From an investment point of view, a lot has happened in the global oil and gas industry over the past year.  Many new developments have either been approved or started production, with one of the most recent being Italian oil and gas company Eni commencing production in the Vandumbu field in December.

The Fraser Institute recently released its annual Global Petroleum Survey, which is a guide to how major investors are perceiving the industry. The researchers surveyed a total of 256 petroleum industry executives and managers across the globe and accumulated sufficient data to evaluate 80 jurisdictions which account for 53 per cent of proved global oil and gas reserves.

The jurisdictions were assessed based on 16 factors known to affect investment decisions. This information was then used to generate a ‘Policy Perception Index’ before sorting the jurisdictions into clusters based on the size of proved reserves to allow for a similar comparison.   In the end, the results of the report found that out of the 11 jurisdictions with the largest petroleum reserves, the countries that were perceived as most attractive for investment were Texas, Russia, Alberta, Egypt, and Mozambique.  The report also found that the 10 least attractive jurisdictions for investment were Venezuela, Yemen, Tasmania, Victoria, Libya, Iraq, Ecuador, New South Wales, Bolivia, and Indonesia.  Australian Petroleum Production and Exploration Association (APPEA) Chief Executive Malcolm Roberts explained that Tasmania, Victoria and New South Wales have been poor performers for years, but their investment rankings are still falling. “At a time when Victoria and NSW increasingly rely on other states to meet their gas needs, their own climate for investment is going from bad to worse,” Dr Roberts commented.

This year the three Australian states were new additions to the list of the 10 least attractive jurisdictions, with NSW experiencing a 6-point deterioration in its score, dropping from the 17th percentile in 2017 to the 10th percentile in 2018.  Tasmania’s Policy Perception Index score deteriorated by over 23 points since the 2015 edition of the report, with Victoria also dropping in score by 14 points since 2017.  All three states have different levels of restrictions on state-wide onshore gas exploration, which are considered to be unpredictable and subject to investor uncertainties.  The researchers made a note that the Victorian Government’s ban on onshore unconventional gas exploration and development was seen as ‘a major deterrent to investment’.

It has been predicted that gas supply will remain tight and prices will rise in these states if investment opportunities remain unenticing to global and local investors.  “Australia must continue to attract investment to develop our oil and gas resources and ensure reliable, affordable energy supplies, but it is alarming that the states that most need new supply are the most hostile to resource development,” Dr Roberts shared.

“Businesses in NSW, Victoria and Tasmania will continue to pay higher prices to transport gas from other states, threatening the viability of hundreds of businesses and thousands of jobs that rely on natural gas supply,” he said.

This year, South Australia was once again ranked as Australia’s most attractive destination for oil and gas investment, although its ranking fell to number 20 among 80 jurisdictions compared to last year when it ranked 10th among 97 jurisdictions. APPEA said the drop in score reflected the impact of the South Australian Government’s fracking moratorium in the state’s South East.  In other parts of the nation, Western Australia was the second most enticing Australian region for investors, coming in at 37th in the report, followed by Queensland (50th) and the Northern Territory (68th), seeing slight increases in rankingssince last year’s edition.

WHAT’S IN STORE FOR OIL AND GAS INVESTMENTS IN 2019?

According to PwC’s Oil and Gas Trends 2018-19 report, after several years of oversupply, the oil and gas industry could very well move into a supply crunch. This may seem hard to grasp due to the current optimism levels in the sector, but the International Energy Agency (IEA) flagged this as a possibility in 2016. In addition, CEOs of some of the industry’s biggest players, including Total, Eni, and Saudi Aramco, have also warned of one by the end of the decade.

The first reason behind this future supply crunch is an ongoing decline in new discoveries, with PwC reporting that by the end of 2017, the volume of new oil and gas discoveries was at its lowest level since the early 1950s. The reason for the decline in new discoveries is simple: It’s getting harder to find the large discoveries, and most prospective areas have already been explored.

The other challenge is that exploration spending has slowed since it fell during the collapse in 2014-16. Globally, spending fell by more than 60 per cent from a high of US$153 billion in 2014 to about $58 billion in 2017. However, PwC forecasts spending to recover modestly over the near term at a 7 per cent compoundannual growth rate.  Lastly, the industry is facing a broader challenge of dealing with the emissions targets and the overall momentum building towards a low-carbon future, according to BP’s 2018 Energy Outlook. The growing electrification of transport, the possible plateauing of oil demand by the 2030s, and the deployment of smart technologies to better manage supply and demand will require business models throughout the energy industry to evolve.

Faced with the uncertainties of a potential supply crunch and the energy transition, and to sustain oil and gas businesses, it is imperative that companies start future-proofing.

IMPLEMENTING A FUTURE-PROOFING STRATEGY

• Continue to manage the overall portfolio with a much lower break-even price, whatever actual oil prices are.
• Hold on to the mantra of capital discipline.
• Refocus investment and efforts on asset maintenance.
• Replace the ‘owner-operator’ model with an ‘owner’-only approach where returns are the priority.
• Double down on digitisation.
• Develop talent for a new era of technology.
• Consider how the overall business should evolve.

Sources: Fraser Institute Global Petroleum Survey, 2018; Oil and GasTrend s 2018–19, Strategy shaped by volatility, PwC, Oil and Gas Trends 2018-19, PwC