A look at Australia’s fossil-fuel industry should be put in a global context, and in viewing the oil and gas industry globally, it’s worthwhile to draw parallels to a theory about human motivation developed by American psychologist Abraham Maslow in 1942.
The Hierarchy of Needs
Known as the hierarchy of needs, Maslow saw motivation as a tiered pyramid. At the base were the physiological needs — food, water, and shelter — that are essential for survival. The second level was security and safety; the third, love and belonging, or relationships; the fourth, esteem or prestige; and finally, a level he called growth, which was about self-actualization. Maslow believed humans strive to meet those needs starting from the bottom and moving upward once a level’s needs are more or less satisfied.
There is a similar hierarchy in the global energy industry. At the base level, the world needs access to sufficient energy to meet day-to-day needs. The second level relates to the reliability of supply. The third is affordability, and finally there is the issue of acceptability or sustainability, both on the environmental and social levels. In terms of Maslow’s hierarchy, the first three levels of the energy hierarchy have been met and we are in a world where the fourth level has become the dominant need and therefore drives a lot of today’s ESG (environmental, social, and governance) agenda.
But let’s step back and look at some of those lower-pyramid tiers for a moment. Over the last 50 years, world primary energy consumption has grown about 300%, from about 56,000 terawatt hours to over 160,000 terawatt hours. Over the past 10 years, total global energy demand has grown at the rate of about 2% per year, on average.
Since increases in energy demand are very likely to continue, and since people talk about transitioning to a sustainable energy future, what are we actually talking about? Over the last 20 years, renewables have gone from about 1% of the total energy mix to about 5%, but fossil fuels still account for about 60% of energy generation worldwide, with biomass accounting for the remainder.
In terms of supply, the fossil fuel industry has continued to meet increasing demand throughout history. Currently, however, there has been a closing of the gap between spare capacity and demand; global inventories are at their lowest seasonal levels ever. And the energy industry is fundamentally driven by a cyclical business driven by a capital spending cycle. Traditionally, when tighter energy markets cause prices to rally, companies generate profits and attract investor capital, which is used to develop more resources. Supply begins to grow and eventually exceeds demand, and the cycle reverses itself as energy prices fall.
Impact of ESG on the Fossil Fuel Industry
One could argue that the ESG trend, which has led to a dearth of investment in the fossil fuel industry, has broken that cycle. ESG also has impacted the industry through higher taxes, increased levels of regulation and approvals, and anti-fossil-fuel sentiment, which have made investments significantly more difficult and risk-taking less likely.
Returning to the Maslow hierarchy analogy, we’re now seeing conflict between the higher need for sustainability and the basic need for affordable, accessible, and reliable energy. That basic need ultimately will prevail, which is why I believe the oil and gas industry will remain a fundamental and important contributor to the global energy picture for many years to come, even well beyond the 2050 horizon that many talk about as the net zero future.
Prospects for Australian Oil and Gas
Given this backdrop, the prospects for the Australian oil and gas industry are somewhat unique. The industry has a long history of unconstrained exploration activity, meaning that companies have been relatively free to explore all onshore and offshore areas of the country using the latest technology. It has been relatively well-explored. The industry’s consolidation over the past decade, however, has dampened its entrepreneurial spirit and the drive to do unconventional exploration, even though domestic and international demand would likely exist for the additional supply.
The nation faces some other fundamental challenges to unconventional exploration. First, Australia has a geographic divide — there is significant demand in the east, significant supply in the west, but the two don’t seem to be able to meet.
Second, there is inadequate infrastructure for unconventional exploration. Australia has only a fraction of the rigs and fracking units available in the U.S. The time and capital required to achieve commercial viability through fracking is very significant, making the success of such an effort practically unrealistic.
For the immediate future, the Australian oil and gas industry is likely to continue being dominated by a few very large-market companies with a continuing lack of small-cap companies pushing the boundaries of new supply options. Small-cap companies are driven by entrepreneurs who believe they can find something that no one else has found. People of that type either are no longer attracted to the industry, are quickly retiring, or have passed away. When the lack of entrepreneurial spirit and entrepreneurs is coupled with a lack of risk capital, the future of the Australian oil and gas industry is likely to be marked by a shrinking number of major companies that will be depleting the nation’s existing resources.
About Stuart Brown
A geologist by training and an accomplished energy industry executive, Stuart Brown is director and founder of International Oil & Gas Strategies Pty Ltd. His technical and managerial experience includes more than 20 years at Shell, where he worked around the world, and 10 years with Woodside Energy. He also has held nonexecutive director positions at Empire Oil & Gas NL, WHL Energy Limited, Cue Energy, and Galicia Energy.
This oil and gas industry article was adapted from the GLG Roundtable “Australia’s Oil and Gas Industry.” If you would like access to events like this or would like to speak with oil and gas industry expert Stuart Brown or any of our approximately 1 million industry experts, please contact us.