Energy Journal: Australia’s Golden Soil and Wealth for Toil

Story originally appeared on the Wall Street Journal.

ADVANCE, AUSTRALIA?

Australia’s been doing pretty well out of the resources boom. Take Perth – from backwater to bona fide city, according to The Wall Street Journal, thanks to Asian demand for raw materials.

The entire Australian economy has prospered where others have stalled thanks to its golden soil, where men plunder iron ore. There has been no recession Down Under.

The oil and gas industry looked for a while like it would move in to add to the mining boom. Some big offshore players have moved into Perth – Shell, Inpex Chevron and Apache have all expanded their local operations – but they may have to supplant rather than complement the mining boom.

Now there is a race against time to construct gas-export facilities before the U.S. gives the all-clear to do likewise, or before Russia strikes a deal with Japan.

The Chevron-led Gorgon project is due to cost at least 52 billion Australian dollars; ExxonMobil is planning a groundbreaking floating LNG-processing plant.

The costs are huge, but being first in the race to ship LNG to Asia is everything. Australia’s decade-long mining boom is ebbing away as Asian demand for coal and iron ore has evaporated, but the need for fuel there could be maintained.

The Australian government will hope so for, as Alen Mattich reports, it long ago chose the British route to dealing with its mineral wealth, rather than the Norwegian one.

The U.K. used the windfall to cut taxes and spend more on services – writing in the Guardian, William Keegan describes North Sea revenue being described by one acolyte of Margaret Thatcher as “what we are using to finance unemployment.”

Norway, by contrast, squirreled much of its revenue away into what is now the world’s biggest sovereign-wealth fund.

Now mining tax revenues are falling and Australia is heading into deficit territory. What that means for Perth’s gleaming new skyscrapers rests on the success of the oil and gas industry.

THAT’S A LOT OF OIL THERE

Wait, what? The U.S. has double the amount of oil and three times the amount of natural gas than previously thought? Where did that all come from?

The previously unaccounted Three Forks shale formation explains the substantial increase, according to the National Journal. Good news for refiners like Phillips 66, which is moving toward the goal of processing only discounted crudes extracted in North America.

Clearly there is no shortage of oil in North America, although qz.com highlights that 47% of oil and gas wells are located in high or extremely water-stressed areas – water of course being crucial to the fracking process that is crucial to getting all this energy out of the ground.

The U.S. government will soon publish draft rules to regulate this technology.

That aside, the biggest threat to getting as much of this oil out as possible is this: who wants it?

Bloomberg Business Week says increasing vehicle fuel efficiency, substitution of natural gas for crude oil and recent elasticity of demand in the U.S. mean the concept of Peak Oil is now being approached from the demand side.

BIG OIL EARNINGS

A big day for big oil earnings — Shell beat expectations but attention is on the retirement of CEO Peter Voser; Statoil disappointed as production was hit in part by the attack on the Algerian In Amenas natural-gas plant; and BG Group reported a slight slip in profits but said it was on track with three flagship projects.

MARKETS

Brent crude eked out moderate gains in London Thursday morning trade, regaining a little ground back above $100 a barrel after the previous session’s big losses.

Cautious trading is likely ahead of the European Central Bank’s interest rate decision, due at 0745 ET, at which there is broad expectation of a 0.25 percentage point cut to the main refinancing rate. The Journal’s market report is here.