By MoneyMorning.com.au
Over the last six months, energy stocks have been some of the best performers in the stock market.
With good reason – global energy demand is set to keep soaring.
As I mentioned in yesterday’s Money Morning, the International energy Agency (IEA) estimates global energy demand will increase by ONE THIRD in the next 25 years.
So to get the ‘good oil’ on the oil and gas sector, I’m in Adelaide to join 3000 other delegates for the Australian Petroleum Production and Exploration Association (APPEA) annual conference.
It’s a pretty heavyweight conference…
We heard from the International Energy Agency (IEA).
Federal and State politicians have weighed in.
Plus, we’ve seen the top executives from global oil companies like Total, and big Aussie firms like Woodside and BHP Billiton Petroleum. But yesterday’s highlights were just as much about what wasn’t said as about what was said, as I’ll explain now…
The Bureau of Resources and Energy Economics talked bullishly about China’s demand for natural gas. Unconventional gas has had a lot of focus, with very interesting talks from Clough Ltd [ASX: CLO], Wood Mackenzie and more from Total S.A. [NYSE: TOT].
All this info means there is a great deal to take in and think about.
After a long day of furious note taking, my brain seized up and it was time for a few medicinal cold ones to help process it all.
So, how would I sum up the first day?
In reflection, the speech from the Saudi Arabian oil minister, Ali Ai-Naimi, should have been a highlight of the first day.
As the most senior executive person in the world’s largest oil exporter, he’s the world’s most important ‘oil-man’. The auditorium was packed, and I was looking forward to his talk. This should have been the meatiest speech of all.
But it was as meaty as a veggie burger.
Saudi Arabia ‘Optimistic’ About New Oil Finds
The big-man was funnier than I expected, but he didn’t give much away at all.
He warmed up with a few gags about how he felt right at home in Australia because of the sand dunes, scuba diving and camels.
Great – but let’s get to business. So when he got talking about the importance of geopolitics of the energy revolution, I thought things were about to get interesting. Would he reveal his views on Iran…maybe Syria…what about China and India?
No luck.
All we got were clichés on the benefits of developing good trade ties with Australia. Nothing on US sanctions squeezing Iranian production. Not a bean on India buying Iran’s oil with gold. And silence on the threat of a potential blockade of the Persian Gulf.
Ali Ai-Naimi also spent a surprising amount of time talking up renewable energy. I thought this was an oil and gas conference? I guess he has to earn the requisite number of politically correct points in public, seeing as his nation is indirectly responsible for a large chunk of the world’s CO2 emissions.
But what about how Saudi Arabia planned to raise its production levels?
The Saudis forever talk about increasing production. They claim they have spare capacity of a few million barrels a day. When the world uses around 90 million barrels a day, that much spare capacity would really take the heat out of the oil price.
But, for all the talk, it’s never happened. How can we believe they have this spare capacity? And how do they plan to increase production from ageing oil fields in the future?
This was the good part of the speech. We heard how Saudi Arabia is investing in technological improvements. They have increased their brain trust by employing three times as many scientists, and have increased collaboration with Australian Universities. They have new seismic data and other geophysical information. That could bear fruit in the long-term.
But what about now?
Here’s what al Naimi said:
‘We are targeting the discovery of significant additional oil resources within the Kingdom… We have also initiated a program to explore frontier areas within Saudi Arabia, including the Red Sea. And while are in the early stages of exploration and evaluation, we are optimistic about the potential for significant discoveries’
Optimistic? That’s nice.
Optimism doesn’t guarantee results. For some time, I’ve been ‘optimistic’ that Port Phillip Publishing will give Keira Knightley a job as a secretary…but it’s yet to happen.
Anyway, one part of the plan to increase output could work. Using recent improvements in production technology, the Saudis aim to increase production by ‘…Increasing aggregate recovery in our major producing fields from the current 50% average to 70%’.
The technological improvements in recent years are astonishing, and could breathe new life into old fields.
