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The Sir Robert Bond Papers: Aussie oil and gas production to jump

By Edward G. Hollett
Tuesday, March 06, 2007

Australian oil production may rise 15% in 2007, with gas rising 22%, according to the Australian Bureau of Agricultural and Resource Economics.

The full report includes some interesting observations about trends in the oil and gas industry globally that have echoes in the local political environment. For example:

Increased costs

Costs of developing new projects and production have increased universally across the world’s minerals and energy industries over the past four or five years. Increased costs have been associated with an almost unprecedented increase in the demand for a range of inputs, such as equipment, materials, skilled labour and mining services, required to bring on new capacity. In some cases the available supplies simply cannot meet demand and the associated delays add further costs, reducing production and delaying the start up of new projects.

Political and security risks may impede supply growth

In a number of oil producing countries, sovereign, geopolitical and security risks have the potential to adversely affect supply. In 2006, it is estimated that 10 per cent of production capacity in Nigeria was lost as a result of attacks on production facilities.

Sovereign risk, which includes significant changes to government policies or political interference, also creates uncertainty for oil supply. Recent examples include national governments changing agreements with oil companies or nationalising industries. For example, in the Russian Federation, Royal Dutch Shell and its partners, Mitsui and Mitsubishi were obliged to sell a share of their stakes in the Sakhalin project to Gazprom, the Russian government owned gas company.

In Venezuela, the government is converting previous agreements with foreign investors into joint venture agreements in which the nationally owned PDVSA is required to hold a minimum 60 per cent interest. In addition, royalties and corporation taxes applied to the oil industry have been increased by 33 per cent and 50 per cent respectively. Such unpredictable changes to the regulatory and fiscal environment represent an important risk and have the potential to compromise foreign investment and limit significant expansions of supply. [Emphasis added]

ABARE also notes a decline in exploration over the past decade. In 2005, 10% of wells drilled globally were exploration wells, compared to 20-25% in the 1990s. Interest is being focused in a smaller number of exploration projects which have higher comparative exploration costs.

In that context, this trend will make it much more difficult for Newfoundland and Labrador to attract new investment for exploration. Costs of operating in the North Atlantic are already high, thereby reducing profitability. Coupled with the costs of what ABARE calls “sovereign risk” and the general increase in exploration costs, government policies may well lead to a dramatic decline in exploration offshore in the next five to 10 years.

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