard when they decline to engage with the critical issues of the impact of their proposed measures on the national economy and employment. It is not, however, enough to dismiss their central point in this fashion -- Australia can do much more to be energy efficient and to promote lower-emission technology.

The bottom line is that there is no escape, even via clean coal technology development, from the near-certainty that by probably no later than 2020 Australians will be confronted by petrol and power bills that are substantially higher than they are today. This has big implications for the economy, for interest rates and for the international value of the Australian dollar. One of the biggest current central planning challenges is to analyse the impacts of this trend properly and to manage the transition efficiently and effectively.

Securing Australia's energy future remains one of the top challenges of national policymaking today.

Keith Orchison

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