The current downturn in the resources industry has sparked concerns about the viability of Australia’s drilling industry, but Hassalls Auctions’ Russell Keast has called for calm.
Director of Valuations for the resource industry auction house Mr Keast says that despite the volatile commodities market, there is huge capacity for future growth.
“We are hearing a lot of comments about how tough it is in the drilling game at the moment, but if you break down the market into different segments you start to see some really positive signs,” Mr Keast says.
“While one driller might be finding it tough, another driller using a different class of rig is finding opportunities.”
OIL AND GAS
Falling commodity prices have dulled the appetite for large energy companies to invest in exploration, however, Mr Keast says there is a counter-balance.
“There is a shortage of gas currently available to fulfil contracts out of the new LNG project on Curtis Island. The only way to supply it with more gas is to increase the number of wells,” he says.
“Even though there is a downturn in the marketplace, as the energy price stabilises, gas prices will increase and gas drilling will increase as well.
“Exactly the same thing is going to happen at the Chevron-operated Gorgon project in Western Australia and at INPEX’s Ichthys LNG Project in Darwin – they don’t physically have enough gas to supply these.
“The gas is in the ground and the only way to get it out is to drill.”
While the gas industry is still feel feeling the effects of the oil price slump, the potential for increasing demand is being seen in South Australia, where gas prices have surged as a result of the brutal cold snap. There, the government has had to plead with ENGIE to restart its mothballed Pelican Point gas-fired power station to combat turmoil in the state’s wind-reliant electricity market.
On top of this, figures from energy analyst EnergyQuest show combined exports from Australia’s three LNG hubs surged 18.5 per cent in June with strong contributions from North West Shelf and Pluto plants in Western Australia and the QCLNG project at Gladstone.
Hassalls Oil and Gas Industry Contracts Manager Steve Wainhouse believes exponential growth in the CSG sector is a foregone conclusion.
“The number of wells that needs to be drilled is quite astounding, I think we have done only 15 per cent of what needs to be done just for phases one and two of the upstream APLNG project,” he says.
“Drilling-wise there is continual work for the next 20 years so it is not doom and gloom.
“The major energy companies have invested billions of dollars in developing the upstream processing and compression facilities and downstream liquefaction. With the hard work complete now it’s just a matter of increasing supply through expanding gas reserves.”
COAL AND MINERALS
Forecasts have been less positive for the coal sector, but Mr Keast says the death knell has not sounded for the drilling in this market either.
While exploration has slowed, continued demand for thermal and coking coal is expected for the foreseeable future.
“Drilling and exploration is a real bellwether for the whole industry. When exploration drilling is at its peak then the coal mining industry is rising and mining companies are looking to invest in new sites to mine,” Mr Keast says.
“At the moment exploration in the coal industry is limited. The focus has been on production and drilling is just keeping in front of the drag lines. Where there is not an acceptable rate of return we are seeing some new projects put on hold because of the coal price.
“Until there is a complete shift to renewables the coal industry is going to remain an integral component of the world’s energy requirements.”
Proposed projects like the Kepco mine at Bylong in New South Wales and Adani’s Carmichael venture in the Galilee Basin are indicators there is still growth to be had, albeit on a smaller, more marginal scale.
Ongoing demand for steel means exploration for coking coal in the Bowen Basin is unlikely to stall, with Western Australia’s iron ore production also heavily reliant on drilling to service export markets.
Thermal coal is one area where Mr Wainhouse foresees the drilling industry will notice considerable cutbacks as more sources of renewable energy come online.
The ratification of the Renewable Energy Target in 2015 and the high penalties imposed on carbon emitting producers will squeeze less efficient thermal coal out of the Australian market.
“Thermal is going to take the biggest impact from the renewables, and that’s going to happen across a lot of Australian industries that are energy based,” he says.
“Export-wise, China has slowed down a lot but much of that will move to India.
“India’s coal reserves have a lower calorific content with higher emissions, whereas Australia has some of the best quality coal in the world. With India’s growing population and movement away from rural areas to urban centres, I think thermal coal exports to that region will provide a cheap and efficient baseload energy source.
“I don’t think thermal coal is dead in Australia but there is a perception that coal, and other fossil fuels, are a dirty source of energy.”
EXPLORATIONS AND PREDICTIONS
Where one door closes, another could open for drillers if Australian uranium mining expands. We have a third of the world’s known uranium resources and are the third-ranking producer, behind Kazakhstan and Canada, with all production exported.
Uranium is currently produced at Ranger, Olympic Dam and Beverley mines, with Toro Wiluna in Western Australia under consideration.
“If uranium mining takes off, that will create a lot of drilling to chase the seams and prove up the leases. It would be huge in terms of exploration work,” Mr Keast says.
Mr Wainhouse believes it is also difficult to predict what impact movements in the US resources industry will have here.
“We are about a year ahead of the States in that we have cut our fleets and we have hit the hurdle before they have. They haven’t had that big pull-back yet,” he says.
“Looking at a lot of the auction results coming out of the US, their assets are falling sharply and with mining companies closing down or, like Peabody going into Chapter 11, confidence in mining is declining.
“That won’t affect our production and it won’t affect how much coal is leaving Australia because most of it is going to the Asian market.
“Funding is probably the biggest hurdle in the coal industry at the moment. Both Australian and Global Banks are reducing their exposure to mining and, more generally, non-renewable energy sources, from a debt perspective and also as an investment option within their Managed Fund portfolios.”
According to Mr Keast, asset valuations have not truly been tested with a lot of equipment being traded via off market sales.
“There has only been few genuine liquidation sales of oil and gas equipment and these results have been mixed,” he says.
“There is a lot of gear for sale in the oil and gas industry, but prices asked do not always represent the true value and it raises the question whether the vendors are serious about selling the equipment or are just testing the market.
“Exploration drilling equipment prices have been very irrational with some assets making above market expectations and some equipment being almost impossible to sell.
“From what we have seen, most buyers are taking the opportunity to buy while prices are soft to upgrade older equipment and reduce costs for existing and potential contracts.
“Hours, condition and current life cycle are the biggest factors in terms of value across the drilling industry. Older equipment that needs time and money spent to meet site standards is often harder to sell, whilst equipment that has been well-maintained and reflects market value is moving.”
From both of Hassalls’ experts, a key message in all of this is to carefully consider the broader context of the drilling industry before buying into rumours about its downfall.
For Mr Keast and Mr Wainhouse, the most important thing is to accept a boom does not have to be followed by bust.
“The best line in the marketplace is that this is the new normal,” Mr Keast says.
“Everybody needs to learn to operate in this market and make the most of the opportunities because the next ‘boom’ probably isn’t going to happen.”
RUSSELL KEAST – HASSALLS, DIRECTOR OF VALUATIONS
Russell is the Director of Valuations at Hassalls, overseeing the day-to-day running of the company’s valuation business in the bank and insolvency sectors. As a certified practicing valuer and auctioneer with the Auctioneers and Valuers Association of Australia (ASA), Russell has more than nine years’ experience valuing equipment in a range of industries including mining, transport, agriculture and manufacturing. Working directly with some of the biggest industry players, Russell has extensive knowledge of land-based drilling rigs and has valued some of Australia’s biggest drilling fleets for finance and publicly-listed