Chapter 5 - Supply side responses - overview and exploration
Regardless of whether peak oil is or is not a pressing problem for Australia,
commentators advance a number of what appear to be sound reasons for exploring
options for increasing or diversifying Australia's indigenous transport fuel
supply, and doing so in the near future. These include:
- Balance of trade – Australia is expected to run an increasingly
large deficit in petroleum products in the future. By developing more locally
available energy supplies, the country may offset some of the trade imbalance
that may result from increasing requirements to import oil, as well as adding
value to products currently exported at lower values, for example, natural gas.
- Security of supply – much of the world's oil supply comes from
countries that are potentially unstable. Some commentators also consider there
is a risk that security of supply may be threatened if larger countries lock in
supply contracts from countries that are developing oil resources. There is
some evidence that the latter may already be occurring.
- Time lags in developing new supply sources are long.
Diversification of supply, whether by finding new supplies of conventional oil
or developing alternative sources of liquid fuel supplies, will be a protracted
process, requiring lead times of up to a decade and possibly longer. If it is
to be successful and sufficiently timely, action may be required sooner rather
- Global warming – some fuel supply diversification options offer
possibilities for reducing or limiting transport sector greenhouse gas
emissions, while maintaining the necessary functionality of transport systems.
Demand side measures, that is, seeking to control or reduce the demand
for liquid transport fuel supplies through options such as energy efficiency
measures, or shifting the transport task to other forms of transport that are
less dependent on liquid transport fuels, may make a significant contribution
to easing the economic disruption of restricted fuel supplies and high prices,
if these come to pass. However, the economy currently depends significantly on
primary industries, in particular mining and agriculture, which are energy
intensive and liquid fuel dependent. The transport industries, which also predominantly
use liquid fuels, are also vital to economic well-being. Accordingly, it is
prudent to also consider options for increasing or diversifying transport fuel
supplies – that is, a supply side response.
The committee has received evidence about a number of supply side
options for meeting domestic liquid transport fuel requirements. These options include:
- finding more conventional oil supplies within Australia or in
Australian territorial waters;
- sourcing a proportion of fuel requirements from biomass - fuels
such as ethanol, biodiesel, DME, methanol and synthetic diesel can be produced
- producing fuels by liquefying coal or natural gas, or distilling
it from oil shales; and
- using other fuels that can be substituted for petrol and diesel,
such as LPG, natural gas (methane) or hydrogen as a transport fuel.
All of these possibilities come at a cost, economic or environmental, or
have limitations. There is no one perfect solution. This chapter gives a broad
overview of the evidence received in relation to exploring for more petroleum
resources. The following two chapters examine options for deriving some or all
of Australia's liquid fuel requirements from sources other than oil, including
natural gas, coal and biomass.
Exploring for more oil in Australian territory
Australia has been nominally
self-sufficient in oil for several decades, thanks largely to the discovery of
the large oil, gas and condensate fields in the Gippsland and Carnarvon basins.
As described in Chapter 2, self sufficiency is declining, partially because the
Bass Strait fields are depleting, but also because of rising demand.
A number of organisations highlighted the effect that this decline in
self sufficiency will have on the trade deficit. The Australian Petroleum Production
and Exploration Association, for example, told the committee that the trade
deficit in crude oil and condensate will be about $20 billion by 2015 – that
is, within a decade.
This deficit may be off-set wholly or partially by energy exports (coal and
gas) and other exported products, but has the potential to have an adverse
economic impact if prices or markets for these other exports fail to meet
The importance of petroleum products or substitutes for them in Australia's
energy mix is likely to continue for the foreseeable future. It therefore
appears to be prudent to actively encourage local exploration. This does not
necessarily mean that resources, if discovered, will be developed. This will
depend ultimately on the economics of bringing any discoveries into production,
and on the price at which competing substitutes or imported product can be made
The evidence received by the committee indicates that there is a view,
particularly amongst organisations such as Geoscience Australia, that there are
good prospects for discovering new oil resources within Australia and in
Australian territorial waters. Geoscience Australia told the committee that by
world standards, Australian sedimentary basins, particularly those in offshore
areas, have only been lightly explored. Fewer than 9,000 exploration and
development wells have been drilled in Australia, compared to about 3,000,000
wells in the United States, which has a comparable land area.
The Australian Bureau of Agricultural and Resource Economics (ABARE)
gave similar evidence, stating that more than half of the offshore basins that
show signs of petroleum potential remain unexplored.
