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Price Shock Worries Deepen Economic Fears
In Australia's oil bread basket, Western Australia, there have been warnings about the dire state of oil production amid fears of an impending oil price shock that could threaten the recovery of a fragile global economy.
Bill Tinapple, Petroleum Division Director at the Department of Mines and Petroleum in WA, which produces up to 90% of Australia's oil, confirmed the overall decline in oil exports, calling it a "major issue for Australia".
"This means we have not had significant new discoveries or developments in quite a long time and there are declining reserves as we can see in the projections, the only new sources of liquids we have is condensate from the gas developments mainly for LNG", he said.
The 'real value' of Australian oil exports is forecast to decline by 12% pa over the next three years despite it increasing in 2011–12 to $12.6 B, which was attributed to higher prices. While not a full recovery, oil exports will grow by 8% in 2016–17, the Bureau of Resources Energy Economics' (BREE) March quarterly report stated.
The lift stems from new production from several small fields including Coniston, Fletcher-Finucane, Turrum, Crux and Balnaves, underpinned by condensate production associated with the Prelude and Ichthys LNG projects.
The lower production is reflected in planned shut-ins on the North West Shelf that occurred in September 2011 and further declines from maturing fields. Output from the Kitan project in the Bonaparte Basin is expected to partially offset these declines, BREE's report stated.
On top of declining production, the draft Energy White Paper issued in late 2011 stated that consumption has also been increasing, along with Australia's oil import dependency.
Australia currently imports around 80% of its crude oil and other refinery feedstock, and maximum refinery capacity will reduce to 39,470 ML a year. The White Paper predicted that the reduction in domestic refining capacity, coupled with the projected increase in consumption, will lead to a greater share of refined petroleum products being sourced from imports. However, the report added that this increased import dependency does not have implications for energy security.
The anticipated shale oil and gas bonanza set to hit Western Australia and South Australia could change this equation.
"The hope that I see on the horizon - for Western Australia in particular - is the shale oil and shale gas liquids, which has significantly turned around the North American balance of trade in liquid petroleum products", Tinapple said.
Australia remains relatively unexplored for oil and there is potential for significant new oil resources to be found in deep water frontier basins (such as in the Great Australian Bight), and the development of onshore shale gas may unlock unconventional liquid hydrocarbons as well, BREE's report stated.
Alternatively, Tinapple said, "gas to liquids and coal to liquids (CTL) five years ago was the government's answer to the liquids shortage we were facing, however it seems to have disappeared as the technology has not developed as fast as it might have. While there are a couple of demonstration plants I know of, it does not seem to have developed very fast, and seems to have dropped off the radar on the Australia energy strategy".
BREE's report stated that while CTL technology is well established, it is one of the most costly sources of unconventional oil. Two commercial scale CTL projects are being proposed in Australia: the Amber CTL project, with an expected capacity of around 2,0000 bpd and is scheduled for completion in 2014; and the Clinton project, which has a capacity of 15,000 bpd and is scheduled for completion in 2015.
Australia's resources and energy commodity export earnings are also forecast to continue to grow over the medium term to reach a record $225 B in 2016-17. Resources and energy export earnings over the next five years are forecast to be underpinned by increases in export earnings for most commodities, including LNG and thermal coal, BREE's
report stated.
Eight LNG projects are currently under construction: APLNG, GLNG, QCLNG, Ichthys, Gorgon, Wheatstone, Prelude floating LNG and Pluto. BREE's report forecasts export volumes to increase from 20 MM t in 2011–12 to over 60 MM t in 2016–17. Once all these projects go online export earnings for LNG are forecast to treble over the same period to $30 B.
BREE's report noted that Australia's Total Primary Energy Supply (TPES) rose by 2.2% pa between 2000 and 2009, supported by robust economic and population growth during this period. Australia is the world's 18th largest energy consumer and accounts for just over 1% of world TPES, with energy consumption per person in Australia having increased by around 0.6% a year over the period 2000 to 2009.
According to BREE, between 2000 and 2009 Australia's energy production was, on average, sufficient to meet 2.3 times its energy requirements.
BREE's report also noted that Australia is a major energy exporter, being the largest exporter of coal, one of the largest uranium exporters and is now ranked fourth in terms of LNG exports, exporting two thirds of its energy production.
International Monetary Fund Managing Director Christine Lagarde expressed fears in March of an impending oil price shock that could threaten the recovery of a fragile global economy, at a time when the price of oil is consistently on the rise and having risen about 17 % so far this year.
The West Texas Intermediate (WTI) oil price is forecast by BREE's report to increase to an average of US$113 a barrel in 2013. The Brent oil price is forecast to increase to an average of US$119 a barrel in 2013, supported by strong demand from emerging economies.
A research paper written by Hasan, M. Z., and Ratti, R. A., released in early 2012 titled Oil Price Shocks and Volatility in Australian Stock Returns, was presented at the Global Accounting, Finance and Economics Conference in Melbourne. The paper commented on the potential impacts of an oil price shock. It reported that all sectors in the Australian economy other than information technology and telecommunications are responsive to oil price shocks.
The paper found that for Australia, oil price returns had a statistically significant positive sensitivity to equity markets in the energy sector including mining, coal and petro chemicals, and negative effects on packaging, transport, insurance, media, property trusts, retailing and banks.
It stated that the statistical significant response of banking stocks to oil price returns may be an Australian phenomenon and this may be based on the fact that oil price shocks are recognised as playing a role in the business cycle and that bank stocks are important in investor portfolios.
As in many other countries, volatility in global financial markets has resulted in noticeable declines in measures of consumer and business confidence in the latter half of 2011.
The paper contended that even though the financial sector is not directly related to oil production and consumption, association with oil occurs via lending to and/or holdings of corporate bonds issued by firms with significant exposure to oil price fluctuations and their speculative positions in oil related instruments. Besides the result for financials already noted, the report found statistically significant negative effect of oil price returns for automobiles and parts, food and beverages and consumer services.
Last year's Libya crisis has already squeezed global oil supply, and growing tensions between the West and Iran could further add to supply shocks and drive prices higher.
Speaking at the sidelines of a conference in India, Lagarde warned that prices could jump 20–30% if Iran's crude exports were to fall sharply and that it would take some time before other oil exporters scrambled to adjust global supplies to stabilise the prices.
