with David Dennison, Managing Director, Wood Mackenzie Australia
As a company that provides comprehensive analysis across the value chain spanning both a technical and commercial perspective, what do you consider the core attributes that make for a successful Wood Mackenzie consultant?
We are an energy research consultancy so our business is built on a strong research base. We are very robust on the supply side dynamics and our experienced energy market specialists also give us a deep understanding on the demand side. Bringing those together, our uniqueness is that our research is “bottom-up” and forward looking in our analysis of all oil and gas fields and energy markets worldwide.
Five years ago we went through a series of deliberate acquisitions which furnished us with the same detailed understanding of the coal industry as with the oil and gas industry. It was an important step because if one looks at the global energy mix going forward then oil, gas, and coal continue to dominate global energy supply. In particular coal is forecast to be the growth fuel globally mainly driven by power needs. The natural progression from coal was then into metals so that we covered the energy and metals value chain. We see a huge benefit from understanding the integrated nature of big resource companies and aiding their requirement to understand energy.
For example, the topic at the forefront of an aluminium producer is power and the cost of fuel. We are able to talk to aluminium producers in great detail not just about Bauxite, Alumina and Aluminium but also their fuel options whether oil, gas, coal, renewables eg hydro power and assess the dynamics of where future prices are going during times of uncertainty. This is particularly relevant as there is a shift in the market from long-term contracts to more short-term.
Multinational companies in the oil and gas industry are steadily deploying capital and resources to Australia in accordance with the growth market that the country has become. What does Australia represent and offer for Wood Mackenzie’s bottom-up, forward thinking, and integrated approach?
Australia now sits at the forefront of the global gas industry, particularly LNG. Through LNG, Australia is finally going to make the connection of its domestic gas market to the global gas market. Previously Australia had a series of isolated regional markets on the eastern side of the country. However, over the past 10-15 years these state-based gas markets have become interconnected.
When people think of Australia they will now see huge opportunities to commercialize gas with a particularly favorable view of the export market. Australia benefits tremendously from its location within the Asia Pacific ie Pacific Basin market where there is a increased price premium for LNG in north Asia. Outside of the traditional LNG markets of Japan, South Korea, and Taiwan, the emerging markets of China and India present huge opportunities for Australian gas and coal.
Do you think that Australia’s gas connectivity to foreign markets and the true globalization of LNG will eventually lead to pricing parity between Atlantic and Pacific Basin LNG?
I believe that the key question on peoples’ minds will instead be, “what will happen to gas prices in Australia?” Anyone who has a gas /LNG project on the eastern side of Australia exposes themselves to oil price linkages. We have a positive view on oil prices in the medium to long term therefore having an attractive LNG project in eastern Australia and exposing yourself to international gas pricing with its inherent oil price link would have its appeal.
The global LNG market has many lump-sum projects coming on stream not just from Australia but from Russia and Qatar as well. Considering increasing supply, voracious Asian demand, and declining LNG production out of Southeast Asia over the next decade, is LNG a buyer’s market or a seller’s market?
Actually we see the market as quite well balanced with a number of new projects forecast to come onstream. We have however seen prices come off the highs of 2007/08 and there appears to be downward pressure on prices for proponents of the CSG to LNG projects versus the more conventional. The key issue is around cost inflation and the challenge to the more recent projects is to deliver on time and as close to budget as possible. The LNG business is cyclical in nature and not so long ago the race was on to fill the perceived shortfall of gas in the large US gas market. Subsequently we saw the meteoric rise of unconventional gas that has negated the pressing need for LNG into North America. In fact now the question in the US is could the unconventional gas be exported.
When looking at the geological basins and exploration activity in Australia do you see the glass as being half empty (an increasing trade deficit in liquid fuels that could hit $30 billion by 2015) or half full (only 20% of sedimentary basins have been explored)?
Overall one would have to say things are very positive. From a gas perspective there are still good opportunities in the Carnarvon Basin. These are also very exciting times for coal seam gas (CSG) with Australia being the first place in the world where we see will CSG-to-LNG.
Furthermore, “unconventional” in the US has become the “conventional” with its plethora of CBM, shale and tight gas. Here in Australia’s Cooper Basin there are significant amounts of gas resource which are deemed stranded for now for example the shale and tight gas potential. This is either through a lack of market or the need for technological advances. The same could be said for the potential of the Perth and Canning Basins in Western Australia. While it is still too early to fully assess their reserve potential, imagine the technology transfer, experience, and knowledge that can come from the US and elsewhere and be applied to any quality shales here.
On the liquids side, many of the liquids-rich LNG projects in Australia have fair amounts of condensate and associated liquefied petroleum gas (LPG). As some of those condensates get blended with declining oil, the question will be whether or not it creates a problem for refiners. If it does not create a problem to blend condensate with crude oil without changing refinery configurations, then some of the country’s issues concerning liquid fuels will be partly offset. Really it is a question of companies adapting to the changing environment.
Around oil, there are still companies whose niche is to shoot 3D seismic and tie-in smaller discoveries to existing infrastructure, much like Woodside does in the Carnarvon Basin. Apache is also a world leader in shooting 3D and tying into infrastructure. There is also the Great Australian Bight, a frontier area where BP has been awarded licences. In sum, there are still basins to explore and many companies are still going after oil. In the old days, we would always say that we are drilling for oil even if we knew we might find gas.