The CSIRO also provided an optimistic assessment of Australia's prospectivity,
telling the committee that:
Australia has probably used only a relatively small proportion
of its overall petroleum endowment. This is a big advantage that sets us apart
from the traditional major OECD petroleum players, including the UK and USA, both of which have sharply
The following graph, drawn from the CSIRO submission, compares estimated
recoverable oil and gas resources, including gas and condensates for Australia
and the rest of the world, in percentage terms.
Figure 5.1 – Comparison of the recoverable oil and
gas resources (%) for Australia and the rest of the world (including gas and
Sourced from USGG Estimates, reprinted from CSIRO, Submission
Others are more cautious about the prospects of finding significant
quantities of oil in particular. For example, John Akehurst, former Managing
Director of Woodside Australian Energy wrote:
...the general view within the industry [is] that Australia has low oil prospectivity and
fields yet to be discovered are of small to medium size and becoming more
Similarly, Professor David Harries, Director of the Research Institute
for Sustainable Energy (RISE) at the Murdoch University submitted that many
petrogeologists considered that the prospects of finding significant oil
reserves in Australian Territory is not high:
Many petrogeologists ... argue that Australia’s prospectivity in oil is
inherently low and that while there are likely to be undiscovered oil reserves
in Australian territory, these are unlikely to be significant. Some petrogeologists
have attempted to explain Australia’s low hydrocarbon prospectivity in terms of plate
tectonics and a possible north-south planetary asymmetry during the
The Australian Academy of Technological Sciences and Engineering
(AATSE) agreed that many Australian sedimentary basins remain substantially
unexplored, but also cautioned that many of these are in deep water and
difficult environmental conditions. The AATSE noted the Government's programs
through Geoscience Australia aimed at opening some of these areas up for
exploration, commenting that only by encouraging exploration in these frontier
areas can the opportunity of finding a new oil province be realised.
However, as noted by AATSE and others, the process of bringing the
resources of a new province on line, assuming that one is found, involves long
delays, as long as a decade. The AATSE said that the release and preliminary
exploration of new acreage took around four years, and if a discovery was made,
it would take a further six years before it could be brought into production.
Intuitively, it might be expected that the high oil prices of 2005 and
2006 would be enough to stimulate exploration activity. As Dr Brian Fisher told
the committee when commenting on whether the recent higher oil prices would
stimulate exploration activity: 'On the supply side, clearly high oil prices
encourage lots of activity in the exploration sector and drive new technology'.
However, evidence from the Australian Petroleum Production and
Exploration Association (APPEA) indicated that while increased prices stimulate
exploration in areas known to have produced hydrocarbons in the past (ie:
brownfield sites), this was not necessarily the case for exploring new areas:
While higher crude oil prices result in increased brownfield
exploration and appraisal drilling, it does not necessarily deliver increased
exploration in those areas where it is needed most, and that is the frontier
areas. It does not provide Australia with any relative competitive exploration
advantage. Frontier basins, of which Australia has many, are high risk and very
high cost, as rightly pointed out by the Prime Minister in his speech to CEDA
Information provided by APPEA shows that around 100 exploration wells
have been drilled in the last year, about half of them in offshore areas.
This does not represent a high level of activity in historical terms.
Figure 5.2 – Exploration wells drilled, 1984 to 2005
(number of wells)
Source: APPEA, Submission 176, p. 4.
There are a number of reasons for this relatively low level of activity.
- exploration costs and risks;
- the longer term price of oil; and
- policy settings including taxation regimes and incentives.
Exploration costs and risks
The costs of exploring for oil, particularly in offshore areas are high
and rising. APPEA provided the committee with information about the costs of
drilling, and in particular, how these have risen:
...where we are seeing really big rises are in rig rates. For the
rigs that we use for exploration our industry was paying about $65,000 a day
about 18 months ago, and now they are upwards of $250,000 to $300,000, or even
$400,000 a day...in general we are seeing cost increases over the past 12 months
of between about 30 to 50 per cent depending on the project.
The costs associated with exploration work are compounded by risk, that
is, the chances of commercial success. Commercial success has to be
distinguished from the rate of discovery, which is apparently quite high. In
2004, the technical success rate (ie: a well is clearly shown to contain
petroleum on the basis of electrical logging) was 53.3 per cent for onshore
wells, and 40 per cent for off shore wells. The following table shows the
technical success rate for oil exploration wells over the last decade.
Discovery rate per well drilled
Success Rates (per wells
Number of exploration
Source: Department of Industry, Tourism and Resources,
Response to Questions taken on notice, 12 September 2006,
However, as noted by the Department of Industry, Tourism and Resources,
technical success does not imply commercial success. Discoveries may be small
and the ability to commercialise them depends on a range of technical and
economic factors which change over time.
