with Will Pulsford, CEO, Resource Investment Strategy Consultants
Before diving into oil and gas market intricacies could you please give us a brief overview of RISC, its scope of work here in Australia, and the unique value that it offers to the industry, key stakeholders, and potential investors?
RISC provides independent and confidential advice to clients on technical and commercial decisions. The advice that we provide is from the perspective of an asset owner by virtue of the fact that our principals have been trained by major oil companies such as Shell, BP, and Woodside. Assignments are typically focused around a key decision that a client is trying to make such as an acquisition, divestment or development sanction. We have a full suite of technical skill sets to review seismic data, in-place volumes, recoverable volumes, development plans, cash flows, NPV evaluation, and commercial issues. While we have that broad skill set, what we try to focus on is translating technical understanding into a business context for clients. We can do the technical work, but what we really do is help them with a key business decision.
How does RISC brand itself – an Australian or international company?
We are based in Perth and we have offices in Brisbane and in the UK. Frequently in oil and gas we see instances of a client in, for instance, Asia buying an asset in Africa with a data room in London so a geographical spread is useful for supporting transactions.
Our geographic focus is on Australia, Asia, Africa, Middle East, Europe, and the former Soviet Union. Yes, we are Australian based, but I would characterize us as an International company.
What is the balance in the customer base that RISC serves between majors, juniors, and small-to-mid cap companies?
The super-majors typically have enormous technical resources in house, so they do not use the services of companies like ours. We generally assist clients who do not have a large technical center from which they can draw support. Our client base extends from mid-caps down to relatively small companies.
With the recent change of Prime Ministers came a new deal that was struck between industry and government concerning the Super Profits Resources Tax (SPRT). Does the revised tax scheme allay industry concerns and imply that it is back to business as usual?
There still needs to be more clarity as to how tax changes will be applied. The original SPRT caused a lot of consternation. It seemed to be particularly harsh in terms of not allowing a risk margin over the long-term bond rate. Subsequent revisions seem to be more workable. From a point of view of oil and gas, it appears that the Petroleum Resources Rent Tax (PRRT) will apply across onshore and offshore projects. The offshore industry has been working with PRRT for years and is quite familiar with it.
For capital intensive projects the revised scheme is less of a burden than the original proposal. The impact it will have on projects remains to be seen, but it will be less than the original SPRT proposal.
The SPRT in its original form raised many concerns about the element of sovereign risk in Australia. Is sovereign risk an appropriate characterization for a developed, free market, OECD country?
One of the attractions of Australia to investors is its political stability. We need to be very careful about changing fiscal terms for existing developments, and even for developments that are yet to be sanctioned. Industry has invested a lot of money in exploration on the basis that an eventual project will be handled under a certain regime. If that changes, then it changes the basis under which people originally invested in the country. It is something that has to be done very carefully indeed.
What are the main obstacles that you see in Australia’s path to becoming a top-two LNG exporter globally over the next decade?
To achieve this, the resources that industry has identified have to capture a market, and proponents must build more LNG plants. Technically there are no insurmountable hurdles to that task. Coal seam gas (CSG) has its own technical challenges, particularly in upstream developments. There has been talk of floating LNG (FLNG) for the Prelude and Sunrise projects, which also carries a technical challenge. But predominantly the emphasis will be on the ability to capture market, which together with joint venture alignment will drive the schedule of LNG projects.
However, if the large number of planned LNG projects were to be sanctioned on the currently predicted schedules, there would be a resource constraint in terms of man power and skill sets. The gas is there, but not all of those projects can proceed in the form or on the schedules that are proposed because there will not be enough resources available to support them. There is likely to be some consolidation between projects and revision of schedules to accommodate both market and manpower constraints.
Given the surge in unconventional gas exploration in the United States and talk of a global gas oversupply, do you think the ability to capture markets has been overlooked as Australia’s LNG projects push forward?
I do not think any proponent of an LNG project will overlook the importance of capturing markets. The United States is turning from a net importer to neutral with shale gas. There is even some suggestion of exporting LNG from the United States which will impact the Atlantic Basin LNG market. Whether US gas will get across the Pacific Basin remains to be seen. But North American shale gas will displace some LNG cargoes.
How do you see FLNG revolutionizing the exploration and production ballgame here in Australia?
For stranded gas in the right conditions it can be a great enabler. It reduces the critical mass of resources needed to underpin an LNG project. An FLNG plant can be constructed on the basis of 2-3 million tons per annum, whereas a two-train plant onshore produces circa 8-10 million tons per annum. FLNG makes development more viable for remote locations and smaller resource sizes. The technology required is not simple, but it is far from impossible.
As oil production-to-consumption continues to decline in Australia and more recoverable assets are demonstrated for gas, are you noticing investment trends to more gas-oriented companies?
In terms of E&P companies, clearly gas is become something that investors want to have in their portfolio. It is the clean fuel of the future displacing coal for power generation and from that perspective it is a very attractive resource. But the development life cycle is longer than for oil which producers can sell on the open market. A gas development requires long term buyers, pipelines, or LNG plants and so the timeframe for developing gas assets is generally longer, unless they are close to an existing open gas market.
