Bumpy ride for exploration
WHILE the current resources commodities boom is dragging Australia’s largest-ever minerals and energy exploration effort in its wake, there are also growing signs that the way ahead may be increasingly bumpy.
Reports of the latest survey of exploration by the Australian Bureau of Agricultural and Resource Economics have highlighted the record-breaking elements of the boom.
ABARE estimates that expenditure on the minerals and energy search in the financial year 2006-07 will hit $4 billion, the highest in inflation-adjusted values since 1982-83. Exploration jumped 56 per cent in 2006-07 compared with 2005-06, and is currently 72 per cent higher than the annual search outlay average for the past quarter century.
The level of exploration is a big turnaround from the opening years of this decade when expenditure, in real terms, was well below the annual average since the 1980s.
Exploration is critical to minerals and petroleum development. The current soaring level of capital expenditure in the sectors — now more than double the annual average outlay for the past 25 years and forecast by ABARE to reach $30 billion in 2007-08 — is underpinned by discoveries made over a number of years. The government agency points out that the present search expenditure will need to be sustained if development is to continue at a high level over the next decade.
However, it is already proving difficult from exploration data collected by the Australian Bureau of Statistics to work out how much of the present record search expenditure is attributable to actual exploration work and how much results from sharp rises in input costs, such as labour and equipment.
Judgment of how well exploration will fare in the years ahead is clouded by the large number of factors that can mar its progress.
Some relate to ever-present issues: judgments on prospectivity, which depend on the frequency and quality of new discoveries, as well as the risk appetite of investors when government policies shift or government changes hands.
In a recent Committee for the Economic Development of Australia forum on carbon emission costs in Sydney, trade-exposed industries warned that investment here rather than elsewhere always hangs on company assessments of risk. Energy policies such as the proposed emissions trading scheme, they said, would be a major factor in attracting or repelling future investment, or in maintaining and expanding existing developments.
Commodity prices are obviously a critical factor for mining and petroleum investors. High oil prices as well as the growing market for Australian LNG are driving the current boom in petroleum exploration. ABARE expects the 2006-07 outlay on the oil and gas search to reach $2.14 billion, 64 per cent up on the previous financial year and the highest in real terms since 1982-83. Exploration for iron ore, gold and base metals is benefiting from strong global demand and good prices for Australian producers.
The possible ‘‘ bother factors’’ for explorers that are now already clear in the marketplace, as identified by ABARE, include the increasing expense of offshore petroleum exploration, the rise in search costs generally, the tightening problems of skilled labour availability and increasing competition for funds as investors seek hundreds of billions of dollars for new ventures.
ABARE notes that companies are reacting to the pressures, especially in the mining sector, by focusing more on ‘‘ brownfields’’ exploration — searching areas around existing or known deposits where projects can be started sooner and have a low capital expenditure requirement because infrastructure exists nearby.
In the development area, the agency warns, some of the 45 minerals projects scheduled for completion in the second half of 2007 may not meet commissioning dates or budgets, reflecting strong, industry-wide competition for skilled labour and equipment.’’
ABARE says there were 91 resource sector projects worth $43.4 billion at an advanced stage of planning as of April this year, three fewer than it listed last October, but even some that have reached the committed stage was be deferred, modified or even cancelled if there are significant changes in economic or competitive circumstances.
‘‘ This,’’ it adds, ‘‘ is particularly relevant in the current period of rapid project development in which the mineral resources sector is experiencing significant difficulties in securing sufficient inputs, including materials, equipment, skilled labour and professionals.’’
ABARE sees the cost pressures attendant on competition for skilled labour and equipment as being ‘‘ unlikely’’ to ease in the short to medium term. This means that the feasibility of many less-advanced projects — of which there are 188 on its list at present — will need to be re-examined, it says, with some being deferred beyond their optimal start-up dates in terms of market opportunities.
Exploration: It is unclear whether increased expenditure is a result of greater activity or greater costs