Themes for 2014
- Increased M&A activity as companies seek to secure the next phase of new production (2018 onwards).
- Continued focus on efficient project delivery and execution.
- Changing regulatory environment for WHS and environmental approvals and tougher standards for Australian local content will create greater compliance requirements for companies.
Following several years of significant activity in the Australian oil and gas sector, 2013 saw participants take a measured approach to oil and gas sector investment. Project proponents focussed on executing projects on time and on budget in a high cost environment and also securing efficiencies from producing projects. Consequently, M&A activity was subdued.
2013 also saw vast regulatory change in the sector. The Commonwealth bedded down changes to the offshore legislation initiated as a result of the Montara incident and various State Governments reformed their onshore regimes to address the challenges posed by coal seam and shale gas exploration, development and production. Governments also initiated processes to revisit energy policy to ensure a correct balance is struck between promoting investment in the sector and ensuring security of supply.
So, what does 2014 hold for the Australian oil & gas sector?
- M&A activity
In terms of overall volume, we anticipate that M&A activity in 2014 will be stronger than the past 12 months. We see the following key areas driving investment activity in 2014:
- Continued investment in exploration acreage (farmins and farmouts), in particular, offshore WA (Carnavron, Browse basins), offshore NT and onshore South Australia and Northern Territory.
- Asset deals on the next wave of development assets. There are a number of ‘marginal’ reserves which are unlikely to warrant a standalone development, but where equity in those reserves is not aligned with processing alternatives available. We may see deals done for these assets in order to ‘unlock’ those reserves for the next phase of projects (2018 and onwards).
- Given the maturity of the Australian market, it is likely that Australian companies will continue to look overseas for growth and to balance risk in their portfolio. Key regions include South East Asia (Myanmar) and Africa.
- Divestment of non-core assets to assist funding of development phase projects.
- Continued government focus on WHS
In Western Australia, the Government will look to reform the penalty regime which applies to onshore, coastal waters and pipelines to ensure a consistent penalty regime across all acts. A public consultation process is currently underway. The modernisation of Queensland’s current resources Acts which was announced in 2013 will start to bear fruit in 2014. While WHS is technically outside of the scope of the modernisation process, we anticipate that the changes will have flow-on effects to health, safety and environment.
At the Federal Government level, we are still waiting for the reintroduction of the Regulatory Powers Act into parliament to reinitiate reforms of the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) arising from the Montara commission. On passing of the Regulator Reforms Act, we can expect to see reforms to:
- the monitoring and investigation powers of NOPSEMA, and
- offences, including the ‘headline’ penalties for health and safety offences caused by recklessness or negligence,
amongst others. We will keep you updated on these reforms.
- Changes to offshore environmental approvals process
As a result of strong Federal Government support for streamlining, wholesale changes to the existing environmental approval regime for offshore projects will likely take effect in Q1 2014. A strategic assessment process is currently underway. If endorsed by the Minister for Environment, for most projects it will eliminate the requirement for environmental approvals under the Environment Protection and Biodiversity Conservation Act 1999 and will see NOPSEMA assume the role of sole offshore petroleum environmental regulator. Concurrently, changes to the Offshore Petroleum and Greenhouse Gas Storage (Environment) Regulations 2009 will be made including the introduction of a new assessment and approval requirement for Offshore Project Proposals.
While the streamlining reforms will cut green-tape and are likely to deliver benefits for industry, some of the proposed changes may present new risks and challenges. In particular, the transfer of responsibility for environment plans from operators to titleholders and major project decision-making by NOPSEMA, rather than at the Ministerial level. Initial success and teething issues will play out in 2014. We will provide updates on this process.
- Finalising polluter pays legislation
2013 saw strengthened financial assurance requirements included in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth), to complement new polluter pays provisions. Initial consultation with industry on how financial assurance can be demonstrated has occurred and an exposure draft of regulations was published in October 2013. The consultation process to date has highlighted the complexity of establishing an effective, non-duplicative and workable financial assurance regime.
It is unlikely regulations in the form of the exposure draft will be enacted and we expect material changes will be made to the exposure draft to increase flexibility and refine information and process requirements. While further details around financial assurance requirements are not presently available, we anticipate regulations or guidelines being in place by mid-2014. This will clarify what is sufficient financial assurance and how titleholders can demonstrate they satisfy their financial assurance obligations. We will provide an update once more detail is released.
- Securing Australian jobs for projects over $500m
The Australian Jobs Act 2013 (Cth) will commence in 2014 and is designed to support the creation and retention of Australian jobs by requiring binding Australian Industry Participant (AIP) Plans to be developed for certain projects, by requiring project proponents to give Australian entities full, fair and reasonable opportunity to bid for key goods and services.
The Act applies to projects where the capital expenditure incurred in carrying out the project is, or is likely to be greater than $500m. The obligations kick-in upon certain trigger events occurring after 28 March 2014, with such trigger events relating to the initial phases of a project such as preparing diagrams, technical specification, equipment lists or environmental submissions.
- Innovation in LNG
The Australian LNG industry is faced with a strong Australian dollar, a high cost environment, competing supply sources from the US and demands from Asia Pacific buyers for ‘fair pricing’. It is clear that the next wave of LNG investment in Australia (first LNG post 2018) will require a new approach to the conventional LNG development model with innovative technical and commercial solutions required, including:
- sharing of essential infrastructure required for natural gas and LNG production and delivery,
- tie-in and access arrangements, and
- moving the cost base offshore (modularisation and floating LNG).
As a result of project lead times (of 3 to 4 years), 2014 could be the year in which we see some of these innovative solutions realised in order to take advantage of gaps in LNG demand and supply from 2018 onwards.