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Thursday, September 1, 2011

Oil Royalties a Mirage?

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Beside the release of the government's final Energy Strategy was a report from Woodward Partners purporting to estimate the potential royalty income from existing, and yet to be discovered oilfields.

Business cheerleaders such as the National Business Review typically took the most extreme best case guesstimate and trumpeted the report with headlines of a $13 billion bonanza. But if they had bothered to actually read the report they would find that quite different story emerges.
1    The report confirms yet again that domestic oil production is falling steeply -

"Production levels from Maari are forecast to decay quite quickly between 2010 and 2015 a lesser extent Tui also will decay quite quickly over this time"

2    Royalty income for oil from existing fields is just over $300 million per annum and most of the income will come in the next 1 -- 3 years and then plummet to almost zero by 2020 .

“Maari is characterised by very high current production levels of oil, with a relatively rapid decay down to low production rates. This provides the Crown with attractive royalty cash flows in the next few years, but means that nearly half of Maari’s value to the Crown ($315 million of $490 million) is received in FY2011 and FY2012. So Maari’s value to the Crown will decline fairly quickly.”

The graph shows the "likely profile in decay of royalties from currently producing fields"

3     the $3 billion royalty projection for existing fields is the total for the next 20 years out to 2030.

4      The projections for frontier, as yet undiscovered oilfields are no more than guesses. The Woodward report admits as much….

“We caution that this valuation should be seen in the context of an industry which faces significant uncertainties, and acknowledge that this valuation could quickly be rendered obsolete”

Worse, the Woodward report relies in turn on a GNS Science report, which also admits its "findings" are no better than pure guesswork.

“ the predicted (pre-drill) volumes are fraught with assumptions, and are usually, but not always, proven to be overly optimistic……” “The business of quantifying undiscovered petroleum resources is fraught with difficulty and there are numerous possibilities for error”

You be the judge as to whether this Report, full of guesses relying in turn on other guesses, is a joke.

5      Even if new oil is discovered, the Woodward report confirms in its mid case scenario it will not be until around 2020 at the earliest before any significant production could begin from frontier fields. And it would be well into the 2030's before royalty streams would reach $1 billion. A paltry $1 billion by 2035 is hardly going to be the economic game changer that the government is making it out to be, when the extra cost of oil imports could be $10 billion per annum by 2015
Note too that the graph above has production and royalty income from as yet undiscovered fields beginning as early as 2014 !  But no new drilling will now take place until the 2012-2013 summer, and it can take upwards of 10 years after discovery to get production in frontier fields under way. This graph has to be severely optimistic.

6     the mid-case scenario estimates the total royalty income for undiscovered fields from now until 2050 at just $5.5 billion. Hardly a bonanza for the government's coffers as it would have us believe.


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