Higher exploration costs sinking offshore drilling

higherTHE rising cost of oil and gas exploration has seen the number of wells drilled offshore Australia fall by more than two thirds, new data has revealed. Analyses from the Australian Bureau of Statistics (ABS) and the
Australian Petroleum Production and Exploration Association (APPEA) showed the cost of drilling offshore wells had increased by more than five times the amount in 2000.

APPEA’s submission to the Economic Regulation Authority (ERA), Inquiry into Microeconomic Reform in Western Australia – Draft Report, estimated it could cost more than $130 million to explore offshore, depending on the well’s geography and technical factors.
In 2003, the average cost was $8.8 million. “These figures reflect a range of factors, including higher daily rig rates and the fact that drilling is shifting further offshore to deeper, more remote and more difficult waters,” APPEA western region chief operating officer Stedman Ellis said.

“The increase in drilling expenditure reflects broader cost pressures across the value chain from exploration to development and through to production. “These are being exacerbated as the industry moves into more complex offshore areas. The low-hanging fruit has been picked.”
The report found that Australian greenfield projects can be nearly double the cost of those in East Africa, North America and other locations. In 2003 it cost more than $500 million to drill 60 wells: 10 years later that number is dramatically higher, with 19 wells drilled for a total cost of $2.5 billion.

ABS figures showed South Australia was the largest contributor to the higher petroleum expenditure trend estimate, up by $5.7 million, while WA was the biggest contributor to the seasonally adjusted estimate (up by $110.9 million), compared with the March quarter.
Furthermore, the trend estimate for expenditure on general offshore exploration in the March quarter fell by $7.2 million while the estimate for offshore drilling fell by $29.6 million.

Onshore drilling seemed to fare slightly better with a $3.8 million increase in the trend estimate but onshore petroleum exploration fell $15.5 million during the same period. The cost analysis was part of the association’s submission to the ERA in response to the “costly and inefficient” gas reservation policy, APPEA stated. APPEA was highly supportive of the ERA’s recommendation to the WA Government to rescind the domestic gas
reservation policy as soon as possible.

The policy promotes the long-term supply of natural gas for WA consumers by reserving 15 per cent of gas from new offshore gas developments for domestic use. APPEA believed the policy threatened WA’s energy security by discouraging investment in new projects. “Big industrial gas customers who benefit from gas reservation in WA have been trying to argue that record investment in offshore exploration shows the policy is not a disincentive to producers,” Mr Ellis said.

“But they conveniently ignore the fact that while exploration expenditure has increased since the policy’s introduction, the number of wells has steadily declined. “Australia’s ability to develop new gas projects is already threatened by rising costs at home and growing competition abroad. Policies that dictate where and how gas can be sold represent a further barrier to investment.”