Oil Crisis Down Under ?  

Posted by Big Gav

Bill Powers from "Canadian Energy Viewpoint" has written about a looming oil crisis in Australia.

While Australia’s natural resource-based economy has enjoyed tremendous growth along with the rebound in commodity prices worldwide, the country’s oil production continues to decline at a staggering pace. The country’s production peaked at 805,000 barrels of oil per day (bopd) in 2000 and only averaged 490,000 bopd in the first 10 months of 2004 (Source: US Department of Energy). I expect Australia’s oil production to continue to drop further in 2005 due to the lack of major new projects scheduled to come online. In this issue, I will examine many of the reasons behind Australia’s precipitous oil production decline, how the country is coping with the issue and most importantly, what it means for energy investors.

The opening paragraph makes some sense - oil production in Australia is definitely dropping - although the impact of this seems to have been more than offset by a number of factors, which has made "coping" pretty straightforward so far.

These factors include the rise in the Australian dollar in recent years, which has kept oil prices fairly static in local currency this decade, and the fact that Australia is a net energy exporter, with natural gas, coal and uranium exports surging (in both quantity and prices attained) during this period.

The article then goes on to note the steep decline since production peaked, which is logical given that most production was from a small group of fields in Bass Strait which were exploited together, supplemented in the peak stage by a quickly depleted offshore field (Laminaria/Corallina).

While it is difficult to pinpoint the reason for the nearly 40% decline in Australia’s oil production over the last four years, I believe the country has been a victim of both Hubbert’s Peak and poor government policy. The main thesis behind Hubbert’s Peak is that once half of the reserves of a specific petroleum producing region have been produced, that region will go into permanent and irreversible decline along a bell shaped curve. As evidenced by the below table, oil production in Australia was relatively flat for years prior to peaking in 2000.

Once the country achieved peak oil production, however it did not decline gradually as one might expect, production fell off a cliff. How did this happen? Shouldn’t production have declined more gradually according to Hubbert’s Peak theory? I believe there are several additional factors that contributed to Australia’s oil production decline. First, oil discovery in Australia was very concentrated in a few fields (over half of the country’s reserves are concentrated in a handful of fields) and several of the country’s biggest fields were discovered nearly simultaneously. Without flush production from new field discoveries to replace declining output from more mature fields, production has gone into a steep decline.


Things then get a bit weird. Firstly the lack of exploration and discovery is blamed on the government and local energy firms, which seems ridiculous, given that many of our reserves are controlled by the likes of ExxonMobil, ChevronTexaco and Apache Energy (and locals like Santos and Woodside are primarily gas producers, even though the high oil price has made their oil discoveries more important in recent years). Is this nonsense based on any evidence ?

Surely some of the blame for Australia’s declining oil production can be traced to years of poor governmental policy. Australia’s energy industry, up until very recently, was dominated by only a few very large firms such as Santos and Woodside Petroleum, who controlled nearly all of the most prospective acreage.

After that it simply seems to ignore reality and begins contradicting itself. A table listing proven reserves at the end of each year from 1980 to 2003 is included. This data shows reserves starting at 2.13 billion barrels, dropping to 1.56 billion barrels in 1996, then steadily climbing to 3.5 billion barrels in 2003 (ie. reserves more than doubled in the past 8 years).

A final explanation for Australia’s oil production retreat, may be the simple fact that there might not be that much oil left to find. Australia is the world’s driest continent and lacks much of the organic material required for the creation of oil. Despite dramatic improvements in seismic and offshore drilling technologies that have opened up huge new areas for exploration, Australia’s reserves have barely budged over the years. The below table clearly displays the difficulty the country has had in growing its oil reserves.

While the reasoning seems sound enough, unfortunately it is in opposition to the facts presented. Australian production may well have peaked - but given that proven reserves are growing quite rapidly it seems rather premature to claim this is a fact (particularly as Santos's recent discovery at Jeruk adds another 10% or so to the reserves as of 2003).

This sort of analysis will give peak oil theorists a bad name if it is repeated in similar sloppy fashion for other countries.

(via Lowem)

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