The place not to be when crude oil prices undergo a correction is in the upstream petroleum industry’s contracting services businesses. They are always on the front line of severe belt-tightening.
I witnessed this at first hand in 1986 when managing what was then the Australian Petroleum Exploration Association. Back then, the oil price ‘corrected’ back to 1974 levels and fell to $US8 a barrel.
Then, as now and at other stages of the rollercoaster prices ride over the past half century, the standard reaction from petroleum production and exploration businesses is to take machetes to their budgets and shove non-essential investment plans back in the drawer.
On the other hand, one of the places to be in Australia as the current storm rages will be at the annual gathering of the upstream petroleum industry, which occurs this year in Melbourne in mid-May.
In good times and in bad, the industry flocks to the annual APPEA conferences. The organisation is now called the Australian Petroleum Production & Exploration Association, reflecting the huge change in local fortunes on the back of LNG development. It publicly and privately shares its hopes and fears and also celebrates its successes. (There has been a lot of the latter in recent years.)
Five times as many people attend the annual conferences compared with my time as association manager through the 1980s. The conference exhibition occupies 15 times as much space. Last year in Perth, APPEA attracted 280 exhibitors from 30 countries and nearly 4,000 attendees.
While the industry’s focus today is on the here-and-now -- being hanged in the morning, commercially as well as otherwise, tends to concentrate the mind -- the hardheads in business as well as government will want to use the Melbourne event to evaluate the longer-term consequences as much as the short-term carnage.
The big local difference between 1986 and now is that then, it was still very much about oil; now it is almost entirely about gas.
For the Hawke government, for example, the ’86 price crash threatened a budget catastrophe, with billions of dollars in revenue coming from the crude oil excise.
However, it sailed through unscathed because, in one of the great pieces of local political sleight-of-hand of the past 50 years, then treasurer Paul Keating switched the excise from the wellhead to the petrol bowser. It was a move that, in turn, gave John Howard heartburn when motorists/voters reacted strongly to high prices in the late 1990s as the rollercoaster took another bend.
Today, industry and policymakers are reconciled to drawing the bulk of Australian transport fuels from overseas. However, the economy, profits, taxes and royalties, jobs and the ongoing search for energy supplies on the east coast (with serious implications for manufacturing) are oriented to gas.
The immediate public focus is on our LNG developments but the fate of onshore gas activity is not a trivial issue.
Whether the urgency of meeting domestic gas needs affordably will outweigh the effects of the price collapse remains an open question.
Deloitte analyst Geoffrey Cann identifies four constants that he says will propel the gas sector along regardless of today’s oil prices and the continuing downward trend.
- LNG contracts will hold firm for several years, giving some certainty to suppliers on sales volumes and pricing.
- The export infrastructure being constructed will continue to be built because gas has been sold on long contracts.
- Wells will be drilled to supply gas to both domestic and export markets.
- The infrastructure will continue to be serviced and maintained to keep gas flowing and to meet regulatory commitments.
It is these factors that will also ameliorate the extent to which the price rout burns the petroleum service and contracting businesses.
The hardheads know the oil price will rebound -- it always does -- but the bugger factor is always timing and extent. And the impacts vary considerably depending on geography.
Deloitte’s Cann argues, for example, that idle equipment and know-how in North America may make its way to Australia, increasing service company competition here and helping to drive costs lower, working to the benefit of petroleum businesses who, he says, will be in a strong negotiating position.
He adds: “The pressure to implement consolidated services and aggregate spending as a way of achieving scale economies should continue and accelerate.”
Cann also thinks the local shift from building gas export infrastructure as present projects are completed to 'operate mode' means that “many current builders will start to look at operations opportunities and cause further expansion in supply”.
However the latest ‘great correction’ plays out, the evidence of history reinforces the truth of the saying that it is an ill wind that blows nobody good. It’s just no fun being caught by surprise out in the open.
Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of OnPower, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.