The Excellence in Oil and Gas conference is going on as we speak and APPEA’s annual conference is just weeks away. If Wood Mackenzie were to draft the agenda for either conference, what would be the issues that you would ring-fence as high priority for the industry to explore?
Certainly the LNG opportunity, for starters. One paper could revolve around putting Australia in the Pacific Basin and global LNG context. Something to be mindful of on the LNG side is cost overruns. On the global stage, anyone who has a project that has gone to FID needs to be sure to deliver on what they say they will. In the lead up to the global financial crisis there was a lot of talk here in Australia about making sure there was enough skilled labor to deliver projects.
The obvious point thereafter would be, what is the real prize in China? For a long time everyone talked about the “hockey stick” effect of China which would kick off once Australia’s first LNG cargo arrived. Now that we are a few years down it is a good time to reflect on China in terms of demand.
I would also like to “tease out” a little bit what else is happening around our petroleum markets such as the competition arising between coal and gas.
The oil and gas industry in Australia has had to deal with a fair amount of uncertainty in fiscal policy over the past year. Is there a particular blueprint or checklist that you could prescribe to companies’ in order to assess the robustness of their commercial strategy during these uncertain times?
Companies have always valued Australia’s stable fiscal environment which underpins their ability to deliver on projects. If we all put ourselves in charge of “Australia Inc.” we see a lot of big opportunities over the next 10-20 years. It would be ill-advised to unnecessarily place hurdles in front of these major opportunities. After all, companies can choose where to spend their exploration and development dollars. We in part rely on the bigger players with deeper pockets to continue exploring around Australia.
Governments worldwide are competing for these exploration dollars. You do not want to send a message to the global industry that the goal posts can be changed at any time.
Australia will be the home to many “world’s firsts” in the oil and gas industry – first floating LNG, first CSG-to-LNG, et al. What type of learning curve has this presented to a company as tried, tested, and experienced as Wood Mackenzie?
One thing we pride ourselves on at Wood Mackenzie is thought leadership. We are very much a forward-looking organization and where appropriate use findings from other parts of the business or globe to help us predict what might eventuate in a particular market. For example here in Australia we were early movers on seeing how the coal seam gas business might flourish.
In the US we have 80 people in Houston as well as teams of analysts in Boston, Massachusetts and Annapolis, Maryland a good number of who are covering the unconventional business in great detail. When looking at CSG, tight gas, and shale gas, I see Wood Mackenzie’s role as playing its part in facilitating the knowledge that comes across here to Australia. Over time we have seen some real advances in technology and we have experience in seeing how service companies have built themselves around the success of CSG. As such we have been able to advise companies on a real cost basis. Rather than saying that a local basin is similar to a certain basin, we are able to differentiate its profile, provide real numbers, and deliver a history that matches activity as more wells were drilled. That allows us to talk credibly to companies.
From the global bottom-up analysis, we have all of the costs and experiences that we can bring to bear for the industry. For example, just before I relocated to Australia in 1998 Victoria was going through a period of gas market liberalization. It was hard for incumbents at the time to foresee that a market might exist where Victorian gas would be connected to Sydney. We at Wood Mackenzie were able to paint a picture of what was happening in the European gas market to serve as a reference since, interestingly, many European countries had characteristics similar to some of the Australian States eg the Netherlands, for example, is a gas exporter, much like Western Australia. Portugal has no indigenous gas which was a bit like New South Wales before the advent of CSG.
Australia seems to be an amalgamation of many international oil and gas provinces that invites foreign interest: offshore elements similar to the North Sea; CSG plays to glean from the US; and European market similarities that you just mentioned. Where do you think this mixed profile places Australia on the “food chain” of oil and gas regions?
It is definitely a hot market for many reasons, but largely stemming from the gas side. There is a lot of interest from the national oil companies particularly from China and Malaysia. When looking at capital allocations the major oil and gas companies will likely all have Australia under the microscope.
This year marks the 10th anniversary of Wood Mackenzie in Australia, which you founded. How would you assess the past 10 years? Has progress exceeded your original expectations?
It has been an extremely challenging but overall rewarding experience. We deliberately moved closer to our clients here in Australia and purposely shifted our research team closer to the operators. We actively engage with the players whose projects we write about by sitting with them and explaining to them our assumptions. Becoming more integrated across energy and metals has meant that we have been able to engage more and provide a lot more strategic solutions for our bigger resource companies who area spread across multiple commodities.
Our difference in this business is our thought leadership, our numbers to back up our analysis, and our ability to draw analysts from a global team. Somewhere in the Wood Mackenzie world we can always get the right expertise to suit the right situation.
The footprint here in Australia has grown considerably since opening the office door back in 2000. We now have offices in Perth and Brisbane as well as Sydney. The growth has also mirrored the expansion into coal and metals such that we have Research and Consulting hubs for the wider business based out of Australia.
We now have around 50 people in Australia and with 70 people in Singapore, 12 growing to 20 people in Beijing, and a good growing office in Tokyo, the Asia-Pacific is a core part of our business for the next 15 years; Australia sits right at the heart of it.
What would be your final message to our readers about Wood Mackenzie and its offering to the Australian oil and gas industry?
We are a very client led organization and we have a lot of great clients. I am very much looking forward to our next 10 years here.