A two-decade decline in exploration is driving the need for carbon neutral investment in Australia’s upstream sector

A turbulent period of change has seen many legal and fiscal changes as Australia tries to balance its gas and energy transition strategy

5 minute read

Stephanie Chiang

Research Analyst, CCUS

Stephanie provides insight and analysis on CCUS to project developers, technology providers, investors and governments.

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Our recent webinar entitled Riding the Rollercoaster: Australia's Oil & Gas Outlook explored the latest themes and trends shaping Australia's oil and gas and carbon capture sectors.

Drawing on proprietary data, research insights and deep industry links, we provide strategic insights that will guide your business decisions over the next 12 months.

The team attended the Australian Energy Producers Conference 2024 (AEPC) last week in Perth.

Fill in the form for immediate access to the recording, and read on for an overview of the challenges and opportunities in Australia’s oil and gas industry.

A 20-year decline in exploration

Despite building a position as one of the largest LNG exporters in the world, oil and gas exploration activities in Australia have fallen significantly over the last two decades. Offshore exploration in particular has taken a big hit, with the number of new wells falling from over 50 in 2010 wells to just 3 in 2023. The lack of new discovered volumes will have major implications for pipeline of new supply projects, in terms of their quality and capacity to backfill LNG and domgas facilities.  

There is some hope however, with upcoming high-impact offshore exploration in the Otway Basin and some drilling across the North West Shelf to prove up additional LNG backfill. That apart, the outlook for new exploration wells remains slim, with limited support for future activity given by the government’s Future Gas Strategy.

Gas’ role in Australia’s net zero objectives

The Future Gas Strategy aims to draw a line under the recent regulatory uncertainty that has plagued the outlook for high-profile projects current under development. Rising costs, legal challenges and environmental activism have added further hurdles.

However, despite these barriers, several onshore projects in the Perth Basin and Beetaloo sub-basin are finding a route to market and are in the process of moving from appraisal to development or pilot phases.

In the Beetaloo we now see pilot projects progressing, and an increased likelihood these shale gas molecules can find a home, first in the Northern Territory market, and then, perhaps, the East Coast too.  

Appetite for investment remains despite government intervention

As has been outlined in recent state and federal reports, gas continues to play an important role in replacing coal in the power generation mix, thus helping the country reach its energy transition targets.

However, industry has not always felt this support in tangible terms. But herein lies an interesting paradox. Although we have seen a series of market interventions and fiscal changes that have increased government take and control of the sector, it doesn’t appear to have had a seriously damaging impact on the country’s external reputation with foreign investors.

Despite a potentially higher risk profile, Australia has seen increased levels of merger and acquisition (M&A) activity, indicating international players see the current turbulence as a short-term phenomenon.

A good example is the two recent sales by Woodside Energy of stakes in its Scarborough gas development, first to LNG Japan and then Japan’s biggest LNG buyer, JERA. These deals come despite protestations last year from the Japanese government that Australia was in danger of becoming an unreliable energy partner.

Market activity clearly indicates that there is still appetite for Australia’s high quality large gas assets. However, we do see it becoming harder to divest legacy oil and gas assets due to the impact of decommissioning policies .

Australia set to lead CCS capacity over the next decade

One clear growth area for the upstream sector in Australia is utilising its expertise to expand the nascent carbon capture and storage (CCS) industry. It can provide an economic and practical solution to support the decarbonization of the energy sector initially, and then other hard-to-abate industries.

The Safeguard Mechanism provides extra impetus to all major emitters to invest in decarbonisation solutions, including CCUS. This has helped created a healthy pipeline of proposed CCS and CCUS projects.

However, it will not be plain sailing, and many regulatory, technical, commercial and cost challenges still need to be solved. The lack of a co-ordinated energy and decarbonisation roadmap from the Australian government will inhibit industry collaboration on ‘chosen solutions’, and only encourages each company to do their own thing, losing economies of scale.

And CCUS projects and hubs in Australia lack the level of financial support or incentives given in other western economies, such as in Europe and North America, which has helped to dramatically kickstart those sectors.

Corporate outlook dependent on size and diversity of portfolios

Corporate strategy is also under intense scrutiny in Australia, adding a further layer of complexity to decision-marking and stakeholder management. The results of Woodside Energy’s recent AGM, where 58% of shareholders voted against the Climate Transition Action Plan and Progress Report, highlight the additional challenges facing Australia’s largest oil and gas producers.

However, assessing Woodside Energy on our Corporate Resilience and Sustainability Index framework, the company compares favourably with its international peers. We rank Woodside Energy 14th out of 54 global oil and gas producers for Corporate Sustainability, our view of how companies are positioned to navigate the long-term challenges of the energy transition.

The company’s gas-weighted, long-life and high-margin portfolio will generate strong and stable cash flow the next two decades, possibly more. The dilemma Woodside faces is whether to deploy its increasing financial flexibility in further production growth or accelerate the build out of its low carbon business. Providing secure, affordable and sustainable energy, while also delivering shareholder returns is the challenge front of mind for all at the Australian Energy Producers conference in Perth this week. 

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Our detailed coverage of the upstream industry can help guide your investment decisions and corporate strategy; while helping you identify the primary drivers that are influencing trade and price dynamics.