In his latest blog, Andy Mant, Senior Account Manager at Fircroft’s Perth office, examines whether claims of a recovery in Australia’s Oil & Gas market are justified…
Shoots of recovery
2017 is showing some great signs of market recovery, not just in oil and gas but in mining as well. We have seen a huge spike in job opportunities over the last 3 months which is instilling a lot of life back into our waning State. Caution must be taken when analysing the job market and we need to look a little deeper into why the market has picked up and whether this surge in activity is sustainable to long term recovery.
The first place we need to look is oil price. Oil price seems to have stabilised across the >$50 and <$55 a barrel range and this market is still not economically conducive to new projects getting sanctioned such as Browse and Scarborough. Not conducive "in this market" is the key here as by 2020 it has been mooted by Coleman at Woodside that an LNG shortage will envelop us and new projects must be fast tracked to first gas. We all know that new stand-alone developments will not be economically viable in Australia for several decades but the infrastructure that is already in place or soon to be in place, as with Ichthys and Prelude, will need back filling. Underestimation of hydrocarbon volume and production capacity for many LNG plants in Australia will mean either optimisation or new fields need to be explored and turned into projects to mitigate this shortfall.
New stand-alone developments?
For this very reason, I was not surprised when Woodside announced recently that Browse gas would most likely be piped to Karratha Gas Plant and not be a stand-alone development. Why do we feel the need to focus on standalone developments in a country boasting 12 operational LNG trains and several more to start up in 2017? Added to this, none of these LNG facilities are running at capacity and those that are running at capacity are running out of gas and have plenty of life left in them given their LNG sales contracts making new back fill developments essential, not a "nice to have".
When we look at the fact that Ichthys Phase 2(a) is approaching FEED and Shell’s Crux development is moving into concept select phase we can hypothesise that the existing wells are not going to place the trains of Prelude and Ichthys under any great stress and to honour gas sales contracts in the long-term back fills are essential to the profitability of all current and future Operators in Australia.
The total cost of back fill projects scheduled in WA/NT alone in the next 4 years will total around $50 billion and that isn’t including the prospects of Browse and Scarborough. Scarborough is another basket case of a project where multiple concepts are being developed from circular FLNGs to FPSOs but when you see the press release stating that an agreement has been reached to pipe the gas to Pluto you can say you heard it here first, a guess from my part but one I would be confident betting on. Back fill is the only commercially viable option unless a head strong Exxon want to puff out their chests in the Australia market place following their declining Bass Strait empire and build some sort of “circular” FLNG as a standalone option.
When ConocoPhillips decide to retire the OG of the Timor Sea, Bayu Undan, does that mean DLNG will close? Nope, back fill will need to occur and they are already looking at Barossa, Poseidon and Cash Maple to re-supply gas to this old giant to honour gas sales contracts into the distant future.
Wider market recovery or an anomaly?
Going back to the original reason I wrote this article and that is “Is the current spike of new jobs indicative of a wider market recovery” and the answer is probably. The answer is only probably as a lot of the job growth is coming in a temporary space of Installation, Hook-Up and Commissioning (IHUC) of the big three (The Venturer, The Explorer and Prelude), the last major offshore IHUC this country will see for at least a decade. These jobs aren’t long term and once finished IHUC personnel may be surplus to requirements for several years. On the other hand, we are placing a fair number of contractors on the front end and concept phases of projects, along with numerous maintenance specialists. Therefore, in this respect these placements are for the long term and are indicative of long term market recovery and strategy.
Do we need high LNG and Oil prices to activate the back fills? Nope, so let’s stop going on about that. All that lower prices will do to these types of projects is make cost more of a focus and innovations to make these projects more attractive at lower prices. Regardless, they must happen, gas needs to be sold globally and LNG facilities need to continue to be supplied with gas to honour contracts, therefore we can safely say that what we are seeing right now are small shoots of recovery and once we hit 2018 expect the new landscape of Australian Oil & Gas to begin to bud and prepare for a full bloom recovery.