This article originally appeared in Oilfield Technology (subscription required).
Executives in Australia’s upstream oil and gas industry may feel like they are running to stand still these days, as they wrestle with high project costs, expensive labour and declining productivity, which raises unit costs beyond sustainable levels.
But in fact, these executives and the industry they serve are hardly standing still. They are poised at a critical crossroads, where the decisions made over the next few years will determine Australia’s long-term position in international energy markets. The industry faces a choice between its continued march towards high project costs, declining productivity and expensive labour—all of which would doom it to lag behind more agile competitors and new supple sources from North America or East Africa—or a reinvigoration that creates more productive companies in a more efficient and streamlined sector.
Reinvigoration is the obvious choice: The opportunities for Australia’s energy sector remain extremely compelling. Global energy demand continues to grow, particularly in Asia, with a shift towards gas. Investments over the past decade could position Australia as the world’s biggest LNG supplier by 2018, and further investment of US $180 billion is possible. There have also been renewed efforts from regulators to smooth out the approval process and reduce the structural complexity of large projects—for example with the emergence of the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) as a one-stop shop for offshore regulatory approval in Commonwealth waters.
However, the challenges are huge, too. Capital and operating costs continue to rise, spurred by large projects, ageing fields, high labour costs and regulatory complexity. New suppliers are going after Australia’s backyard markets in Asia. Some customers are agitating to change how they buy LNG. Margins for producers will depend on where they sit on the cost supply curve. This has always been true, but the imperative to control costs is even stronger now. The tightening labour squeeze is made worse by the imminent retirement of a generation of seasoned professionals just as new capacity comes online, increasing the demand for capable operators and making continued wage inflation a real concern. This year’s Australian Petroleum Production and Exploration (APPEA) conference in Perth reported cooks on offshore platforms making US $350,000 per year.