A new report has found that the collapse in global oil prices over the past 12 months is now officially decimating oil and gas exploration activity in Australia – the lifeblood of feedstock for existing and future oil and gas projects. And despite gas and petroleum annual production hitting record highs over the period, it is feared the exploration collapse is also having a secondary longer term economic impact.

This is the emerging expectation of a significant weakening for years to come in  Australia’s oil and gas reserves base. The latest findings are in the just released March quarterly report by respected independent analyst, EnergyQuest, and detailed today at the Australia Domestic Gas Outlook conference in Sydney.

EnergyQuest’s Chief Executive Officer, Dr Graeme Bethune, said today that the total number of exploration and development oil and gas wells drilled in Australia nearly halved, falling from 1,534 in calendar 2014 to just 821 in calendar 2015, including exploration wells falling from 119 to 54.

“In that time, exploration spending fell from A$1,034 million in Q4 2014 to A$446 million in Q4 2015,” Dr Bethune said.

“This is Australia’s lowest oil exploration spend in a decade.”

Dr Bethune said the low oil prices had driven significant downwards revisions of reserves, leading to negative reserves replacement ratios over the year just gone.

The price slump did not hit sales, with Australian oil and gas company sales volumes up strongly in 2015 Q4 by 6.8% qoq on average - but revenue realised per barrel of oil equivalent (boe) fell by an average 29%.

This saw total sales revenue (excluding BHPB) plummet from A$4.4 billion in Q4 2014 to $3.3 billion in Q4 2015 - a drop of A$1.1 billion – or Dr Bethune noted, one billion dollars not going back into Australian energy exploration, production or other oil and gas related business activity. The collapsed oil price had its worst impacts off Australia’s coastline, with offshore exploration activity crashing last year to just three wells sunk – nine times lower than the 29 offshore targets drilled in 2014. Dr Bethune believes last year’s drought in offshore drilling is just the beginning of a prolonged period of very low Australian offshore activity, “despite the large take up of new acreage in offshore release programs between 2012 and 2014”.

“A survey by EnergyQuest of work programs to win offshore acreage in this three-year period shows explorers have guaranteed to spend a total of A$1,105m in the first three years - but this impressive headline figure includes only 12 wells,” Dr Bethune said.

“In addition, winning bidders loaded most of their proposed spending ($1,774 million and 43 exploration wells) into the secondary, non-guaranteed component of their work programs (years four to six of the permits). “This effectively gives them in a low oil price environment, the freedom to severely prune
their activity for as long as prices remain low. “Onshore, the decline in exploration wells was less precipitous but still serious,” he said. “The number of onshore exploration wells dropped from 90 to 51, with big declines in all states except WA, where exciting results in the Perth Basin are driving activity.

Time for real “Bight”

“To make matters even more difficult, some politicians are intent on killing what little oil and gas exploration activity there is, with Senate inquiries now into unconventional gas as well as proposed oil and gas exploration in the Great Australian Bight.

“Australia is estimated to have only produced 76 million barrels (MMbbl) of oil in 2015, the lowest since 1970 – yet exploration in the Bight provides the best chance of finding the new oil basin that Australia badly needs.”

Not surprisingly, the price hit players in Australia’s energy sector saw the ASX 200 Energy Index halve - from 15,332 in September 2014 to 7,511 at the end of January 2016 – its lowest level in 11 years. At the bottom of the players’ trough, 14 of the 79 oil and gas juniors on the ASX are either exiting the industry, being forced into major asset sales and/or contemplating a switch to another sector.

EnergyQuest noted, however, some good news in the price ravaged oil sector, with Australian LNG export revenue growing quickly, to “benefit the whole economy”. Gross Australian LNG production in 2015 was 30.4 million tonnes (Mt) - an increase of 23.5% year on year and up 48.3% at 9.1 Mt in the final quarter. Not surprisingly, as the new east coast LNG plants soak up available gas, EnergyQuest forecast in its March quarterly that it estimated a southern supply gap of around 80 petajoules (PJ) in 2020, increasing to ~170PJ just five years later in 2025.

It was better news in the west where WA domestic gas production increased by 4.4% yoy in 2015 to a record 371.7PJ – after four years of flat demand. Overall, Australia’s natural gas production increased by 12.6% in 2015 to a record 2,634.6 PJ and by 26.7% in Q4 to 729.4PJ - due mainly to increased Surat-Bowen basin production.

Australian petroleum production (oil, gas, LNG, natural gas liquids) in 2015 was a record 581.0 MMboe, 6.6% higher yoy.

Regional Queensland’s upwelling

EnergyQuest noted a second area with a positive outlook – Queensland’s development drilling.

“This region will need to  maintain production to fuel the LNG projects,” Dr Bethune said. “Drilling there fell from 1,173 wells in 2014 to 612 wells in 2015. This was a natural consequence of the initial need to drill, discover and develop maiden gas flows for the commissioning cycles for the new LNG plants - but substantial numbers of additional development wells are still needed now as the plants move to long-term output. “Production of close to 1,500 PJ/a from the Bowen and Surat basins is needed to underpin the Gladstone based LNG projects as well as to meet other demand.

“Some of the best fields are able to deliver 2PJ or more per well. If this could be achieved on average across the basins, it would still imply a need for 750 wells pa. “This figure seems to be what the LNG companies are assuming, with plans to drill 800 wells a year in total.

“However, many areas are poorer than this and recoveries will fall over time. Average recoveries of 1 PJ/well would therefore need around 1,500 wells pa,” Dr Bethune said.