Australian oil and gas productivity limiting investment

Even if at the end 2012 Australian oil proved reserves were 3.9 thousand million barrels and R/P ratio was 23.4, Australia’s oil and gas industry is at risk of losing investment overseas if productivity within the sector can’t be improved, according to a report into the sector’s performance released by Ernst and Young and the University of Queensland. According to this report, complicated regulation, red tape* and the high Australian dollar are limiting productivity in the industry, so if those barriers remain, investment will head overseas.

“Companies that are investing just aren’t seeing returns and it’s due to the cost of doing business, due to some of the constraints around regulations, and I think the returns just have to be there, otherwise business will invest somewhere else in the world” explains John Steen, an associate professor of strategy at the University of Queensland. Seen in this light, low productivity will damage the returns of Australian companies. “The cost of doing business, which is essentially the productivity question, is rising” he said. “We’re not getting the outputs per level of investment and that means the investment money goes elsewhere, where there are better rates of return.” The report finds the biggest driver of productivity is innovation, things like streamlining supply chains and developing new construction methods. Interestingly, the report also points out that obstacles, the very things limiting productivity, also boost innovation by forcing companies to overcome them. Bradley Farrell, the leader of Ernst and Young’s oil and gas advisory services, says despite obstacle encouraging innovation, they still need to be addressed. “I think that one of the calls to action from our report if for government and regulators to understand the impact of lengthy approvals and red tape, and how important those factors are in creating obstacles for business. They ought to be a strong focus for government to remove, to shorten approval times and to reduce red tape where ever possible.”

*Proved reserves of oil: generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions

* Reserves-to-production (R/P) ratio: if the reserves remaining at the end of any year are divided by the production in that year, the result is the length of time that those remaining reserves would last if production were to continue at that rate

*Red tape is excessive regulation or rigid conformity to formal rules that is considered redundant or bureaucratic and hinders or prevents action or decision-making. It is usually applied to governments, corporations, and other large organizations

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