The catch is that the methods are usually significantly more expensive. This may be why Saudi Arabia increased the oil price ‘target’ to $100 a barrel back in January. Or that could have just been due to the increased fiscal cost of pacifying Saudi citizens during the Arab Spring.
All up, I had expected much more from Ai-Naimi, the ‘Central banker of Oil’. But clearly he was here as a diplomat, creating relationships – and not controversy.
So, what about the rest of the day?
30 Years of Energy Growth
Fortunately, it was as meaty as it gets, and I got what I came here for. The meat and potatoes were the expert’s views on the exciting future of unconventional energy, and Australia’s place in what could be the biggest money-spinner and job-creator in the resources sector for the next 30 years or more.
To begin the day there were a few mandatory pot shots fired between the politicians and everyone else.
The politicians talked up how incredibly well Australia could do from the energy boom, while everyone else was saying that this boom depends squarely on the politicians creating a stable regime.
In the words of APPEA’s Chairman, David Knox:
‘…I’m talking about the need for a stable fiscal and regulatory environment. Governments need to mindful of not just their capacity to facilitate investment growth, but also their capacity to impede it…[they] need to be conscious that projects are competing for investment dollars globally… My message to the Australian Government is: Do not create uncertainty.‘
It takes me back to those heady early days of the mining tax debate. Politicians’ eyes lighting up with dollar signs, while those living in the real world reminded them it’s only fair that investors ask for fiscal stability when they’re stumping up a few hundred billion dollars.
We’ve seen all this before. But what I didn’t see coming was Minister for Resources and Energy, Martin Ferguson, agreeing. He conceded tax changes and uncertainty are no good for the energy sector, and warned the cabinet against fiscal instability. Who would have thought?
The Managing Director and CEO of Woodside, Peter Coleman, also made the same point about having a stable and competitive fiscal regime.
A good example of how governments can impede growth is that Australia is the second most expensive producer of LNG.
This is partly because of higher labour costs due to a skill shortage, which could be fixed with changes to immigration policy. Production costs are also higher as Aussie States have different safety standards, so companies in two states have to jump through twice as many legal hoops, causing unnecessary extra costs without making anything safer.
Aussie LNG Imports to Rise 460%
Woodside celebrated its first LNG shipment from its Pluto project this year. Coleman pointed out the timing was auspicious – it is 70 years exactly since its namesake, the ‘Pluto’ pipeline, was built across the English Channel in total secrecy. This carried oil to Allied troops in Europe. In the words of General Patton: ‘My men can eat their belts…but my tanks gotta have gas.’
Today it’s Asia that’s ‘gotta have gas’. 17 LNG receiving terminals are being built across Asia, and 18 more are planned for construction before 2020. Asia is the greatest source of LNG demand, though globally demand is expected to increase around 5% a year for the rest of this decade. Where’s it all going to come from?
There are a few LNG producers globally, with Qatar the biggest, but Australia has a chance of becoming the largest. Pluto has just come on line, but there are another eight huge projects in the wings, including Gorgon, Browse, Ichthys, Gladstone and others.
Cristophe de Margerie, the Chairman and CEO of Total pointed out that Australia currently produces 25 million tonnes a year. By 2018, this could increase to 80 million tonnes a year. Going out to 2024 it could be more like 140 million tonnes.
That’s if everything goes to plan of course – but when does that ever happen?
Finally, the biggest buzzword at the conference is ‘Shale’.
There have been some excellent presentations on ‘shale gas‘ and ‘shale oil’. Technological advances have opened up energy resources that simply weren’t there 7 years ago.
Shale is completely rewriting the energy landscape in terms of new suppliers, new markets and commodity prices. But I’ll save that for tomorrow.
This morning’s presentations are about to kick off and are titled ‘making the unconventional conventional’, so it’s time to knock back a few more coffees and get the notepad out.
I’ll be back tomorrow.
Dr. Alex Cowie
Editor, Diggers and Drillers
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