RISING COSTS IN AUSTRALIAN HYDROCARBON EXPLORATION AND DEVELOPMENT

Abstract

Rapidly rising costs have created operating and investment problems for companies involved in the Australian hydrocarbon resource industry. Expenditure in this area has declined markedly in constant dollar terms, an adverse trend given Australia's outlook for increasing reliance on imported crude oil in the 1980's.

Costs in hydrocarbon exploration appear to have risen in excess of general inflation in the Australian economy. This situation may be attributed to the strong upward movement in wages and equipment costs, and in some cases, the low level of domestic exploration in the mid-1970's.

Capital costs for hydrocarbon development and pipeline projects in Australia have also escalated, a trend caused by rising wage levels in project construction and increases in equipment costs. Additional factors such as design alterations, environmental considerations and labour disputes, can also add significantly to costs. Large scale hydrocarbon projects, which have long lead times, are susceptible to inflationary trends.

Increasing amounts of funds are required for exploration and development as a result of the rising cost trend. However, difficulty is being experienced in raising funds through capital and equity markets, as well as retained earnings. A key factor in securing adequate funds is profitability, which is largely determined by the State and Federal Governments. For the smaller oil and gas producers, the past profitability record has been inadequate, although the improvement in recent years should continue because of higher oil and gas prices.

Costs may be expected to continue to increase in hydrocarbon exploration and development, but probably at a lower rate than experienced in the mid- 1970's. The future viability of the hydrocarbon sector is dependent on a favourable investment environment and higher profitability to offset the considerable risks in exploration and escalation in costs.