Launceston, Australia — The decision by Norway’s Equinor to pull the plug on plans to drill for crude off Australia’s south coast raises two issues for future exploration projects, namely the economics must stack up and environmental concerns cannot be ignored.
The majority state-owned oil major said on Tuesday that its exploration programme in the Great Australian Bight “is not commercially competitive compared with other exploration opportunities in the company.”
The decision to scrap the drilling programme, which would have cost around $200 million, was hailed by environmental groups, which had opposed the project in the remote and unspoilt waters off the coast of South Australia state.
Equinor had received all the relevant environmental approvals for its planned exploration, planned for water about 400 km (248 miles) off the coast, in permits that consultants Wood Mackenzie estimated may hold as much as 1.9 billion barrels of crude oil.
The reaction to Equinor’s decision was predictable, with Australia’s conservative government and the oil and gas industry body lamenting the move and calling for other companies to step up, while environmental groups saw it as a vindication of their opposition to all exploration in the area.
While corporate statements are often written in dry and legally safe language, and sometimes don’t tell the whole story, Equinor’s assertion that the drilling programme didn’t make economic sense rings true.
Equinor becomes the third major oil company to exit drilling in the Bight, following Chevron, which dropped permits in 2017, and BP, which was the Norwegian’s company partner in the planned venture until 2016.
While there may be crude in sufficient volumes in the Bight, its remote location and challenging geology makes any exploration there risky from both a commercial and operating standpoint.
Even if the drilling programme did find viable crude reserves, the cost of installing platforms, sub-sea infrastructure and loading facilities would be expensive, especially relative to other exploration opportunities, both globally and in Australia.
With crude oil prices under pressure from weaker global demand growth and plentiful supply, it was probably a stretch for Equinor to make drilling in the Bight viable, unless a higher long-term oil price was factored in.
Brent crude futures ended at $54.95 a barrel on Tuesday, having slumped from a high this year of $68.91 on Jan. 6 amid concerns about the coronavirus epidemic, which started in China but has now spread to some 30 countries, infecting around 80,000 people and leaving more than 2,700 dead.
While it’s likely that eventually the virus will be contained, crude prices are unlikely to enjoy a significant rally in the absence of further production cuts by OPEC and its allies in order to tighten a currently well-supplied market.
While the dynamics of the crude market may have played a role in Equinor’s decision, it’s also likely that the Norwegian company was increasingly mindful of public opposition to its Australian drilling plans.
Equinor is one of the oil and gas companies that appears most committed to addressing climate change, saying earlier this month that it intends to reduce its carbon intensity by 50% by 2050, and it plans to expand its renewable energy generation to 4 to 6 gigawatts by 2026, about 10 times the current level.
While the company hadn’t face widespread public protests over its plans to drill in the Bight, the chances are that actions against its programme would have ramped up had it gone ahead, raising the risk of negative publicity and reputational damage.
If environmentalists can claim a victory over Equinor, the lesson may be that it will be increasingly difficult for any company to undertake exploration in frontier basins in developed countries for fear of public opposition.
This means that future oil and gas exploration may well be concentrated in countries with authoritarian regimes, where public protest is curtailed.
Driving oil and gas exploration to such jurisdictions, which are also likely to have less well developed environmental approvals, may prove somewhat self-defeating for the green lobby.
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