Best In Class: How Upstream Gas Can Work Smarter

7 April 2014

  • Focus on upstream boosts productivity and cuts costs
  • Adopting best practice not enough
  • Government critical to foster innovation
  • Adjust foreign investment settings to encourage shale gas
Australia's oil and gas industry is lagging global counterparts in critical capabilities but a renewed focus on upstream activity, including the adoption of lean manufacturing principles, will complement efforts to boost productivity, cut costs and close the gap with overseas peers.

According to PwC's new report, Best in Class: How Upstream Gas Can Work Smarter, released at APPEA's 2014 conference today, this closer focus could lead to a 10-20 per cent improvement in breakeven costs.

Half of the LNG operators to report significant CAPEX blowouts cite upstream issues as one contributing cause of their overruns. Improving upstream productivity could significantly improve our competitive position globally.

Based on overseas markets, closing the gap to achieve best practice could affect one or more of the following areas:
  • Improve well delivery cycle times (by up to 40 per cent)
  • Decrease development CAPEX / well development costs by more than 3 per cent)
  • Lower Operations and Maintenance costs (by more than 15 per cent)
  • Reduce total procurement costs (by up to 10 per cent)
PwC Australia's head of Energy, Utilities and Mining, Jock O'Callaghan, said our upstream productivity gap indicated Australia's industry is lagging at a time when competition for new capacity is increasing globally and prices are expected to fall.

"Our research shows that the industry needs to embrace a culture of change," Mr O'Callaghan said.

"The danger is that Australia's LNG industry, which has commanded almost $200 billion in capital investment for seven plants, will not deliver on its promise."

According to the report, which is a global first from the newly combined PwC and Strategy& (formerly Booze & Co) industry should embrace a number of the following initiatives:
  • Cultivate a continuous improvement culture to catch up with and ultimately become the standard setter for global ‘best in class'
  • Adopt a "factory" approach to operations and unconventional field development - the report shows that optimising operations around total cost of operations and NOT production has a significant positive impact on break even costs.
  • Make explicit investments in innovation - not just adopting overseas technology. Australian operators are early adopters but we need to define (as opposed to follow) best in class.
While industry is doing everything within its means to be globally competitive the North American experience shows that government has a critical role to play.

The role for government: The lesson from North America

PwC's report describes how over a four-year period US Northeast shale producers boosted break-even performance by almost 20 per cent through improvements in drilling techniques, planning and sub-surface completions. The US shale industry has moved from marginal status as recently as 2007 to one where it now generates base load production.

Mr O'Callaghan said key to the US's success was the government's streamlining of regulations, as well as providing tax breaks and incentives targeted at high cost operations.

Other critical initiatives included early consolidation of energy policy from six agencies into one super-agency and combining more than three R&D centres into one.

"In Australia a blanket increase to innovation funding from the government is not the answer," Mr O'Callaghan said. "What is needed is a focus on creating an environment that encourages the development of truly ground breaking innovation that increases our competitive advantage.

"Australia's LNG industry has welcomed the recognition that comes with its pending status as the world leader in LNG exports. Ideally we would aim to match this with a track record for innovation and technical advances - to be the biggest and the best.

"We also need to work towards a single state-based agency model - as is prevalent in North America - to avoid overlap, inconsistent administration and eliminate outright duplication, which is such a bugbear for the industry.

The scale of shale: Getting foreign investment right

"Given the sheer scale of the investment needed to progress the development of Australia's shale reserves, Australia needs to provide early stage investors with confidence and clarity.

"Shale is shaping as the next foreign investment wave for Australian resources so it's imperative we are on the front foot."

Consideration needs to be given to increasing the threshold for foreign investment review for industries such as shale.

Mr O'Callaghan said: "The threshold of $248 million can buy a substantial market presence in many other industries, but represents an insignificant proportion of the potential shale reserves in Australia. Any money invested is subject to multi-staged risk.

"To ensure the industry retains its social licence to operate it also needs to proactively address public perceptions about the industry, especially regarding the environment.

"Any legislation impacting shale development needs to be explicit -not generic - to create an informed public debate that enhances outcomes for the environment, the industry and the communities in which it operates."

About PwC

© 2014 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

PwC Australia helps organisations and individuals create the value they're looking for. We're a member of the PwC network of firms in 157 countries with close to 184,000 people. We're committed to delivering quality in assurance, tax and advisory services.