What is the viability of CSG being the next big frontier for Australian oil and gas?
There are four major consortiums looking to put LNG plants on Curtis Island and a few smaller ones nearby. However, it is unlikely that they will all proceed in their predicted timeframes. Whether there will be consolidation between projects is hard to say, but at least one or two of them should proceed in the near future.
Skeptics of the CSG industry argue that a leniency in reporting recoverable CSG reserves without factoring in the technical challenges to commercialize them has created an unjustified exuberance in the market, even drawing comparisons to the Dot Com boom in the US. Is this a reasonable concern in your opinion?
CSG has certainly had a great impact on the value of many small companies. Several small companies took significant CSG tenements when it was seen only as an interesting add-on to the domestic gas market. In 2-3 years it has gone from an interesting add-on to a major resource that multinationals want in their portfolio. So, yes, values have gone up significantly. Whether the current valuations are valid or not will be proven when these resources can be brought to market profitably and deliver the revenues that are predicted. The real proof will be in CSG-to-LNG projects moving into development.
Do you see stability in the medium-term oil price environment that can continue to bolster exploration and production operations?
We have seen huge swings in the last couple of years up to $140 down to $40 and as low as $10 per barrel since I have been working in industry. When looking at a range of projects, the current oil price of around $75 per barrel appears sufficient to support further developments and strikes a balance between the producer’s cost to explore and develop oil assets and delivering a return that reflects the risk that they take. From the demand side, I have not read a lot of comments in the press about oil prices being too high and forcing people to shift to different fuels. There is probably greater concern for environmental reasons than for price.
With the Financial Year 2009-2010 recently ending, how would you sum up the past year both for RISC and the Australian oil and gas industry as a whole?
Activity levels have been lower than the previous year. The volume of transactions has been down significantly globally and that is something that drives our business. Generally when there is a large change – such as in oil price and the credit crisis as we have seen over the past 18 months – there is a pause to understand the new paradigm and to wait for markets to settle down before people transact on that basis. It has been a variable year but there seems to be a greater sense of optimism now than six months ago.
What is that new paradigm?
$70-$80 per barrel. There seems to be stability in that over the past several months. Stability helps decision making.
Are mergers and acquisitions therefore picking up?
I think activity is increasing. With stability, financial markets become more predictable and banks are lending more. However everyone is still cautious.
What the market needs now is confidence. External investors need to be confident that they can come to Australia to do business and know that they can predict the fiscal terms within which they will be doing business. If you take that away, then it undermines confidence.
We have huge resources in gas and we need external investment to help develop them. We need buyers for our LNG, which is ultimately a form of investment through long-term contracts. If we do not encourage that confidence and necessary investment, then it is going to be much harder to progress asset development.
How do you see this company growing in conjunction with the oil and gas industry in Australia?
I definitely see growth. The demographics of the oil and gas industry are such that there are relatively few experienced people at the senior managerial and technical professional level which makes recruiting and growth challenging. A lot of my clients find exactly the same thing. We will always be constrained by finding good quality people.
What would you tell them to attract them to RISC?
What I like about working with RISC is the variety that this company offers. I am keeping my technical skill set alive, but I am also participating in interesting decisions. I am working with a wide range of clients from small to mid-cap energy companies to lawyers to banks.
The first page of all of our reports has an introductory paragraph that both prefaces the rest of the report and sums up the industry at-large. If you could give us a head start on that paragraph, how would you sum up the industry here?
Australia’s amazing resources base gives the country huge potential. A hopefully stable future fiscal regime and political climate makes it a great place to invest in oil and gas projects. There are very interesting projects coming through. How fast they develop is driven by access to markets and joint venture alignment.
One factor that may constrain the speed or smoothness of gas resource projects is the availability of human resources. One of the greatest assets for a really good company will be the people working there to monetize oil and gas resources. Without them, companies will struggle. They may be able to initiate projects, but executing them on time and on budget is going to be driven by having enough good people.
Manpower was a key constraint before the credit crunch. Banks were willing to lend money and there were hydrocarbon resources awaiting development. But could you find staff for the operator and asset owners and the resources to execute from an engineering point of view without creating a bottleneck? With the emerging stability we are seeing now and as the industry picks up, those concerns will arise again. In Coal Seam Gas for example there are large numbers of wells that need to be drilled for each project. Access to the required number of skilled people who know what they are doing will be a challenge.
However Australia is well placed for attracting human resources from a personal perspective. It has a vibrant oil and gas industry, interesting projects, and it is a pleasant place to live. In terms of the ability of Australia to attract the workforce needed for the industry, it is well placed from a societal perspective.
What would be your final message to our readers about RISC?
We see growth. The oil and gas industry in the areas where we work – Australia, Asia, Africa, Middle East and up through to Europe – is becoming more interesting as it evolves. The industry never stays still. North America was established as an LNG importer and then with the emergence of shale gas it is positioned as a potential exporter of LNG. The emergence of coal seam methane in Australia has changed the game here. The North Sea is maturing and new operators are establishing asset positions. There is always something happening and it is a fascinating industry to work in. RISC is well positioned to assist clients making key decisions as they become more complex, more interesting, and as companies encounter more promising opportunities.