Oz Upstream Needs Stable Regulation: Report
Australia’s upstream oil and gas industry needs long-term regulatory stability to create attractive investment opportunities for the sector, according to new research commissioned by upstream lobby group Australian Petroleum Production & Exploration Association (Appea). Companies are cutting their upstream spending and focusing on those that give the shortest pay-back with the least regulatory risk, putting Australia at a disadvantage.
Wood Mackenzie's report highlights the industry’s success from 2009 to 2012 which was predicated on relatively few regulatory and fiscal changes in the previous decade. This "provided a strong foundation for a wave of unprecedented investment," it said. These include the LNG export projects in Queensland.
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"Australia’s LNG success has been supported by a comparatively stable policy and regulatory environment which underpinned the significant long-term investments during the period of 1999–2010. The stability of Australia’s taxation arrangements was a key contributing factor in attracting this wave of investment. In addition, Australia offers the rare combination of being an OECD, developed economy with the ability to attract skilled labour and technology, alongside the significant prospectivity outlined in the first point of this section. The dual attraction of stability and material resource is often a compelling factor for investment," it said.
The consultancy said that "against the backdrop of a challenging macroeconomic environment and lower commodity prices, Australian fiscal and regulatory volatility has increased at a time when continued stability would be highly beneficial.”
The findings also show that the regulatory instability, intervention and uncertainty, coupled with Australia being considered to be a high-cost destination for business, may be relevant for many other industries.
Spend has contracted significantly in recent years and may never recover, it said. "We expect global upstream investment of $350bn (A$534bn) in 2020, representing just 5% year-on-year growth and a 40% drop from the peak of 2014. Cash flow and dividend payments are increasingly prioritised over new investment projects, and caution is exercised over all discretionary spend.
"This is potentially bad news for Australia’s upstream industry on two counts. Firstly, there is simply less capital available for deployment – the overall pot is smaller. Secondly, as capital allocation becomes more competitive, higher-cost jurisdictions are less attractive for deploying what capital is made available.
"In addition to this, increasing environmental social governance disclosure requirements will add another layer of complexity and administrative burden to the upstream investment process," it said.
Longer payback
Lower prices make projects with the high up-front costs of LNG even less attractive. Using the $54bn Gorgon LNG as an example, the payback period is 19.5 years even at a high $65/barrel average price. But at $50/b in today's money this becomes 21.4 years; and at $30/b it becomes 32.5 years, according to WoodMac.
"In view of this, it is important that the Australian government continue to support the upstream oil and gas sector by providing a stable regulatory environment for investors. Existing projects will attain breakeven and reach the tax-paying part of their lifecycles in due time. It is also important to note that whilst the bulk of payments will be made once costs are recovered, it is not to say that payments to governments do not occur before costs are received," it said.
Appea CEO Andrew McConville said: “For decades, our industry has contributed to our national economic growth, and we are delivering around 2% of Australia’s GDP. “Australia has an opportunity to secure the next wave of investment which has the potential to deliver upwards of $50bn in capital expenditure, and secure up to 6,300 jobs across the life of a project and an estimated $80bn in taxation receipts.
“We are the world’s leading LNG exporter – an industry worth $350bn – however, there have been no LNG sanctions since 2012 [Ichthys] and we risk losing investments."