Slugcatcher: Tales from the crypt

Sifting the wheat from the chaff is an old agricultural saying that few petroleum types think much about. They will soon, especially as the roll call of hopeful new oil, gas, and alternative energy projects, are floated in the popular media.

Over the past few months, as the price of oil has climbed steadily higher, Slugcatcher reckons he has even heard the rattle of old filing cabinets as plans from the 70s and 80s are dragged out, dusted off, and served up as something new to parade before an energy-worried public.

The most recent of the old faithfuls to catch his attention was the Scarborough gas project of ExxonMobil and BHP Billiton. According to some reports, a plan for a $4 billion development will be released within days, including a site for the onshore processing plant.

Pardon Slugcatcher for being a bit of a cynic but Scarborough has spent so much time in the too-hard basket that a few guys using ink-dipped quills probably sketched its original plans on parchment.

Scarborough, despite the latest bout of hype, is definitely one of those projects in a category best described as remote.

Not only is the gasfield itself remote, but it’s not actually very big when compared with the rival gas projects jockeying for the so-called windows of opportunity opening in Asia and North America.

Scott Reef and Brecknock, which are actually even older discoveries than Scarborough, are estimated to contain up to 18 trillion cubic feet of gas compared with a “lowly” 8 tcf at Scarborough. Both of those pale against the 40tcf estimated to be in the Greater Gorgon project area.

The point being made by Slugcatcher is that no-one has any doubts about the gas in the ground. The issue is all about economics, the cost of development, the price of oil (and gas), and above all the profit potential of any development – over the long term.

It is those final four words which seem to elude everyone when high oil prices trigger an outbreak of excess enthusiasm seen during every silly season.

Quite simply, everything is economic when oil hits $US45 a barrel. The test is how does the project look at $US18 a barrel, which remains a figure used by banks when assessing long-term viability of a project which wants a loan to fund development.

It is possible that we have entered a period of perpetually high oil prices but Slugcatcher thinks not. Markets always ebb and flow and if oil stays at $US45 a barrel the world will plunge into recession and the price will come crashing down, along with everything else.

As a casual observer of the energy scene, Slugcatcher is looking for a few signs to tell him that the silly season of old and uneconomic projects is at its peak.

The stampede into geothermal energy is one indicator, remote gas is another, but the king hit comes when shale oil wagon rolls into town – as it did last week when a Tasmanian junior said it was looking at reviving that state’s shale industry which squeezed out its last drop of oil sometime early last century.

A lifetime ago, or 30 years if you insist on counting, shale oil was hailed as the saviour of the world. Australia led the charge back to a commodity which had its heyday in the 19th century, along with that other great source of heat and light, whale oil.

Promises made about the Queensland shale industry remain some of the most outrageous in Australia’s fabulous history of outrageous resource project promises. In hindsight even plans for steel mills along the west coast, laterite nickel projects across the outback and aluminium smelters all over the place were wimpish imitations of shale oil.

So it is we enter the height of the season of weird and wonderful energy projects. One shale project has popped up so far, and you can put your money on a few more making their cameo appearances before the season passes.