[Peakoil] Peak Oil: Explorers Spend Up in The West

[Antony Barry]

Shell, ConocoPhillips and other global energy majors show no sign of pulling back from hugely expensive exploration programs off the coast of Australia, demonstrating an optimism about future major development despite increasingly strident concerns about costs.

In a highly unusual concentration of gas exploration drilling, three of the most expensive exploration wells ever drilled in Australia are due to start at the same time.

Shell is days away from starting a major exploration well off Western Australia, with Conoco Phillips and local player Santos set to soon follow with high-profile wells of their own. All of the wells will cost more than $100 million, in an intensive search for more reserves to feed liquefied natural gas ventures beyond the current wave of LNG plant construction.

Hefty spending on oil and gas wells helped drive total investment in minerals and petroleum exploration in WA to a record in the June quarter of $1.227 billion. Some analysts are starting to pick an upturn in commodity prices more widely. Westpac chief economist Bill Evans yesterday forecast a 30 percent jump in commodity prices next year as China recovers.

Morningstar analyst Mark Taylor said there were already signs that the iron ore market was becoming “more balanced” after the recent slump in prices to $87 a tonne, which has since rebounded to $114 a tonne.

Australia already has more than $175 billion of LNG projects being built, triggering a squeeze on labour and construction resources and warnings of cost blowouts and delays. Last week ExxonMobil Australia chairman John Dashwood joined his counterpart at Shell, Ann Pickard, in cautioning investment was at risk from labour costs and poor productivity.

Mark Taylor has calculated that Chevron’s $29 billion Wheatstone LNG project being built in WA will be almost double the real cost of the North-West Shelf venture’s LNG supply capacity.

The surging costs of new plants and heightened competition from rival LNG supply ventures in North America mean the best-placed companies are those with “a head-start on infrastructure spend,” he said. Indeed, much of the exploration drilling is being driven by companies seeking to capitalise on plants already under construction that will offer more economical expansion than building a brand-new project, analysts noted.

But while most of their focus is on regions such as the Browse and Carnarvon basins known for giant gas deposits, some are also prepared to place hefty bets on frontier drilling. BP, for example, is advancing plans for a $1.4 billion four-well exploration campaign in remote and rough waters far off South Australia, where no oil or gas has been found.

“If you stop exploration, that kills the growth of a company,” said Graeme Bethune, principal at energy economics consultancy EnergyQuest. “One of the aims is to get the stuff in the larder; most oil majors take a very long-range view.”

ConocoPhillips and partner Karoon Gas Australia are drilling the first of up to seven wells in their Browse Basin permits off the far north-west of Australia, each expected to cost about $100 million. The Boreas-1 well is part of a campaign to prove up gas resources that could feed an expansion of Conoco’s existing Darwin LNG project.

The $150 million Crown-1 well being drilled by a Santos-led venture also in the Browse is a follow-up to the Burnside discovery in 2010 and could lead to more gas for an expansion of the $34 billion Ichthys LNG project in Darwin by Inpex, a partner in the well. It will be followed next year by the Treasury-1 well in the same permit.

Chevron last month made its 15th gas discovery off WA since mid-2009 in support of its Gorgon and Wheatstone LNG projects. It has eight wells scheduled this financial year and cites US government estimates that the Carnarvon Basin still holds about 127 trillion cubic feet of undiscovered gas, 7 percent more than has been found to date. Shell, meanwhile, is understood to be very close to starting to drill its controversial Palta-1 exploration well, west of Ningaloo Reef. The well has to be drilled as a requirement of the exploration permit, held by Shell and Mitsubishi.

The drilling should at least maintain the pick-up in the level of oil and gas exploration in WA seen in the June quarter, which spiked higher after a lull early this year. Petroleum exploration in WA recovered sharply in the June quarter, jumping 59 percent to $624 million,reported the WA Chamber of Minerals and Energy.

CME director Damian Callachor said the increase could be partly due to the finalisation of regulatory arrangements for offshore drilling through new national regulator the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA).

Bill Tinapple, director of petroleum at the WA Department of Mines and Petroleum, said delays in approvals had led to the deferral of some drilling but activity off the coast of WA was being maintained.

But the spending in WA appears to be masking a dip in offshore exploration across the country, at least in the number of wells drilled.

Australia-wide, the number of offshore exploration wells is running about 50 percent lower than in previous years, said Chris Graham, head of upstream Australasia research at Wood Mackenzie.

“This is perhaps unsurprising because there has been a big shift from offshore exploration and appraisal activities towards development this year,” he said. “You’ve got a number of the major projects with their development drilling campaigns under way and there are only a finite number of rigs available.”

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Antony Barry
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