Oil boom excites but leaves Australia with a touch of gas - Business - Business


As oil prices shoot through record levels, the oil industry is capturing the hearts and minds of investors like it has not since the days of the '70s oil shocks. Australian majors Woodside and BHP Billiton have returned investors 104 per cent and 81 per cent respectively in the past year, while little cousin Oil Search up 98 per cent.
Even Australian Gas Light has shaken off the unpleasant memories of its '80s experiences and gone back into the oil game.
But just when Australia needs its oil industry to foil the effects of rising prices in the balance of payments, the industry is spluttering and finding it hard to attract major investment. The reality Australia faces is that we have spent the best part of our oil inheritance in the years of low prices between the Iranian revolution and the rise of China a year or two ago.
Australian oil production peaked around 2001 and has been on the slide ever since, with a dramatic effect on our balance of payments.
Our deficit on oil imports has increased from $448 million in 2001 to $6.3 billion in 2005, and the figure will grow from here. Last year that petroleum products deficit accounted for about 25 per cent of Australia's total trade imbalance.
The '80s were the glory days of Australia's oil industry, when the massive Bass Strait oilfield was at its height, spewing out 550,000 barrels of oil a day. Now the field is a shadow of its former self, producing 100,000 barrels a day. That is still 21 per cent of the nation's supply, but no new field of that magnitude has been discovered, and those that have taken up some of the slack are now waning dramatically while demand grows unabated.
The North-West Shelf fields initially took over from Bass Strait, producing 544,000 barrels by 2000. But they proved shallow and production from there is now back to 214,000 bpd.
Even the effort to find new oil is not what it was. In 1984 the industry (including gas explorers) spent $1.7 billion on exploration in today's dollars. Last year, after a few years of steep rises, it spent $1.156 billion.
Deutsche analyst John Hirjee says Australia is an attractive place for oil exploration. The tax regime is relatively benign, infrastructure is good and there is stable government. However, there is a reputational issue. "Australia is gas prone, not oil prone," Hirjee says. That means explorers are far more likely to find gas than oil, and that is a problem. Australia has far more gas than it can use and so developing new fields is difficult.

There is the growing market for LNG exports but this is also contested, and it takes huge capital investment in production and transport facilities to exploit. Big companies would rather risk the wilds of West Africa or Algeria, where a big oil find can make the difficulties worthwhile rather than spend up and find yet another Australian gas well.
There have been some new finds, such as Woodside's Vincent and Enfield deposits and a to-date disappointing prospecting area in the great Australian Bight. "None have been the billion-barrel deposit that would attract the majors," Hirjee says.
Hirjee believes the current oil spike is not caused by unmet demand. A strong world economy and the rise of China have brought supply and demand into balance, leaving little in reserve. In this situation, political concerns over major producing countries such as Iran, Iraq, Nigeria and Venezuela have been amplified, causing the spikes.
Prices should ease back to between $US45 and $US50 a barrel, Deutsche says. At these prices some new technologies, such as producing oil from Canada's vast oil sands deposits, biodiesel, and ethanol and coal-to-oil plants, will be increasingly viable. Australia, with its rich agricultural and coal resources, could be at the forefront of those developments.
But even if these do take up considerable slack, their economics are such that the oil prices in the $US20s and $US30s a barrel of the past two decades are unlikely to return.