THE ECONOMICS OF MARGINAL OFFSHORE OILFIELDS IN AUSTRALIA

Abstract

Australia's self sufficiency in oil will drop to below 50 per cent by the middle of the next decade unless major discoveries are made within the next few years. There is still a confusing series of permit regimes and fiscal frameworks applicable to exploration and development operations, and no indication of any upturn in offshore activity. If the decline in self sufficiency is to be halted, Industry needs to be assured that it will be allowed to operate under a simple unchanging set of rules such that it is guaranteed a fair return on its risk capital investment.

There are many marginal oil discoveries which remain undeveloped for a variety of reasons, but the economics of their development must obviously be the one major limiting factor. A recoverable reserve of 15 million barrels of oil with peak production of about 8000 barrels of oil per day will in most instances provide a base development level with rate of return of 15 + per cent after tax. The new resource rent tax will have only a marginal impact on a development of this size, but the increasing impact of the resource rent tax as reserves and productivity increase above the base level will limit the rate of return on many marginal offshore discoveries to about 21 per cent.

It is in marginal discoveries that there is a significant downside risk in development, and producers need to be assured of a reasonable risk loaded rate of return before committing to development. There are many ways of protecting operating companies from the relatively high risks of entering into a marginal offshore development. We have looked at only one of these and suggest that government might consider a lowering of the resource rent tax to 20 per cent for projects with reserves of less than 25 million barrels.