The Energy Report: Johan, please give us an overview of the shape of the oil and gas industry in Australia.
Johan Hedstrom: The Australian oil and gas industry is dominated by a series of big investments in new liquefied natural gas (LNG) projects. Our industry is building seven new LNG projects, costing $240 billion ($240B). The biggest one is Chevron Corp.’s (CVX:NYSE) Gorgon project, which is projected to cost $55B. The BG Group Plc’s (BRGYY:OTCQX; BG:LSE) Gladstone project in Queensland is now selling LNG. A couple more LNG projects will go online this year, a couple more next year, and the rest of the projects will go live in 2017. This gargantuan investment sector is dominating the Australian energy industry and—it must be said—driving up costs in the field as energy services are in great demand.
TER: How is the Australian energy sector affected by global oversupply and falling prices?
“The Australian oil and gas industry is dominated by a series of big investments in new LNG projects.”
JH: The high level of LNG activity and the competition for energy services in Australia—plus a high Aussie dollar—means that Australia is simply an expensive place to operate. If West Texas Intermediate stays at about $50 per barrel ($50/bbl), it will be difficult for companies to generate the elevated returns they had projected at high prices. They can still make money with Brent at about $60/bbl, but not as much as they had hoped. On the other hand, the industry is irrevocably committed to bringing the new LNG projects onstream, and the investment is huge. But wherever the firms can save on expenditures, such as exploration, they do cut back.
TER: Major firms like Chevron are obviously in for the long term. But do low prices thwart the timely development of …read more