In Australia, commercial success rates have been considerably lower than
in other countries, creating the perception that explorers may be more likely
to achieve a return on investment elsewhere. As APPEA pointed out in its
The offshore Australia region success rate for commercial oil
discoveries was 6.5 percent (that is on average one in fifteen exploration
wells drilled in the study period resulted in a commercial petroleum discovery
in offshore Australia). This compares to a global average success rate of 17
Ms Robinson of APPEA elaborated:
...frontier areas are very high risk and high cost. We are talking
about perhaps a risk ratio of 1:15. In other words, if you drill an exploration
hole you have about a 1:15 chance of finding something, and it has been very
costly because it is deep water and so on, whereas a lot of the companies would
prefer to go to, say, North Africa, the Middle East, Russia or other places
where the risk ratio is much lower—in the Gulf of Mexico it is 1:4 and in West
Africa it is 1:3. I think that is the issue.
Australian commercial discoveries are generally smaller compared to other
countries, further increasing the perception that Australia is not an
attractive place to explore for petroleum. APPEA advised the committee that the
average commercial discovery size in offshore Australia was small compared to
other regions (28 million barrels for oil and 197 billion cubic feet for gas).
APPEA submitted that this combination of factors 'presents significant
challenges from a policy context'.
Lack of confidence in longer term oil
A lack of confidence in the longer term cost of oil also appears to act
as a disincentive to undertake exploration in frontier areas, which are
acknowledged as being more difficult areas in which to achieve an acceptable
return on investment. When asked about what would happen if the price of oil returned
to $US20 per barrel, Ms Robinson of APPEA responded that:
If it went back to $20 a barrel I think we would see what we
have seen in the past around the world, and which is perhaps part of the reason
why we are in the predicament that we are globally, and that is a failure to
invest in exploration.
One factor which holds down the longer term expectation of higher oil
prices is substitution – that is, when the price gets to a certain level,
substitutes for conventional oil may become economically viable. Dr Fisher of
ABARE alluded to this factor in evidence:
If your long-term expectation is that oil prices will be
sustained at very high levels then you bring in all this extra supply. The
reason you do not see that extra supply rushing in today is that effectively
people are not convinced that oil prices are going to stay at these levels... anyone
who calls a price above $40 is not taking into account the liquefaction of coal.
APPEA was of the view that Australian policy settings need to be adjusted
to improve Australia's relative attractiveness as an investment destination on
a risk adjusted basis. APPEA also sought an extension of Geoscience Australia's
pre-competitive geoscientific information program, commenting that 'probably
the most useful service or program that the government provides for the
industry as a whole is the collection and provision of... pre-competitive
APPEA also addressed the introduction by the Government of a 150 per
cent uplift factor in relation to Petroleum Resource Rent Tax in relation to a
limited number of designated frontier exploration areas. APPEA did not appear
to regard this measure as particularly useful, pointing out that it is of
'limited interest' in that it is only relevant to those companies paying
petroleum resource rent tax who are actually in profit.
The committee notes that on 14 August 2006, the Prime Minister announced
a number of initiatives to stimulate local exploration activity, including the
requested extension of the Geoscience information program. The initiatives
include the following:
- the allocation of an additional $76.4 million over the next five
years to expand Geoscience Australia’s pre-competitive data acquisition
- a review of the exploration policy framework, to reduce the red-tape
burden on the petroleum exploration industry; and
- $58.9 million to allow Geoscience Australia to 'to pioneer
innovative, integrated geoscientific research to better understand the
geological potential of onshore Australia for both minerals and petroleum.'
The committee also notes that in February 2006, the Minister for
Industry, Tourism and Resources announced the awarding of a total of 13 new petroleum
exploration permits. Nine of these new permits are in Commonwealth waters off
WA, two are off Tasmania and two are in the Territory of Ashmore and Cartier Islands
Ultimately, decisions about whether to conduct exploration will be
commercial decisions made by companies on the basis of the assessment of
commercial risk and likely returns. In making these decisions, companies will
undoubtedly make an assessment of whether any resources discovered can be
produced at a price that is competitive with alternative fuel sources.
It remains to be seen whether the Government's initiatives will result
in the discovery of significant new oil reserves. The committee accepts that
there are reasonable grounds to believe that there are good prospects for
discovering further reserves. However, a multifaceted approach to reducing
dependence on imported oil is prudent, requiring the parallel consideration of
other alternative sources of liquid or substitute fuels, as considered in the
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